Is there a corporate tax break that ships jobs overseas?

An ad from Alison Lundergan Grimes attacks Mitch McConnell on taxes.
An ad from Alison Lundergan Grimes attacks Mitch McConnell on taxes.

Democrats and their advocates have washed, rinsed and are now repeating one of their favorite talking points from 2012: that "(Insert Republican Here) supports tax breaks for corporations that ship jobs overseas."

There’s a lot packed into this insult. It implies that the person on the receiving end is beholden to corporate interests, against sensible tax reform and unconcerned about American employment. It plays to Americans’ economic woes and fits into the recent discussions about corporate tax reform, following Burger King’s merger with a Canadian company.

Only a CPA might enjoy digging into the nuances of tax policy. But our search for evidence shows that the Democrats’ description is so simplistic as to be misleading. There is no special tax break for outsourcing.

When we asked Democratic groups for evidence for their claims, they pointed us to Republican votes on a failed tax reform bill -- a bill that experts told us would not have affected corporations’ behavior.

In the 2014 midterms, we’ve seen the claim lobbed at Sen. Mitch McConnell, R-Ky., by his Democrat challenger Alison Lundergan Grimes, who said McConnell voted "three times for corporate tax breaks that send Kentucky jobs overseas." In Iowa, liberal political action committee Next Generation Climate said Republican Senate candidate Joni Ernst signed a pledge that "protects tax breaks for companies that ship jobs overseas." And in Louisiana, the liberal Senate Majority PAC ran an ad that said the Koch brothers want to "protect tax cuts for companies that ship our jobs overseas."

Other Democrats have used it this year, too. Obama mentioned it in his 2014 State of the Union address in January, and Rep. Nancy Pelosi, D-Calif., said it on The Colbert Report.

The Internal Revenue Code is lengthy and complicated (an understatement), but we wanted to dig into the details to explain why this talking point isn’t solid.

A tiny portion of the tax base

There is no tax break or loophole that addresses outsourcing or insourcing jobs specifically. When Democrats say "tax breaks" in these ads, they are usually talking about standard business expense deductions. Companies can write off many business-related expenses as tax-deductible -- including relocation.

But this isn’t a special provision just for businesses that move outside of the United States. A business would get the same deductions for money spent moving from New York to California.

We should note that this isn’t connected to things like the Burger King merger, which is a tax inversion -- a process by which the company becomes part of a foreign parent company, potentially resulting in significant savings on what it pays in U.S. taxes. (More on this in a bit.)

Some Democratic lawmakers think it’s unfair that a company can take a deduction for moving costs when those costs include money spent transporting jobs out of the country. To remedy this, Senate Democrats proposed the Bring Jobs Home Act in 2012 and again in 2014. The bill failed both times.

The Bring Jobs Home Act would have eliminated the standard deduction for moving expenses for businesses relocating overseas. It also would have given a 20 percent tax credit to companies who insource jobs.

(Democrats also proposed a similar bill, that also failed, in 2010.)

To prove that a Republican supports extending standard deductions to companies that outsource, Democrats often point to a "no" vote on the bill. Votes in 2012 and 2014 split almost exclusively along party lines -- with Democrats voting for the measure, and Republicans voting against.

Among Republicans’ reasons for opposing the legislation, the policy would have lost revenue and added to the deficit, according to Congress’ Joint Committee on Taxation. The government would have spent more money on the tax credit for insourcing than it would have raised by eliminating deductions related to outsourcing. Overall, the policy would have resulted in an estimated $214 million loss over 10 years.

Tax experts we spoke with said the law was almost entirely symbolic. The amount of money associated with these standard deductions is minuscule, compared to corporate tax revenue overall. So minuscule, in fact, that getting rid of deductions for business expenses associated with outsourcing would not be nearly enough to affect a company’s decision to engage in foreign activity.

"It adds up to a trivial amount of money," said James Hines, a professor of law and economics at the University of Michigan. "Given how many big multinational firms we have, it’s impossible that it has any effect on their behavior."

Eliminating standard deductions for costs associated with outsourcing would result in an average $14.2 million a year in revenue, according to the Joint Committee on Taxation estimates. That’s not much in the grand scheme of things.

For some perspective, the Internal Revenue Service took in $273.5 billion in corporate income taxes in 2013 alone, according to the Tax Policy Center, a research group, based on Office of Management and Budget data. Revenue from eliminating that deduction would amount to 0.005 percent of total revenue.

Hines said the Bring Jobs Home Act ignores more significant issues with the corporate tax code that have the potential to incentivize businesses to increase offshore operations.

It’s worth noting that at 39.1 percent, the United States has the highest statutory corporate income tax rate among developed countries. (Though this doesn’t take into account deductions and exclusions, which result in a lower effective tax rate.)

Businesses with international operations pay the host country’s tax on income earned, which is likely lower than the American rate. The companies then pay U.S. taxes on profits they bring back home. But companies can avoid paying U.S. taxes on foreign-earned income entirely by investing the profits abroad instead. This is called deferral.

Then there are inversions, and the famous example of Burger King. When Burger King merges with Canadian donut chain Tim Hortons, its official address -- for tax purposes -- will go to Canada. But the headquarters will remain in Miami.

Tax Policy Center fellow Roberton Williams said companies don’t choose to increase their foreign operations because of the tax benefits alone. There are significant difficulties and administrative costs when expanding abroad, so there has to be some business incentive, too.

But these tax policies have more influence on where companies keep their money -- not necessarily their employees, Williams said. Though if a company has a significant amount of money in a foreign country, it might choose to employ people there.

The jury’s still out on whether or not corporations’ international activity has a positive or negative effect on American jobs. Hines said there’s good research on both sides -- on the one hand, one could argue that multinational corporations deplete American jobs by sending more to overseas plants. But on the other, foreign activity boosts the domestic economy, resulting in more jobs at home. Hines’ own research says companies that expand abroad tend to expand their domestic activity, as well.

This nuanced picture of tax policy gets lost in the 30-second attack ads that have been dominating the airwaves.

"A politician is certainly not going to have 10 minutes to say, ‘Here’s what’s going on on the issue of international finance,’" Williams said. "That's not nearly as effective as a shorter version that explains the basic issues in a way that listeners can understand."