By Dustin Hurst | Watchdog.org
HELENA — More often than not, Democratic congressional candidate Kim Gillan offers a single solution for fixing the nation’s bulging national debt, a message straight from the party playbook: Ending tax credits for companies shipping jobs overseas.
And why not? It’s a catchy phrase endearing her to her union base, a demographic concerned with corporate fat cats maximizing profits on the backs of foreign workers using American tax loopholes.
Gillan’s argument, however, is problematic for either of these two reasons: Her proposal would do essentially nothing to fix the $16 trillion national credit balance or it would harm U.S. companies conducting business overseas.
The state senator from Billings could be talking about two slightly different variations in tax code, and she’s never offered specifics, so voters might wonder which she would address if elected.
The first is a general deduction every company enjoys as a result of doing business. Companies moving jobs over state or international lines can deduct those costs, resulting in lower taxes.
Here’s FactCheck.org’s explanation of this so-called loophole:
But the tax code does allow companies to deduct business expenses when calculating their tax liability. And those expenses can include the costs of moving a job to another state or even to another country, according to tax experts with whom we spoke.
While ending this deduction might soothe some overly worried union hearts, it would do little to address the national debt.
The Washington Post explains the fiscal ramifications of the maneuver:
The nonpartisan Joint Committee on Taxation estimated that ending the deduction for moving operations overseas would raise just $168 million over a decade.
Mull that over one more time: $168 million over a decade.
The Post continues its assessment, putting to rest any notion Gillan might run on the correct track to national fiscal solvency:
In the federal government, with an annual budget deficit of more than $1 trillion, that’s what you call a rounding error.
It’s a painfully accurate judgment of the plan. The $16.8 million closing this deduction would generate annually represents just .0001 of the national debt.
A “rounding error,” indeed.
There’s another, much less likely policy Gillan could be addressing in her remarks: Tax deferral for companies operating on foreign turf.
Tax deferral permits American companies to skip paying taxes on profits made overseas until those profits come home.
Here’s an entirely plausible scenario demonstrating the deferral: Joe’s Printers operates in Texas, but opens a shop in Canada, which pays a 15 percent corporate tax rate. Joe’s would pay the 15 percent rate to the Canadian government for all profit made in that country as long as the money stays there. The American government would not gain from Joe’s profits made abroad.
Some Democrats call for an end to the tax deferral, essentially asking companies to pay annual taxes to America and the country in which they do business. If that occurs, Joe’s would pay the 15 percent to the Canadian government and another 20 percent — to satisfy America’s 35 percent corporate tax level — to the United States.
The conservative-leaning Tax Foundation says ending the deferral would put American companies competing abroad at a steep competitive disadvantage.
“Over the next five years, the global economy is expected to expand by over $21 trillion, with 85% of that demand for new goods and services occurring in countries outside the U.S.,” the group wrote in February.
“When American corporations compete for that new business, some companies will make products here and ship them to customers overseas, but for others, the best way to win new business will (be) to make their products as close to their overseas customers as possible.”
The group says American should eliminate its worldwide taxation policy in favor of a territorial plan that wouldn’t tax foreign profits.
Democratic critics might not give much credence to a conservative-leaning research organization, but perhaps they’ll give credence to the bipartisan Simpson-Bowles deficit-reduction plan released in 2011. The report says America taxing foreign profits is “outside the norm” and a blockade to business development.
Here’s an excerpt from that document:
The U.S. is one of the only industrialized countries with a hybrid system of taxing active foreign-source income. The current system puts U.S. corporations at a competitive disadvantage against their foreign competitors. A territorial tax system should be adopted to help put the U.S. system in line with other countries, leveling the playing field.
Of the G7 industrial alliance, a group featuring notable members France, Germany, Great Britain, Italy, Japan and Canada, America alone taxes foreign profits.
Interestingly enough, President Barack Obama’s Council on Jobs and Competitiveness admits the country should eliminate the tax deferral.
Here’s what that group said about the issue in its 2011 year-end report:
Many members of the Council agreed that the United States should move to a territorial system of taxing corporate income akin to the practices of the other developed economies. Territoriality would eliminate the so-called lock-out effect in the current worldwide system of taxation that discourages repatriation and investment of the foreign earnings of U.S. companies in the United States.
Gillan’s campaign did not return a call requesting comment on the issue. Gillan faces Republican businessman Steve Daines in the race to replace U.S. Rep. Denny Rehberg, also a Republican, in Montana’s lone congressional seat. Rehberg is challenging Democratic U.S. Sen. Jon Tester for his seat.
Contact Dustin Hurst at Dustin@Watchdog.org or follow him on Twitter @DustinHurst.