Tuesday nights debate between President Obama and Gov. Mitt Romney highlighted two visions of Americas future for investors.
Obama emphasized fairness when he discussed the potential for future economic growth. He criticized Romneys plans for a new corporate tax system. And he promised to raise taxes on upper income Americans, including some small businesses.
Romney had a different vision. He repeatedly described American economic growth as linked to making America the most attractive place for new businesses, for entrepreneurs, and for globally mobile capital investment. He emphasized lower tax rates, including corporate tax rates.
Take, for example, the candidates plans for corporate tax reform. Both recognize that because Americas corporate tax rate is 35%, the highest in the world, and 12 percentage points higher than the average of 23% for its industrialized competitors, reform is becoming increasingly urgent.
High tax rates are driving American companies overseas. For example, Aon PLC /quotes/zigman/9422289/quotes/nls/aon AON +1.16% , the Chicago-based insurance company, recently relocated its headquarters to London, in part for tax reasons.
Furthermore, America taxes corporations on their worldwide income, rather than on a territorial basis, namely income earned in the U.S. Only 7 of the 34 Organisation for Economic Cooperation and Development (OECD) countries do the same. This places America at a competitive disadvantage.
Obama has called for a top rate of 28%, and Romney has called for a rate of 25%. Both have called for ending tax preferences — namely, deductions from gross income that reduce taxable income and therefore tax payments.
In addition, Obama has proposed ending deductions for moving overseas, eliminating tax preferences for oil and gas that also apply to other domestic manufacturing, and imposing a minimum tax on foreign income held abroad and not repatriated. See counterpoint by Rex Nutting: Obama debate win gets campaign back on track.
Obamas tax plan would make the United States an even less desirable place to invest than it is at present, with the result that more corporations would move offshore. Corporations could escape the minimum tax on foreign income and the increase in taxation on oil and gas by relocating to other countries. Ending the deduction for moving overseas reduces incentives for companies to locate in America.
Romney has proposed changing to a territorial system of taxation, with a minimum repatriation tax.
Obama said, "Now, Governor Romney actually wants to expand those tax breaks. One of his big ideas when it comes to corporate tax reform would be to say, if you invest overseas, you make profits overseas, you dont have to pay U.S. taxes."
The president continued, "And its estimated that that will create 800,000 new jobs. The problem is theyll be in China. Or India. Or Germany."
Obama was likely referring to an economic study by Reed College professor Kimberly Clausing in which she calculated that a U.S. transition to a territorial tax system would result in 800,000 jobs being created abroad. She argued that corporations would have greater incentives to move income to lower tax jurisdictions.
But Clausings study has serious flaws. She looked only at the effect of changing from a worldwide to a territorial system, and not from changing to a territorial system with a lower rate. A combination of a lower rate with territoriality would drive fewer jobs offshore. Most proposals to move to a territorial system are accompanied by reduced corporate tax rates.
The implication of Clausings study is that jobs abroad necessarily replace those in America. However, economic studies conclude that productivity gains abroad are generally firmwide and that job creation abroad is accompanied by domestic job creation.
Lower rates and a territorial tax system would attract jobs back to America rather than driving them offshore. Multinationals would have fewer reasons to leave. Other corporations would be likely to return to the United States. Read Manhattan Institute report on the merits of a territorial tax system.
Incentives to locate offshore — specifically, a high top U.S. marginal rate — compared with that of competitors and taxation of foreign income when repatriated are already embedded into Americas tax code. Thats one reason that multinationals have created more jobs overseas that in America.
Between 1999 and 2008, according to the Commerce Department, employment by majority-owned foreign affiliates of U.S. parent corporations increased by 2.4 million, or 30%. In contrast, U.S. employees of U.S. multinationals declined by 1.9 million, or 8%.
Our worldwide system of taxation has resulted in about $1.7 trillion of undistributed earnings that remain abroad and that contribute little to the U.S. economy. These funds could return to America and be used for capital projects, consumption, and job creation, or paid out as dividends or share repurchases — all of which would boost a weak economy. A territorial system would allow earnings to be repatriated with minimal taxation.
Based on tax reform and other ideas, Romney has an optimistic view of Americas future.
Pundits will spend the coming days disputing which candidate won and which candidate lost the debate. But investors are not really interested in political debates. They are interested in finding a good place to invest their capital. For a good place to invest, it looks to me that Romneys vision of America beats Obamas vision any day.
Original Source: http://www.marketwatch.com/story/romneys-tax-plan-will-drive-business-growth-2012-10-17?reflink=MW_GoogleNews