Taxing U.S. Multinationals Abroad and at Home

From today's headlines:

vowed on Monday to overhaul tax policies that he said reward companies for shifting U.S. jobs overseas and allow wealthy people to evade taxes using offshore accounts.

The White House estimated the plan would save $210 billion over the next decade.

In one proposal businesses are poised to fight, Obama would tighten tax-code provisions that allow firms to defer paying taxes on profits they make overseas as long as those earnings are plowed back into the foreign subsidiaries.

Congress is skeptical:

Sen. Max Baucus of Montana, the

, said the plan needed further study, even though similar ideas have been around for years.

One of the key disagreements is the following:

[Obama] contends the current system gives companies an incentive to invest overseas rather than creating jobs in the U.S.

"It's a

that says you should pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, N.Y.," Obama said Monday.

But the other side says:

The business community argues the deferral system helps them compete against foreign companies that pay taxes only in the countries where they generate profits.

What if they are both right?  That is, in some instances, the current system gives companies an incentive to invest abroad rather than at home.  At the same time, however, changing the current system would put U.S. companies at a disadvantage when competing against non-U.S. companies in foreign countries.  How do we deal with this problem?  One way is this part of the plan, which makes up for the lost tax breaks with new tax breaks:

In exchange for the increased taxes some companies would have to pay, Obama agreed to make permanent a research tax credit that would provide firms about $75 billion in breaks over the next 10 years. The credit currently is to expire at the end of the year.

There's more on this in the White House press release:

3.    

The resources saved by curbing tax incentives for jobs overseas and limiting losses to tax havens would be used to strengthen incentives to invest in jobs in the United States by making permanent the R&E tax credit.

I just hope they are keeping in mind WTO rules when handing out these R&E subsidies.