President Barack Obama's proposal to give tax breaks to firms that set up shops at "Buffalo instead of Bangalore" would dramatically affect American jobs and investment and leave US companies less competitive in global markets, a new economic report has warned.
As many as s 2.2 million American jobs could be affected by a repeal, or effective repeal, of "tax deferral", warns the report authored by Robert J. Shapiro, a former Clinton Administration economic official, and Aparna Mathur, a Research Fellow at the American Enterprise Institute.
The report, commissioned by the Technology CEO Council, a Washington-based advocacy group of US American tech-companies, also found that besides affecting jobs, investments in the United States in plant, equipment and property could fall by as much as $84.2 billion.
Repealing or sharply limiting deferral would not generate large tax revenues, since substantial job losses, wage cuts and lower investments would reduce tax revenues, it said.
Congress is now considering legislation that would sharply limit the "deferral" rules that protect US businesses from bearing much higher tax burdens on their earnings abroad than their foreign competitors in the same markets.
The key to these results is evidence showing that in modern global companies, new investment and job creation in foreign subsidiaries are closely linked to new investment and job creation by the parent companies in the United States, the report said.
These close linkages mean that while reducing or repealing deferral may be tempting politically, it would produce significant, negative economic consequences, it said.
The policy goal of changing deferral is ostensibly to make the United States a more desirable place for investment and job creation, but these changes would have the opposite effect of reducing domestic investment and jobs.
"The current proposal to substantially restrict 'deferral' would end up reducing American jobs and investment and could impair our economic recovery," said Dr. Shapiro, who has advised former President Bill Clinton and British Prime Ministers Tony Blair and Gordon Brown as well as other leaders and private companies.
"The Obama Administration deserves credit for many initiatives to promote investment and innovation," said Bruce Mehlman, Executive Director of the TCC, a group made up of high-tech CEOs focused on policies that strengthen American competitiveness.
"But we cannot expect to lead the world in high tech by marrying the world's best innovation infrastructure with the world's most confiscatory corporate tax structure."
The report concludes that the Administration and the Congress should conduct a serious review of the tax code and identify broad reforms that take account of the actual dynamics of the global economy and the need to support the integrated operations and international competitiveness of American companies.