Jobs or corporate profits?

Matthew Hoy
By Matthew Hoy on October 9, 2012

Pulitzer Prize-winning embarrassment Politifact decided to wade into the deep water by analyzing President Obama’s claim that the federal tax code has “loopholes that are giving incentives for companies that are shipping jobs overseas.” It’s another classic bit of analysis where Politifraud reaches far and wide to expand the claim in question so that they can produce enough “evidence” for their desired result.

This one is so bad that you don’t even have to consult an outside source to poke huge holes in their analysis.

In this fact-check, we'll examine the president’s statement and ask if there are tax incentives for companies that set up foreign operations.

In the narrowest sense possible, Romney’s rebuttal is accurate. There is no clause in the tax code that rewards a company when it relocates production beyond U.S. borders.

If Politifraud were in fact the non-partisan, unbiased determiners of actual facts that they fancy themselves to be, they would stop right here. Rule Obama’s claim False and be done with it.

But that’s not the Politifraud we know and love.

But if a plant moves at all, whether it’s from Ohio to Tennessee or Ohio to Malaysia, it is eligible for deductions.

So what? If there is a deduction for the business expense of moving your business anywhere—including within the United States—then how is that an incentive? Under this logic, businesses would move to and fro for no other reason than to claim this deduction. This only makes sense if you’re President Obama who has never run a business, or a “journalist” who has never run a business.

The Politifraud analysis then gets seriously into the completely unrelated field of overseas profits.

Tax break #1: Keeping profits overseas
When an American firm opens a foreign division, it typically sets up a separate company that does not pay U.S. taxes.

"That foreign subsidiary is a new entity, organized and created in a foreign country, "said McGill. "And responsible for its own taxes." Profits earned by the subsidiary need not show up on the parent company’s tax return.

The subsidiary pays taxes in the country where it's located. Those rates are often lower than in the U.S., where the corporate rate is 35 percent. So long as profits remain overseas, U.S. taxes are deferred.

The company can declare that none of that money will return to the U.S.

McGill, along with colleagues Edmund Outslay and Michael Donohoe, picked apart the public financial statements of Apple and other high-tech companies such as Google and IBM. With Apple, they found the company had built up $23.4 billion in earnings the company said would stay overseas permanently. And for good reason: Apple was paying an effective tax rate overseas of 1.2 percent on those profits.

This makes a solid case for Romney’s plan to lower corporate taxes so those profits can be brought home and invested here, but how exactly is this an incentive to ship jobs overseas? This has nothing to do with the movement of jobs—this is money made by selling products or services to other countries.

Just out of curiosity, did anyone think to ask the Obama campaign if this is a tax break they want to eliminate?

Let’s say we eliminate this tax break and tax those overseas profits whether they are repatriated or not. What impact would this have on jobs? Would they come flooding back to the U.S.? Does the American factory worker suddenly become more cost-effective than those Foxconn workers in China?

Tax break #2: Selling to yourself

An American firm with a global network of subsidiaries has another way to trim its tax bill. All of those companies can buy and sell among themselves. It’s perfectly legal and very lucrative. Take the example of Google.

In just one quarter, the owner of the world’s most popular search engine had nearly $2.8 billion in net income and over half of that came from outside the U.S. That would put Google in good shape regardless, but the foreign earnings would be especially valuable. In 2009, the company’s foreign tax rate was 2.4 percent, reported Bloomberg News.

Google helped keep its taxes low by licensing its algorithms and other digital wizardry to an Irish subsidiary which then sold advertising around the world. The Irish tax rate on that income was 4 percent. But Google was able to drive its tax bill even lower by creating Google Ireland Holdings based in Bermuda where the tax rate is 0.6 percent. The Irish subsidiary sheltered its income by paying royalties to the subsidiary based in Bermuda.

These transactions are supposed to cost the same as if they were conducted at arm’s length. Harvey, the former Pricewaterhouse Coopers partner, said they are anything but.
"It is relatively clear most U.S. multinational corporations are aggressively shifting taxable income to low-tax jurisdictions," Harvey said. "I believe that anyone who believes the IRS can effectively enforce the arm’s-length standard is an eternal optimist — or delusional."

Interesting. What does it have to do with jobs? So you can shift money between subsidiaries you own overseas. It’s a tax loophole. Close it. What happens to the jobs? Do they come flooding back? Or is that Irish worker still cheaper than his American counterpart? Is the tax rate in Ireland still better than here in the United States?

Sullivan also noted that American firms with international operations had shed American jobs while increasing their overseas employment.

"Between 1999 and 2008, U.S. multinational corporations cut their domestic employment by 1.9 million. Over the same period U.S. multinationals increased their employment overseas by 2.4 million," Sullivan said.

Oh no, this is bad. Maybe my analysis is crap!

But the picture is more complicated than that might seem. There is strong debate over the role that tax rates play in those job shifts. Some analysts, including Harvey, believe the real drivers could be lower wage rates and being closer to important markets around the globe.

Nope, Politifraud’s analysis is crap.

Our ruling

President Obama said there are "loopholes that are giving incentives for companies that are shipping jobs overseas."

Independent analysts agree that firms with international operations can take advantage of tax loopholes that domestic firms can not. The value of these is in the billions. Such tax laws might not be the deciding factor for companies to locate in foreign countries, but they make that choice more lucrative.

We rate the statement True.

Are these really tax loopholes, or are they simply an acknowledgement in the tax code that taxing overseas profits of American firms that have already been taxed overseas at the highest rates practicable might be a sure way to encourage these companies to move everything overseas. It might be cheaper to become a Taiwan-based company that has a subsidiary in the U.S., rather than the other way around.

Politifraud’s whole analysis comes down to little more than hand-waving and obfuscation. Where exactly is the incentive to move jobs overseas? They don’t identify one. The company can keep those profits overseas, but that’s not going to directly benefit shareholders and the CEO can’t use that money to buy a burger. The loophole may prompt the company to create more jobs overseas, but the loophole isn’t an incentive nearly as much as the punitive tax treatment of bringing those profits home is a disincentive to create more jobs here.

Selling to yourself? Again it’s not an incentive to ship jobs overseas—the jobs already have to be overseas before you can use this tool—it’s the punishing tax rate here at home that makes that type of maneuver a wise decision.  This is about maximizing corporate profits and shielding money as best you can from taxation—it’s not about jobs.

Politifraud shows as little understanding of business decisions and incentives as President Obama does.

We here at Hoystory rate this ruling crap.

3 comments on “Jobs or corporate profits?”

  1. I always find it amazing how lefties find all sorts of ways that our tax code creates incentives when it suits one of their narratives, but strangely also claim that raising individual tax rates will have negligible impact on economic behavior.


In a just world, SB 918 and its New York counterpart would make the Supreme Court* say: "well, we tried to let you keep shall issue, but you morons just couldn't help yourselves, so now constitutional carry is the law of the land".

*Hopefully it doesn't need to go to SCOTUS.

New talking points just dropped in WaPo -- if that's the excuse for the raid, how does the FBI also justify letting Clinton skate when she also had docs "classified at the highest classification level"?

The most dramatic consequences of government intervention occurred in Sri Lanka, where a 2021 fertilizer ban led to a massive reduction in yields, sparking starvation and an economic crisis that brought down the government in July.

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