November 22, 2010

Creating Pants on Fire Out of Truth

Justin Katz

Sunday's PolitiFact correctly rates as "true" RI Democrat Senator Sheldon Whitehouse's statement that "the law... permits companies that close down American factories... to take a tax deduction for the costs associated with moving the jobs to China or India or wherever." But in its headline, in its presentation, and in an expanded quotation from Whitehouse, the article restates the argument in such a way as to drift into "pants on fire" territory.

The headline in the print edition of the Providence Journal is "Businesses do get tax incentive for 'offshoring.'" Reporter Eugene Emery rephrases the question as whether "the U.S. tax code actually offer[s] an incentive for firms to engage in such 'offshoring.'" And an expanded quotation shows Whitehouse stating that "loopholes in the tax code... reward American companies for moving American jobs overseas."

One needn't enter the debate about whether and what the United States should do about the loss of jobs to lower-cost workers in other countries to note that the rephrasing of the question is significantly deceptive. As the initial quotation states, businesses can deduct "for the costs associated with moving," but:

Robert E. Scott, senior international economist with the Economic Policy Institute, a liberal-leaning think tank that deals with issues of concern to low- and middle-income workers, confirmed that relocation expenses are deductible and that existing tax law makes no distinction between whether a company moves part of its operations to another state or to another country.

In other words, the code doesn't create an incentive to move, it just doesn't create a disincentive to do so. That's a very different dynamic. Were the U.S. government actively encouraging companies to leave our shores, the public reaction would rightly be greater than if tax law merely allows the usual adjustment for revenue spent on business-related activities.

The incentive to offshore is actually that labor is much less expensive overseas, and that merits a different response than pursuing a species of protectionist policy. I'd suggest endeavoring to increase the rights and expectations of those foreign workers and encouraging Americans toward more profitable careers.

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The Projo totally sucks.
If Sheldon took a dump on their conference table,they'd go looking for spoons.

Posted by: joe bernstein at November 22, 2010 4:42 PM

There are additional incentives to offshore, some the perverse, unintended consequences of stupid legislation.

1. Tax on overseas earnings is deferred until the money is repatriated, then it is taxed at the full rate. So if a company generates positive cash flow from overseas operations and wants to grow, it must expand overseas because that's more tax-efficient than bringing the money home to invest here.

2. The catch-22 of federal, state and local regulations can be a major hassle. Take for example the moratorium on offshore oil drilling in the Gulf of Mexico. A foreign subsidiary of an American oil company can drill somewhere else in the Gulf, while the American company can't drill in US waters.

Posted by: BobN at November 22, 2010 6:09 PM

God forbid we engage in protectionism.

I know, let's bring in more immigrants!

Let's EXPAND affirmative action!

That way the new arrivals will get job preferences over native born Americans!

Stab your own people in the back!

It's the new American way!

Who needs more native born American computer scientists?

What we really need are more white gangster rappers and H1B visa arrivals from India.

Posted by: dood at November 23, 2010 12:54 AM

"In other words, the code doesn't create an incentive to move, it just doesn't create a disincentive to do so."

We could argue semantics. I think you're splitting hairs since you're not a big Whitehouse fan. The fact remains, if the government did provide that tax break more jobs would remain in the U.S. because it would be cost effective to do so.

Posted by: Russ at November 23, 2010 3:53 PM

er, "if the government did NOT provide..."

Posted by: Russ at November 23, 2010 3:55 PM

Russ-you need a spoon?

Posted by: joe bernstein at November 23, 2010 4:53 PM
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