If you watched last night’s Presidential Town Hall debate between Governor Mitt Romney and President Barack Obama and know anything at all about U.S. Economic Policy, you couldn’t help but be struck by the opportunities Romney left on the floor to show how utterly illiterate President Obama is on the subject of Macroeconomics. One opportunity in particular had me screaming at the television and pausing the DVR to vent.
The wide-open question from Carol Goldberg which should have been a lay-up for Romney was as follows:
The outsourcing of American jobs overseas has taken a toll on our economy. What plans do you have to put back and keep jobs here in the United States?
In response to this question Romney talked in generalities about “making sure it’s more attractive to come to America again,” but he failed to go into enough detail about why America isn’t attractive now or why President Obama’s policies will make America less so. By failing to go into adequate detail to help Carol understand the background behind the problem so that she could clearly understand the solution (and the resident’s lack of one), he actually opened up a window for Obama to preemptively attack the correct course of American policy without fear of having his own ignorance exposed on national television.
To illustrate my point, consider this scenario (which Frankly Governor Romney should have used to drive the problem home to Mrs. Goldberg):
Let’s say for the sake of arguments that you are an American corporation which sells products throughout North America from Mexico to Canada. Your sales are up in both the United States and in Canada, but most of your sales force is located state-side and you need to make a decision about expanding. You can either hire more workers here in the states, or you can open up a new branch office in Canada to handle surging demand across the border. What do you do?
Here’s a little known fact to help your decision making process – companies pay corporate income taxes on foreign earnings to the government of the country in which they earned the profits. If you earned $1 million dollars in Canada, you will pay the Canadian corporate income tax rate, in Ireland you pay the Irish rate, etc. This is important because currently the United States has the highest corporate income tax rate in the world at 35%! …actually I think Congo might be a little higher, but how many companies want to set up shop in Congo at any tax rate? The corporate income tax rate in Canada is less than half that of the U.S. at 15%. What all this means is that you’ll be able to keep and re-invest an extra 20% of your earnings if you expand your operations in Canada rather than in the United States. Politics and patriotism aside, what would you do?
Now let’s suppose you made the objective decision to expand your Canadian operations and the gamble was a success. You’ve earned $10 million dollars more than you expected in Canada and you need to decide what to do with the extra profits. You have a choice – you can either bring the money back to the United States and spend it hiring new workers, expanding your domestic manufacturing facilities and modernizing your equipment (all of which will create American jobs) or you can leave it in Canada and continue to expand your operations there.
Before you decide, consider another little known fact which may influence your decision – the United States is the only country in the world that does not have a ‘territorial corporate tax system’. In other words, even though you’ve already paid the Canadian income tax rate of 15%, the United States mandates that you pay an additional 35% on top of the 15% you’ve already paid before you can bring those funds back into this country.
Your choice is simple: invest $10 million to expand your Canadian operations, or $6.5 million in the United States. Let’s say that your Canadian investment is expected to provide a net return on investment of 10% ($1 million dollars). If you do the math, your equivalent U.S. investment would need to return 15.4% in order to keep up with the Canadian investment. Put another way, the U.S. office needs to perform 53.8% better than the Canadian office in order to justify bringing the money back home. Politics and patriotism aside, what would you do?
Japanese companies don’t have to make these kinds of decisions. Their country’s ‘territorial tax system’ allows them to pay taxes in the countries in which they do business, and to bring the profits back home with only a minimal repatriated funds fee on top of that. The United Kingdom, Germany, France, Ireland and every other industrialized nation on Earth is the same way. The United States stands alone on the globe in wanting to discourage corporations with operations abroad from bringing their profits back home to create jobs where it counts. What’s worse is that all that extra capital would also help improve domestic productivity providing higher paying jobs, as anyone who’s studied economics will tell you is the main benefit of capital influxes to an economy.
Most economists agree that the amount of capital currently parked overseas waiting for fair tax treatment before returning to this country exceeds ONE TRILLION DOLLARS!!! ($1,000,000,000,000). A simple change to our countries tax code to align with the rest of the world would create an influx of money into this economy greater than the President’s own “jobs” bill and without adding a penny to the national debt!
President Obama tried to counter what I’ve just explained this way:
One of [Governor Romney’s] big ideas when it comes to corporate tax reform would be to say, if you invest overseas, you make profits overseas, you don’t have to pay U.S. taxes. But of course if you’re a small business or a mom- and-pop business or a big business starting up here, you’ve got to pay even the reduced rate that Governor Romney’s talking about.
As you can see, it’s more important for President Obama to demonize companies with operations overseas (companies such as Apple, HP, and even government owned GM) rather than understand how best to help those companies bring their profits home to help create more jobs here. It’s more important for Obama to sound like a populist hero rather than to study a problem and to understand real-world solutions that could help put Americans back to work and make us competitive int he world again.
Governor Romney was right – Obama is long on speeches and short on ideas. The same, tired old socialist rhetoric isn’t going to make America strong again, and neither is the same, tired old president.