Is Kerry's Jobs Proposal Jinxed?

Rejiggering foreign taxes is politically savvy, but it won't help unemployment much

Senator John F. Kerry may deserve a political Bronze Star for walking into the minefield of international taxes. In his quest to create 10 million new jobs in five years, the Massachusetts senator has zeroed in on, of all things, the way U.S.-based multinational corporations pay taxes on the profits they earn overseas.

On Mar. 26, the Democratic standard-bearer unveiled several carrots and one large stick to encourage U.S. business to create jobs at home. The carrots: a cut in the corporate tax rate to 33.25%, from 35%, and an income tax credit to offset payroll taxes that companies pay on newly hired workers. The stick: a big tax hike for U.S. multinationals that park overseas profits in foreign subsidiaries. Today, such companies can delay indefinitely paying taxes on those profits. Under Kerry's plan, the earnings would be taxed whether companies return the dough to the U.S. or not. Kerry argues that current tax law encourages companies to keep money abroad, spurring them to invest and hire overseas. His goal is to end those subsidies -- which one study puts at $8 billion a year -- and thus encourage U.S. multinationals to keep jobs at home.

Kerry's strategy is ambitious -- and politically savvy. It plays to his theme of "Benedict Arnold CEOs" and allows voters to compare his targeted attack on offshore outsourcing of U.S. jobs with President George W. Bush's tax-cuts-for-all approach. And, of course, it never hurts for a Democrat to play against type by proposing a corporate tax cut, particularly one that could help small business.

None of that, however, is likely to bring Corporate America into Kerry's column. For business, the Kerry plan is a mixed bag. Many small and midsize corporations that do the lion's share of their business within the U.S. will reap savings from his rate cut. They'll also benefit from his proposal to effectively cut payroll taxes for companies that hire more U.S. workers. While most U.S. companies' total tax tab is far less than 35% of profits -- thanks to both the deduction of legitimate expenses and fancy accounting -- Kerry's cut in the top rate would lower effective rates for many domestic companies.

OTHER OVERSEAS INCENTIVES. Kerry's initiative also signals an aggressive push against multinationals that have avoided paying U.S. taxes on more than $600 billion in offshore profits. He's trying to clean up the numbingly complex international tax code, which gives multinationals a better deal than businesses operating solely at home. But he would still allow some outfits to dodge tax on foreign income while punishing others that are scrambling to compete overseas.

Will the plan create jobs -- or at least keep them in the U.S.? There's scant evidence that Kerry's package, taken as a whole, will boost employment. "It would be very tough to put this into a macroeconomic model and find any kind of job change," says Chris Edwards, director of fiscal-policy studies at the libertarian Cato Institute. U.S.-based multinationals insist that access to local markets, cheaper labor, and other factors are more important than taxes in deciding where to locate operations. "It is not clear that U.S. tax law by itself has that much to do with why companies move overseas," says a lobbyist for a major financial-services company.

Even so, any increased taxes abroad would hit the bottom line. And multinationals worry that the plan would curb the ability of their foreign subs to sell in regional markets. They insist that U.S. companies will suffer a huge disadvantage if they're forced to pay higher taxes on those overseas earnings than their foreign rivals. Kerry's strategy "raises the cost of producing goods and services in foreign markets and could make U.S. companies significantly less competitive," says Karen M. Myers, tax policy director at Electronic Data Systems (EDS ).

A TAX HOLIDAY. Today, companies owe U.S. tax on their global income no matter where it is earned. To avoid double taxation, U.S. outfits get a U.S. credit for taxes they pay to foreign governments. But the system is crumbling as U.S. multinationals shift foreign income to countries that impose little or no tax. Martin A. Sullivan, an economist with Tax Notes, a nonpartisan publication, figures that in 2001, more than $107 billion -- or 46% of the foreign profits of U.S. multinationals -- ended up in 11 countries with an average tax rate of just 8.1%.

This tax-code arbitrage works because U.S. multinationals can defer paying their U.S. tax until they return profits home. But many companies never repatriate those earnings, so that day never comes. Kerry would end the game by requiring companies to pay U.S. taxes right away, whether overseas earnings are returned to the U.S. or not. In addition, to encourage business to bring back some of their retained foreign earnings, Kerry would create a one-year tax holiday wherein companies would pay just a 10% tax instead of the ordinary corporate rate, which would be cut to 33.25%.

Trimming corporate rates is a good idea, say most economists. And by promising to create 10 million new jobs, Kerry is clearly aiming to throw Bush on the defensive amid a jobless recovery. But the U.S. levy would still exceed the average for major industrialized nations -- about 31.4%. As for the jobs debate, it's far from clear whether Kerry's corporate tax gambit will add new hires or even slow American companies' headlong rush overseas.

By Howard Gleckman in Washington

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