It was one of the most heated and perplexing moments in the presidential debate last night. Barack Obama pledged to "close those loopholes that are giving incentives for companies that are shipping jobs overseas" and instead "provide tax breaks for companies that are investing here in the United States." As things stand, he added, "you can actually take a deduction for moving a plant overseas. I think most Americans would say that doesn't make sense. And all that raises revenue."
Romney expressed bewilderment. "You said you get a deduction for taking a plant overseas," he noted. "Look, I've been in business for 25 years. I have no idea what you're talking about. I maybe need to get a new accountant."
So what's going on here? It turns out that both candidates, in a sense, had it right. There's no specific tax break for moving jobs or a plant abroad, but companies can deduct the expenses associated with doing so as part of the cost of doing business.
"To be perfectly blunt [Obama's] proposal is for show only," Eric Toder, co-director of the Washington, D.C.-based Tax Policy Center, told Foreign Policy. While many companies invest overseas, he explained, "there are not a lot of companies that take plants and literally ship them overseas." "Who knows," he added, "maybe [Romney's] businesses never did ship a plant."
For some time now, however, Obama has been running on the promise to end tax breaks for companies that ship jobs overseas. He made it a central theme of his 2008 campaign, and even raised the issue during a debate while running for the Senate in 2004:
But Obama's talk of "loopholes" and "incentives" for companies to send jobs abroad is pretty misleading. As the Washington Post's Glenn Kessler notes today, it's true that companies can deduct the expenses associated with moving their operations overseas, but they can do so because "ordinary and necessary" business expenses -- including closing a plant in the United States and opening one in another country -- are tax deductible. Or, as Fox News put it, "a company can claim the deduction whether it's moving operations to Bangalore or Boston, to Kuala Lumpur or Kansas City."
In other words, it's not like the U.S. government is encouraging corporations to relocate plants overseas through specific tax credits or sleight of hand in the tax code. Instead, Obama wants to add incentives and disincentives to the tax code by preventing companies from deducting the costs of moving their operations overseas as part of their ordinary business expenses. Kessler also points out that, according to the nonpartisan Joint Committee on Taxation, taking such action would only raise $168 million in revenue over a decade -- a paltry sum relative to the country's $1 trillion annual budget deficits.
The Obama administration would go a step further by offering companies a 20-percent tax credit for the costs they incur in moving operations back to the United States, in an effort to incentivize "insourcing." Senate Republicans blocked a Democrat-led bill -- the Bring Jobs Home Act -- that included these very proposals. "Unfortunately, there's a constituency in Congress that supports tax breaks for companies that ship jobs overseas," White House Press Secretary Jay Carney lamented shortly before the legislation died, in response to a question about why, three-and-a-half years after Obama's election, the president hadn't made good on his campaign promise.
In January, shortly after Obama's State of the Union address, the White House released a fact sheet that offered a clearer explanation of what the president meant by his overseas jobs sound bite:
If a company was closing a plant to move that plant overseas and incurred $1 million in expenses - ranging from the cost of scrapping equipment to shipping physical capital to clean up costs - it could right now deduct those expenses, and get a tax reduction of $350,000 (assuming the firm faces the 35 percent statutory tax rate). The President proposes to eliminate this tax deduction. And, if a corporation moving jobs to the U.S. incurred similar expenses, the President proposes to provide that company with a tax credit of $200,000 to help offset these costs and encourage investment here at home.
That's a point the administration can make without clouding the issue by invoking phantom "loopholes" and "incentives." Or, as Senator Orrin Hatch (R-UT) put it after waiving a copy of the U.S. tax code on the House floor in July:
"I'll keep this book of tax codes at my desk here. If someone wants to show me the tax code that allows deductions for shipping jobs overseas. I'd like to see it. But it's not in here."
For those who are wondering: As far as I can tell, Orrin Hatch is not Mitt Romney's accountant.
Passport, FP’s flagship blog, brings you news and hidden angles on the biggest stories of the day, as well as insights and under-the-radar gems from around the world.