Obama plans tax crackdown on firms setting shop in India

Contending that the current US tax system gives US-based multinationals shipping jobs to places like India an unfair advantage over domestic rivals, President Barack Obama has announced plans to reduce tax breaks for them.

"It's a tax code that says you should pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, NewYork," Obama said Monday spelling out his proposals to close corporate tax loopholes and crack down on overseas tax havens.

"I want to see our companies remain the most competitive in the world. But the way to make sure that happens is not to reward our companies for moving jobs off our shores or transferring profits to overseas tax havens," he said in a White House announcement.

The goal of the Obama plan is to help create new jobs in the US and make the tax code fairer, officials said. All told the changes would raise $210 billion in tax revenue over 10 years, they said.

But tax policy experts and corporate lobbyists cited by CNN said such measures, unless accompanied by a reduction in the corporate tax rate, will push more companies to move their operations-and jobs-overseas to more tax friendly countries.

The White House and Treasury Department laid out three proposals, some of which would require congressional approval to take effect, that they say will eliminate the current tax advantages US-based multinationals get for investing and creating jobs abroad.

Tax deferral rules: A reform of the "deferral" rule, which lets US-based multinationals deduct expenses for overseas operations, but defer paying income tax on the profits from those operations. That gets paid only if and when companies bring that money back to the US.

R&D credit: A tax cut for companies that do their research and development in the US by making permanent a "research and experimentation" credit that already exists and would cost $74.5 billion in tax revenue over 10 years.

Foreign tax credit: Make it harder for companies to "abuse the foreign tax credit. Currently companies may claim a credit against their US income taxes for taxes they paid to another country. Amending that rule would raise an estimated $43 billion over 10 years, according to the administration.

Several lawmakers, including US House of Representatives Ways and Means Chairman Charles Rangel, signalled support for Obama's proposals.

But one crucial player, Senator Max Baucus, Democratic chairman of the Senate Finance Committee, called for more study of how US businesses would be affected.

The proposed changes to the deferral and foreign tax credit rules will make for a tough sell to the business community too.

"These aren't loopholes. These were put into the code with full knowledge and full discussion," said US Chamber of Commerce chief economist Martin Regalia.

"This is only about raising more money - it's not about making the tax code simpler or more efficient or easier or anything else."

Swadeshi Bachao: Obama calls for "Buy American" provision

A "Buy American" provision in President Barack Obama's $819 billion stimulus plan that bans the purchase of foreign construction materials for public works projects has set off a heated debate about its efficacy.

The contentious provision in the bill as passed by the US House of Representatives Wednesday would, with some notable exceptions, ensure that only US-produced iron and steel be used for construction.

It expands on a 76-year-old federal law. The Senate, which is likely to take up stimulus next week, would go even further, effectively requiring that any products and equipment be American-made.

"The Buy American provision will help stimulate our own economy," Democrat Byron Dorgan, who wrote the provision, told CNNMoney. "When taxpayer dollars are used, we should urge that money to support the things be produced here at home."

Critics argue the proposal appears to fly in the face of a G-20 agreement reached in November, when world leaders decided not to raise new trade barriers in 2009.

Many economists also argue that a Buy American provision could actually backfire, slowing economic growth instead of helping expand the American job market.

"It's not a good time to initiate protectionist measures in any shape or form," Kurt Karl, head of economic research at Swiss Re was cited as saying.

"It hurts growth, because if you force one side to go with domestic production only, then that precludes them from getting less expensive materials from overseas."

The economy is already reeling, and will soon enter the 15th month of a recession. A major drop in trade could cause a one percent drop in gross domestic product, according to Karl.

"We believe it invites reciprocal restrictions on US exports," Peter O'Toole, a spokesman for General Electric, which gets half its of revenue from abroad was cited as saying.

"When you take competition out, it drives prices up. We're in a globalized world - we can't turn back the clock."

But a host of politicians believe the Buy American provisions have appropriate safeguards to ensure stimulus spending is not wasted on expensive materials and the US economy does not suffer long-term consequences.

Dorgan for one said his support for the bill comes down to fulfilling President Obama's promise of creating up to 4 million American jobs.