The Silicon Valley is a fairly liberal place that has generally supported many of the Obama Administration’s moves, but yesterday  many about Obama’s proposal to effectively raise taxes on foreign income by billions of dollars.

Currently, U.S. based companies can defer corporate taxes on foreign income as long as they keep the income in another country.  Additionally, U.S. companies can deduct the foreign taxes and costs  they already paid against their income.  The Obama administration argues that this ships jobs overseas.  The problem with that argument  is that many U.S. based companies actually make more than 50% of their income from citizens of other countries.  Imagine if you are selling 1000000 units of something here in the United States, and you are selling 1000000 units of the same thing to the rest of the world, then you would absolutely need staff and offices in the rest of the world.  There is a Walmart in my hometown in China, and sure, it is staffed by Chinese people, but it also earns money from Chinese people.  Does the Obama administration think that taxing this Walmart more will bring those jobs to America?  That is absolutely ridiculous.  What it will do is that it would cut the profit margin of the Walmart in China, and the Chinese will have to suffer higher prices and they will probably just shop elsewhere.  This will reduce the competitiveness of American companies in other countries because other stores have to pay only the local taxes.

I really think this plan to enact protectionism via the tax code is really short sighted.  America has 5% of the world’s population, and a lot of the large multinational corporations have little room to expand in this country.  Just think of how many iPods and McDonalds you see everyday and you would understand that the United States is absolutely saturated with a lot of products and services and the growth rate for a company that stayed exclusively in the United States would not be as large as a company that sells to the rest of the world.  So why would the United States government punish corporations for making money from the rest of the 95% of the world?

Another consequence of this initiative that was not mentioned by the administration is that this will affect the stock prices of the bluest blue chips.  When you see those earnings per share numbers, they do include foreign earnings.  For example, Johnson and Johnson is a company that gets more than 50% of its earnings from foreign countries.  So imagine that half of its earnings suddenly had a tax of 30% compared to 2% the year before.  This will cut into the earnings per share significantly.  The result would be lower stock prices, and the further erosion of 401ks and pension funds.  What a great way to destroy more retirements.

The worst consequence is that large corporations could just pack up and leave the United States completely.  Just imagine all of the Silicon Valley greats like Oracle, Google, and Cisco reincorporating in another country with more favorable corporate tax systems and taking away tens of thousands of jobs permanently.  That would be a huge blow to the United States economy, and it may be irreparable.

So far, the reception to this plan has been somewhat hostile from many industry groups and foreign nations.  The Register in the UK states that for its low business taxes.  In some ways, that is true.  U.S. based companies employ millions of people in foreign countries, and if the administration specifically targets foreign taxes, it is essentially targeting the livelihoods of these people.  It is also ridiculous to think that laying off foreign workers is good for America, because as the living standards of everyone else improves, they also purchase American goods.  If you take away those good paying jobs around the world, it is really worse for everyone.  The plan will supposedly raise $210 billion for the Treasury in the next decade, but at what cost to the global economy and America?

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