Financial collapse has significantly changed the globalization equation. This year’s fears of job outsourcing and trade deficits — and business worries about a protectionist response from Congress — have given way to more imminent problems of corporate bankruptcies and short-term survival.
On the trade front, current events will likely preoccupy the Obama administration and force it to focus on policy changes that will promote economic growth. In that context, the important debate for business is likely to be over tax policy. Both Barack Obama and John Kerry before him criticized multinational corporations for moving investments and jobs overseas and parking income there to avoid taxes. Both candidates promised to take steps to bring that income back home and tax it.
This debate matters because a misstep could derail our efforts to restart growth. The U.S. combined corporate income tax rate is the second highest among Organization for Economic Cooperation and Development countries and more than 12 percentage points higher than the OECD average. While the need for revenue is high, the trend in the OECD is for countries to reduce CIT rates to encourage growth. Some proposals have been floated that would reduce the U.S. rate but couple the reduction with elimination or narrowing of the deferral rules in an effort to discourage companies from increasing their overseas activities.
This is a potentially dangerous approach — if our tax rules constrain the ability of U.S. business to participate in growing overseas markets, their foreign competitors will have a permanent advantage. If we require U.S. corporations to pay more income tax than their foreign competitors on non-U.S. earnings, we would create a permanent cash drain that over time would so weaken U.S. companies that they could not catch up to their foreign competitors. This would be exactly the wrong move at this perilous time.