Kerry’s Tax Proposals

Kerry is giving a speech today in which he will propose some significant changes to corporate taxes. The NYTimes describes the main features of his proposal:

The essence of the Kerry plan boils down to two main elements. The first would be eliminating the ability of American multinational companies to defer taxes on their foreign profits as long as those profits stay outside the United States. That would raise about $12 billion a year in extra tax revenue, which Mr. Kerry would use to reduce the overall corporate tax rate to 33.25 percent from 35 percent. Analysts on Wall Street have estimated that American companies have accumulated more than $400 billion in overseas profits.

… Mr. Kerry also borrowed an idea supported by many Republicans. In addition to reducing the corporate tax rate, the plan would give American multinational companies a one-year “tax holiday” under which they could bring their accumulated foreign profits back to the United States at a tax rate of only 10 percent.

Economic advisers to Mr. Kerry said the tax holiday would actually lead to a short-term windfall in tax revenues, because companies would have a special incentive to bring back hundreds of billions of dollars that have been sitting untaxed overseas. Under the plan, the government would use that windfall to pay for a two-year tax credit to companies that create new jobs.

I gather from this description that the plan is intended to be revenue-neutral, which means that it is designed to keep the total taxes paid by corporations roughly constant. Given that, Kerry’s plan makes some sense, though I think that he is probably overdoing the rhetoric a bit if he suggests that these changes to the tax code will reduce the movement of US firms overseas. In fact, I doubt that his changes would have any measurable impact on US corporate decisions about setting up operations overseas. The most important factors that cause a US firm to produce in another country are usually wages, fixed costs, and transportation costs, not tax considerations.

On the plus side, though, by eliminating this odd distortion in the corporate tax code, there may be some efficiency gains as capital is no longer held in overseas bank accounts simply for tax purposes. Most interesting to me, however, is the suggestion that the windfall in tax collections could be used for some direct job-creating tax stimulus. That’s an excellent idea, I think. Like AB’s proposed reduction in the payroll tax, these are the sorts of ideas that could actually generate real job creation.