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John Kerry's corporate-tax plan

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  • John Kerry's corporate-tax plan

    Apr 1st 2004
    From The Economist print edition

    The Democratic candidate's proposal is slick, but unwise

    GEORGE BUSH will try to make quick work of John Kerry in America's election campaign this year by painting the Massachusetts senator as merely another tax-and-spend liberal. But the president's task has just become harder. That is because Mr Kerry, in a recent speech in Michigan, a state that has suffered thousands of job losses since 2001, made a rather unexpected proposal. The man who rails at “Benedict Arnold CEOs” said that he wants to cut corporate taxes.

    Well, almost. To be sure, Mr Kerry's plan would cut the top tax rate on all American corporate profits from 35% to 33.25%. The details, however, are less encouraging. Mr Kerry wants to eliminate a “tax break” that allows American firms to avoid American tax on foreign earnings that are not brought home.

    Yet this “tax break” is not quite the example of corporate welfare that Mr Kerry claims. After all, America has one of the most imperialistic tax codes in the world. Almost uniquely for a rich country, America's taxmen take a bite out of its corporations' (and, as many expats learn, its citizens') “worldwide income”. Most rich countries' tax collectors worry far less about what goes on outside their borders. America's deferred taxes on foreign earnings have been an attempt to bring America's corporate-tax code closer to those of other countries.

    Mr Kerry's real concern, of course, is not with philosophical questions of international taxation. Instead, he wants to slow the loss of American jobs to cheaper countries (see article). But such tinkering with the tax code is the wrong way to go about it. Mr Kerry's plan does little to make America more attractive to investment and new jobs at a time when many countries are slashing corporate-tax rates to much lower levels. It will make America's hideously complex tax code more so. Much worse, it tries to hamper trade through a change in the tax law. This is anything but “tax reform.”

    When Mr Bush tried to save industrial jobs, which just happen to be concentrated in the states he needs to win most in November, he slapped tariffs on steel imports. Those were blatantly protectionist and were ruled illegal by the WTO last November. Mr Kerry's plan to stem job losses is more subtle. He is not, so far, advocating a new tariff on imports of foreign-made products, nor subsidising American exports.

    Buy American?
    His tax plan nonetheless amounts to protectionism by other means. For it is aimed squarely at discouraging manufacturing abroad by American companies. But it is a bizarre type of trade barrier, because it hits only imports from American firms abroad. A Japanese-owned factory in Malaysia, for example, exporting semiconductors to America but paying only local taxes, would be at a great advantage against a similar American-owned plant, which would be subject to America's higher tax rate. Mr Kerry thinks he is encouraging bosses to keep jobs at home. Instead, he may just prod American consumers to buy even more from foreign companies.

    Mr Kerry says he wants to level the tax rate between American firms' manufacturing in America and their manufacturing in foreign countries. But genuine tax reform would level the playing field by bringing all corporate taxes down radically, rather than slapping what is in effect a big new tax rise on American firms' foreign operations. The timing of Mr Kerry's plan is especially bad. Tax competition is surging around the world. Ireland has used low corporate taxes to fuel a surge in investment and sharp reduction in unemployment. Central European countries from Estonia to Slovakia are now catching on. Russia's taxes are a flat 24% of profits.

    For sheer political cleverness, Mr Kerry's plan deserves full marks. Voters are anxious about offshoring, and domestic firms, at least, will be grateful for the cut in their rates. Indeed, with his new enthusiasm for rate cuts, Mr Kerry may yet shed the label “liberal”. But that should not distract from the truth about his proposal: it is unwise, likely to be counterproductive and seems to be meant mostly to mislead voters.

    Un-Official Sponsor of Randy Choate and Kevin Siegrist

  • #2
    It's a moot point if these leeches are paying less than zero.

    The difference between 35 and 33.25% is the difference between a 40 or a 38.25% increase.
    Damn these electric sex pants!

    26+31+34+42+44+46+64+67+82+06 = 10

    Bring back the death penalty for corporations!