New tax threatens U.S. Recovery

    Proposed tax hike on international operations could delay economic rebound

    By John Chen

    President Barack Obama has proposed to raise taxes on the international operations of U.S. businesses. There is one thing the proposal can effectively achieve: make the United States an even less friendly place to do business, and thus delay the economic recovery.

    The current environment is dire to begin with. The U.S. has the highest corporate tax rate among developed nations. The latest Index of Economic Freedom by the Heritage Foundation ranks us an alarming 125th among 156 countries. We are one of the very few developed countries that still double-tax overseas income of our own businesses.

    Even more discouraging, President Obama’s proposal aims to levy tax on international profits once the money is made. This is in contrast to the current practice where companies pay tax upon repatriating the profits. In either case, it comes on top of what they already pay the foreign country in which they operate.

    The proposal also would limit the tax credit an international company could claim, whereas now we allow a tax credit equal to the amount of foreign tax paid.

    Although intended to keep investments and jobs from leaving our country, in the long run the measures in the proposal will drive investments away, and kill jobs in the U.S.

    On the micro level, it will make it even harder for global companies to run a profitable business, especially in this economic gloom. It’s already an uphill battle to drive revenue growth, and now companies are to be burdened with heavier taxes. After all means to reduce operational costs are exhausted, layoffs will follow. There’s no doubt that this will push the unemployment rate well into the double digits, from where it is now approaching 10 percent.

    On the macro level, investments in the U.S. will eventually dry up. The intention of the proposal could be to make it less attractive to run a global business and therefore curb outbound flow of investments. However, the reality is that companies will find a more pro-business, pro-growth region in which to establish themselves..

    OECD finds that the U.S. exerts a combined marginal corporate rate of 40 percent, a stark contrast to Europe’s average, for example, of 25 percent. Today, we have numerous American companies with a foreign arm. Tomorrow, these companies can choose to headquarter in a foreign country and create an American arm.

    When we lose the confidence of our global companies, our economy will suffer. How severe will this be? The parent companies of our multinational corporations – the flagships of our international businesses – account for a quarter of U.S. private sector output; and employ almost one fifth of the total private-sector workers. Three-quarters of the R&D investments of all U.S. companies combined come from these parent companies.

    The international tax modification represents not only a misunderstanding of the factors that drive the competitiveness of our economy, but also a protectionist undertone in the economic policies. When we attempt to limit the flow of investments, we hurt the confidence and prosperity of our businesses. And when that happens, we lose big time as a nation.

    Chen is chairman and CEO of Sybase, Inc., an enterprise software and services company based in Dublin, Calif.