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Wednesday, April 21, 2004

Kerry's Plan to Fight Outsourcing: Protectionist?

In another comment, Peter points out that the Economist has criticized Kerry's anti-outsourcing plan, which involves charging same tax rates to American-owned companies operating abroad as they pay at home:

"His tax plan nonetheless amounts to protectionism by other means. For it is aimed squarely at discouraging manufacturing abroad by American companies. But it is a bizarre type of trade barrier, because it hits only imports from American firms abroad. A Japanese-owned factory in Malaysia, for example, exporting semiconductors to America but paying only local taxes, would be at a great advantage against a similar American-owned plant, which would be subject to America's higher tax rate. Mr Kerry thinks he is encouraging bosses to keep jobs at home. Instead, he may just prod American consumers to buy even more from foreign companies."

This article reads to me a lot like the scattershot criticism from the National Review I cited yesterday. The Economist says Kerry's plan is "protectionism by other means...[it may] prod American consumers to buy even more from foreign companies." So the Economist criticizes protectionism in the beginning of the paragraph, but switches to mercantilism by the end, worrying that Americans will buy too much from those darned foreigners. Huh?

Peter doesn't cite some of the weaker points in the article. The Economist points out that many other countries don't tax overseas profits of their companies [So? Is this is a good policy?] It says what's really needed is to drastically cut corporate income taxes, like Russia and Estonia [!] have [Perhaps we really should adopt Russia's corporate tax policy. But this isn't a criticism of Kerry's plan, just a claim that it doesn't go far enough]. And again, the Economist seems to be endorsing mercantilism, raising fears of "tax competition" from other countries with low corporate tax rates [Huh? Isn't trade a good thing?].

I think the article's logic is supposed to work this way: Kerry is a protectionist. Kerry's plan won't achieve protectionist ends. Therefore, Kerry is foolish for proposing it. But a simpler explanation for why Kerry is proposing this plan is that he isn't a protectionist. Instead, he's trying to calm protectionist impulses in the public, and at the same time decrease distortions in the economy (by equalizing corporate taxes at home and abroad) and increase investment (by lowering corporate tax rates).

But back to the article's strongest point, which is that the Kerry plan will make imports of goods from Japanese-owned plants in Malaysia cheaper than similar imports from American-owned plants in Malaysia. But, once again, so what? Why should we care about whether Malaysian workers report to Japanese bosses or American ones? Why should we care if American subsidiaries in Malaysia are sold to Japanese companies? Neither affects American jobs and neither affects real economic activity in Malaysia or America.

By contrast, the problem that Kerry proposes to deal with -- American plants relocating abroad for the sake of lower taxes -- is a classic case of a "distortion" in economic activity due to the tax code. And another article in the Economist points out a related distortion caused by current policy. Because American companies don't have to pay taxes on foreign income until they bring it home, they try do avoid doing so. There may be as much as $600 billion in un-repatriated American profits invested overseas in order to avoid paying U.S. taxes.

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