President Obama’s new international tax proposals promise to “replace tax advantages of creating jobs overseas with incentives to create them at home”.  The main offender is the so-called deferral provision.   Under current law, U.S. corporations pay tax on their worldwide profits, but can defer tax on profits earned by their overseas subsidiaries until they “repatriate” the profits as dividends to the U.S. parent corporation.  If the foreign subsidiary is located in a country with a corporate tax rate lower than the U.S. corporate tax rate, deferral makes the effective tax rate companies pay lower on foreign investments than here -- an incentive for U.S. corporations to invest in low-tax foreign countries instead of in high-tax foreign countries or at home.  (Some of our major trading partners also allow their companies to defer tax on foreign profits, while many exempt most foreign-source income from tax entirely.)

But does deferral cost American jobs?  The simple answer is no.   The number of jobs in the United States has almost nothing to do with any tax provision that affects selected investments or industries.  Employment is influenced by fiscal and monetary policies – as well as periodic shocks to the system such as financial market meltdowns - that determine whether American and foreign consumers and investors are willing to purchase enough American-made goods, services, and assets to keep U.S. workers fully employed.  Taxes can indirectly affect employment to the extent they affect overall wage levels, but this effect is likely quite small because labor supply is not very sensitive to wages.  Specific tax incentives do affect where Americans work and what they produce and also affect overall living standards by influencing how efficiently we use our scarce people and capital and how much we invest for the future.  But they have scant impact on total employment.  

For example, a tax incentive for foreign investment may cause U.S. companies to close plants here and manufacture more overseas, paying wages to foreign instead of U.S. workers.  This raises the incomes of these foreign workers so they spend more overseas and on U.S. goods. It also drives down the value of the US dollar because the United States ends up purchasing more foreign currency.  With the US dollar cheaper, exports rise and imports fall, increasing jobs, though not the same ones that were lost.  Maintaining domestic employment depends on having the right overall monetary and fiscal policies, but these policies are needed whether we have the tax incentive or not. 

You can substitute any of your favorite causes and come to the same conclusion.  “Green” jobs are great for a lot of reasons, but replacing a dirty job with a green job does not increase employment.

But, you might ask, wouldn’t deferral's benefits raise employment in U.S. multinational corporations by encouraging them to produce more at home and less overseas?  Again, not necessarily.   U.S. companies that produce overseas do sometimes replace U.S. workers with foreign workers.  But some studies have instead shown that increased U.S. investment overseas stimulates exports of the goods those companies produce here or related goods.  U.S. foreign investment and U.S. exports may even be complementary - the more of one, the more of the other, and so, it is argued, foreign investment increases U.S. jobs.  I reject this argument for the same reason I'm throwing water on the notion that new deferral provisions can create U.S. jobs: employment is determined by overall demand for goods and services, not by targeted tax and spending provisions.  But the research suggests that even the initial impact on jobs before adjustments in currency values or interest rates could be either positive or negative.

I don’t say this to disparage the Administration’s international tax proposals.  There are valuable provisions that would improve enforcement tools and close loopholes that erode the corporate tax base.  And the pros and cons of paring back deferral reflect a complex trade-off between the efficiency gains from taxing all investment of U.S. corporations at the same rate and the efficiency costs of taxing U.S. resident corporations less favorably on the same investments as foreign-residence corporations.   But despite the great sound bite, these provisions won’t increase U.S. jobs.