Yesterday the Senate Homeland Security Committee’s Permanent Subcommittee on Investigations held a hearing on “offshore profits shifting,” with a focus on making Apple and its CEO Tim Cook into the poster child of corporate tax avoidance. As I wrote in The Hill, blame is not a national competitiveness strategy.
But another theme of the event was the seeming unfairness of a situation where domestic multinationals like Apple are not required to pay the full 35 percent tax on their foreign earnings. Despite the fact that we are one of the only nations with a worldwide system of taxation (that requires U.S. multinationals to pay US taxes on foreign earnings when they bring them home), this notion is actually wrong. It is actually in the interest of non-multinational U.S. firms for multinationals to pay less in taxes. Here’s why.
U.S. economic politics is often framed as a clash between “Main Street” and big multinational corporations, with the former salt-of-the earth hard working mom and pop owners and the latter controlled by profit-hungry greedy tycoons. But this framing misses the point that what will determine whether America thrives in the global economy is not whether Fred’s clothing shop on Main Street sells more pants. It is whether companies like Apple that export goods and services and compete in tough international markets do well.
Defenders of Main Street will, of course, argue otherwise. “How can you say that corporations, and not small Main Street businesses, are the engines of growth?” they will protest. “We all know that Main Street creates the jobs, produces the innovations, and drives the growth.” We may think we know this but what we think we know is wrong.
Let’s start with the claim that Main Street is the source of jobs. To understand why the jobs claim is wrong, it’s important to understand the difference between what regional economists refer to as local-serving and export-serving businesses. Consider if Apple were to go out of business because one of its main competitors, Samsung, pays lower taxes than it does (assuming that the U.S. ends foreign tax deferral). The closed facility would mean that Apple workers and suppliers would have less money to spend, and the local restaurants, dry cleaners, clothing stores, and barber shops in Silicon Valley would lose a significant amount of business. In contrast, if one of these local-serving “Main Street” businesses had gone out of business, it would have had no effect on the output of Apple; moreover, another business would more or less automatically expand or emerge to meet local demand.
The reality is that the majority of U.S. businesses are local-serving. These include, for example, the 219,986 doctors’ offices, 166,366 auto repair facilities, 151,031 food and beverage stores, 115,533 gas stations, 111,028 offices of real estate agents and brokers, 93,121 landscaping companies, 75,606 nursing homes, 36,246 furniture stores, 28,336 veterinary offices, 15,666 travel agencies, 4,571 bowling alleys, 2,463 amusement arcades, 858 radio networks, and 26 commuter rail systems. These and millions of other local-serving businesses will neither prosper nor suffer principally on the basis of economic policies targeted at them. Providing them easier credit, cutting their taxes, giving them subsidies, exempting them from regulations, or any of the myriad “remedies” offered by Main Street backers are largely irrelevant to their collective survival (although perhaps not to their owners’ income) and to U.S. economic vitality. What is relevant is the strength of the demand for their goods and services. Let’s say that the government decided to help these Main Street businesses by saying that they could pay taxes at a rate of 10 percent instead of 35 percent. No new jobs would be created because the same number of people would need haircuts and pants. It would even be the same if the government provided them with low-cost loans. If we want to help Main Street create jobs, the best way to do so is to help U.S. companies competing in intense global markets.
Presumably Subcommittee Chairman Senator Carl Levin (D-MI) knows this when it comes to his home state of Michigan. For the Michigan Democratic party platform clearly endorses giving tax breaks to companies that sell their goods or services outside the state of Michigan. The same kind of tax breaks that Ireland provides to attract Apple jobs. Somehow it is okay that Michigan does this, but not okay for other nations, and certainly not okay for the federal government. Aren’t these policies the Democratic party supports unfair to local Michigan companies? Why should GM pay lower taxes than the local electric utility or barber shop? Every person who calls him or herself an economic developer knows the answer, for it’s the thing you learn in the first week of studying regional economic development. Unless Michigan (or any state or city) has healthy companies that sell their goods or services outside the state (e.g., the big three auto makers, Dow Chemical, etc.), they will not have a healthy economy and local-serving businesses will shrink. It’s no different at the national level.
In short, it’s Multinational Street (and “high growth entrepreneurship street”) not Main Street that predominantly drive the nation’s jobs, competitiveness, innovation, and productivity growth. Requiring U.S. traded sector firms to pay the same taxes as non-traded sector firms is a sure recipe for even lower levels of U.S. economic competitiveness, even less spending at Main Street companies, and even fewer jobs.