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Ah, the catchphrase. It sounds so simple and so outrageous. "Tax breaks for companies that ship jobs overseas."
Democrats use the line frequently, and vice presidential nominee Joe Biden offered a version of it to attack John McCain during his acceptance speech at the Democratic National Convention: "Millions of Americans have seen their jobs go offshore, yet John continues to support tax breaks for corporations that send them there," Biden said.
The way Biden says it, it sounds like McCain wants to offer a special tax break for companies to move jobs offshore. Right?
That's not quite how it works. So what is Biden talking about?
Bear with us here, because this requires a quick explanation of the international corporate tax system.
U.S.-based corporations are required to pay U.S. corporate income taxes on all of their profits, no matter where in the world those profits are earned. Companies operating overseas pay taxes to foreign countries. Then, if the amount they paid is less than what they would have owed on domestic profits, they pay the remainder to the United States.
For example, if a company earns $1 million in Ireland, which has a 12.5 percent corporate tax rate, it pays $125,000 to Ireland. Then, because the U.S. corporate tax rate is 35 percent, the company would owe an additional $225,000 to the United States. (This example is deliberately oversimplified, and U.S. companies often have tax breaks that reduce their real tax rates below 35 percent.)
But there's a catch. The company only pays that $225,000 when it brings the profits back to the United States. If the profits remain overseas, the company gets to defer taxation indefinitely. Deferral is a powerful incentive, and the ability to pay taxes later on income earned now is what makes 401(k) plans so attractive to individuals. Deferral also helps U.S. companies compete overseas, because they don't immediately face higher taxes than their foreign-based competitors.
However, Democrats argue, that ability to defer taxes encourages companies to locate jobs overseas and keep their profits there, and that's a logical argument. Of course, there are plenty of nontax reasons why companies might operate internationally, such as cheaper labor, access to foreign markets and proximity to raw materials.
Got all that? So let's come back to Biden's statement: What does McCain believe?
In a recent campaign ad, the Obama campaign refers to a 2004 Senate vote on the issue. Sixty senators, including McCain and eight Democrats, voted to kill a proposal that would have required companies to pay taxes when they import goods produced in their foreign factories. The measure would have limited, though not eliminated the tax deferral.
During his presidential campaign, McCain has taken a different approach to international taxes. He argues that the current tax system puts U.S. companies at a disadvantage, and has proposed lowering the top corporate tax rate from 35 percent to 25 percent.
Carly Fiorina, the former Hewlett-Packard CEO who advises McCain on economic policy, argued that there is no tax break for companies to move jobs overseas. "If the tax rate were lowered on businesses in this country, businesses would bring money back," she said on ABC. "The reason they cannot bring money back is because the tax rate is so high."
As a side note, Obama has not been clear about what limits he would place on deferral of income earned overseas. In a recent conference call with reporters, campaign economic adviser Austan Goolsbee said the magnitude or length of deferral could be curtailed, but the campaign has not released a detailed plan.
Does John McCain support tax breaks for companies that ship jobs overseas? Not really. He supports retaining a long-standing principle of the U.S. tax system that encourages some companies to move operations overseas. The world is far more complicated than Biden's catchphrase makes it seem, and that makes his argument Barely True.
Editor's note: This statement was rated Barely True when it was published. On July 27, 2011, we changed the name for the rating to Mostly False.
Barack Obama campaign ad, "Original," Accessed on Aug. 28, 2008
ABC News, Comments of McCain economic adviser Carly Fiorina , accessed on Aug. 28, 2008
Barack Obama campaign conference call with economic advisers Jason Furman and Austan Goolsbee, Aug. 14, 2008, and follow-up e-mail exchange with campaign spokeswoman Moira Mack
Tax Policy Center, Explanation of the international tax system , accessed on Aug. 28, 2008
Tax Policy Center, An Updated Analysis of the 2008 Presidential Candidates' Tax Plans , Aug. 15, 2008. Accessed Aug. 28, 2008
U.S. Senate, Vote to Table Dorgan Amendment to S 1637 , May 5, 2004, accessed Aug. 28, 2004
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