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Obama Announces New Plan To Close U.S. Tax Shelters

U.S. President Barack Obama (right) speaks about tax reform as Treasury Secretary Timothy Geithner looks on at the White House.
U.S. President Barack Obama (right) speaks about tax reform as Treasury Secretary Timothy Geithner looks on at the White House.
WASHINGTON -- Two of the most important problems facing the administration of U.S. President Barack Obama during the current worldwide recession is putting more Americans back to work and reducing the country's huge deficit.

Obama has announced a program that he says will address both by eliminating tax shelters for companies that outsource jobs to other countries and giving tax incentives to those who create jobs in the United States.

Obama and his treasury secretary, Timothy Geithner, said it's long past time for Washington to straighten out a tax code that makes it more expensive for American companies to hire employees in the United States than in other countries.

At a May 4 announcement at the White House, Geithner began by saying the Obama administration believes that it's time to bring fairness to the U.S. tax code.

"Today we are taking another important step toward those goals by ending indefensible tax breaks and loopholes which allow some companies and some well-off citizens to evade the rules that the rest of America lives by," Geithner said.

"We believe in a level playing field. Unfortunately we have a tax code that gives businesses that invest and create jobs overseas a competitive advantage over those who invest and create jobs at home," he said.

Bad Recipe

Under the current system, multinational U.S. companies are allowed to keep foreign-made profits in foreign companies, delaying tax liabilities on them virtually forever. Obama said this contributes heavily to the country's deficit, and to unemployment, and is not a recipe for competitiveness.

"The way we make our businesses competitive is not to reward American companies operating overseas with a roughly 2 percent tax rate on foreign profits, a rate that costs taxpayers tens of billions of dollars a year," Obama said. "The way to make American businesses competitive is not to let some citizens and businesses dodge their responsibilities while ordinary Americans pick up the slack."

Instead, Obama's calling for Congress to approve new sections of the tax code that would deny existing tax breaks to companies with overseas operations. He said his plan would lead to $210 billion in new tax revenues over 10 years.

Those savings, according to Obama, would allow for tax incentives for doing exactly the opposite: creating jobs in the United States. He also plans to hire nearly 800 new agents at the Internal Revenue Service, which collects federal taxes.

Such a plan should be considered very carefully, according to Barry Bosworth, an economist at the Brookings Institution, a private policy-research center in Washington.

While many Americans now may look skeptically at the needs of big businesses, Bosworth tells RFE/RL that it's important not to frighten these enterprises out of the country altogether. And he says business taxes in the United States are among the highest -- and therefore the most frightening -- in the world.

"My view is that in a global world, you can't tax people out of proportion to the benefits that they receive. Because if somebody tries to tax you and you're not getting anything from it, you just move," Bosworth says.

"We're very aware of that within the United States, that companies move from one state to another all the time -- people move from one state to another all the time -- because of taxes. And that's true in the [globalized business] world as well."

Deserving Scrutiny

But Bosworth says there are some international business practices that deserve scrutiny by the Obama administration. He uses the Microsoft Corporation as an example.

Bosworth says Microsoft sells its computer operating system, Windows, all around the world. He notes that Microsoft develops Windows in the United States, but then exports what might be called a "master copy" of the software to a factory in Ireland, a country that's given Microsoft tax incentives to operate there.

It's at that Irish factory that Microsoft produces the disks that are then sold around the world. Bosworth says Microsoft says Windows is therefore exported not from the United States but from Ireland -- and under the more favorable Irish tax laws on exports.

Bosworth says this is the sort of solution Obama should pursue, and he argues that taxes on sales royalties would generate at least as much new tax revenue as the new plan announced at the White House.

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