Foreign Earnings Tax Would Fund Cronyism

SMITH BRAIN TRUST -- Earlier this week, President Obama proposed a 14 percent tax on U.S. multinationals’ overseas earnings, plus a 19 percent minimum tax rate on future foreign profits. The proceeds would fix roads, bridges and other infrastructure. The proposal, however, would make “U.S. firms less competitive internationally as the foreign subsidiaries’ costs would increase by the amount of the tax," says Michael Faulkender, associate professor and director of the Masters Program in Finance at the University of Maryland’s Robert H. Smith School of Business. Plus, the proceeds should target deficit reduction, ahead of infrastructure, Faulkender says.

“The Obama administration’s proposal to spend on infrastructure essentially means spending it on the same cronyism that we saw with the stimulus while running $500 billion annual deficits, adding $6 trillion to the national debt over the next 10 years," Faulkender says. "Raising taxes on our most innovative companies to fund ever greater unsustainable federal budgets is a recipe for disaster.”
 
In addition, Faulkender says cash is imminently fungible and cannot be tracked in a way that ensures the U.S. investment is beyond what the firm would have done anyway. “We saw this play out under the 2004 American Jobs Creation Act,” he says. Additionally, the types of firms engaged in significant foreign operations already have access to capital to fully fund any domestic investment opportunities. “We saw only marginal increases in domestic investment resulting from the AJCA tax holiday," he says. "And there is no reason to believe we would get more under this proposal.”