Romney's New Tax Incentive for Outsourcing U.S. Jobs;
Bloomberg.com Exposes Romney's Bain

Romney's New Tax Incentive for Outsourcing U.S. Jobs 
How Romney's Plan Would Reward Foreign Outsourcing

By Seth Hanlon

Center for American Progress Action Fund July 16, 2012

http://www.americanprogressaction.org/issues/2012/07/hanlon_outsourcing.html

he Washington Post recently reported that some of the
companies Mitt Romney's firm Bain Capital invested in were
"pioneers in the practice of shipping work from the United
States to overseas call centers and factories." Even more
troubling than his business record is his platform as
Republican presidential candidate, which includes a policy
that would encourage and further accelerate the outsourcing of
American jobs to foreign countries.

The former Massachusetts governor would make U.S.
corporations' overseas profits exempt from U.S. taxes. These
profits are already treated favorably under the tax code
compared to corporate profits that are earned and reported
domestically, creating an inefficient bias toward investment
offshore. The favorable treatment of profits that are reported
offshore also creates rewards for corporations that shift
profits (on paper) out of the United States to foreign
countries, including tax havens such as Bermuda and the Cayman
Islands.

Romney's proposed exemption for foreign profits would
exacerbate the worst features of our current tax system. It
would:

    * Enhance the tax code's rewards for moving jobs and
    investments overseas

    * Provide a gratuitous windfall to some of the very
    companies that have already shifted jobs and profits
    overseas

    * Further invite the offshore tax haven abuse that
    deprives the U.S. Treasury of tens of billions of dollars
    in revenue every year

Romney argues that we must exempt the overseas profits of
American companies from U.S. taxes to make them more
competitive in a global economy. But the evidence for this
claim is lacking, as this issue brief will demonstrate. More
fundamentally, Romney confuses the interests of multinational
corporations based in the United States with the
competitiveness of the U.S. economy overall. His plan would
not make the U.S. economy - or U.S. workers - more
competitive. Instead, it would reward foreign outsourcing,
putting American workers at a disadvantage.

One of the many ways that our tax system is broken is that it
actually encourages and rewards U.S. corporations to make job-
creating investments overseas even if similar investments in
the United States - absent tax considerations - would be more
profitable.

This perverse incentive stems from a feature of our tax system
known as "deferral." Under deferral, U.S. corporations pay
taxes on their domestic profits in the year they are earned,
but can delay paying taxes on their foreign profits for many
years, or even indefinitely. Deferral is a valuable benefit
because foreign profits can compound free of U.S. tax until
they are "repatriated," or brought back to the United States
(at which point the corporation is allowed a credit for
foreign taxes paid).

The disparate treatment between domestic and foreign profits
means that the U.S. tax code makes moving investment abroad
more attractive. Economist Martin Sullivan of Tax Analysts
explains:

	Under current law, if an American corporation opens a
	factory in Indiana, the profits of that factory are
	subject to the 35 percent U.S. corporate tax rate. If
	the same corporation instead opens a similar factory
	in Ireland, the profits from that factory are subject
	to a 12.5 percent tax rate [Ireland's corporate tax
	rate]. If that factory generates a profit of $100, the
	choice is between an after-tax profit of $65 in the
	United States and $87.50 in Ireland. Obviously, U.S.
	tax law provides a large tax advantage for building
	and moving factories to low-tax countries

In reality, most U.S. corporations don't pay the full 35
percent on income earned in the United States because they
take advantage of many available tax deductions and credits.
But they're also unlikely to pay the full foreign rate on
overseas profits. In fact, major U.S. corporations investing
in Ireland pay a small fraction of the 12.5 percent Irish
rate. Indeed, many major U.S. corporations pay extremely low
foreign taxes, while indefinitely deferring the U.S. taxes on
their foreign profits. The bottom line is that overall, the
effective tax rate that U.S. corporations pay on their foreign
profits is about a third lower than the tax rate on their
domestic profits, according to a 2008 study by the Government
Accountability Office. (see figure below)
http://www.americanprogressaction.org/issues/2012/07/hanlon_outsourcing.html

The unfortunate consequence is that our tax system's skewed
incentives "encourage firms to locate physical assets,
production, and jobs in [low-tax foreign] countries,"
according to the nonpartisan Tax Policy Center. Worse, our
existing system even encourages companies to invest in high-
tax foreign countries, rather than the United States, because
once assets are offshore, the resulting profits can be moved
fairly easily on paper to tax havens.

Loopholes in the existing tax code also encourage and reward
large corporations to game the rules to treat their profits as
having been earned abroad even if they were actually earned in
the United States. Profit shifting by multinational
corporations costs the United States tens of billions of
dollars in revenue. This system is badly in need of reform to
reverse the bias toward offshore investment and prevent profit
shifting.

Romney's new and expanded subsidy for offshore investment

Romney's economic platform would exacerbate these harmful
features of the international tax system. He pledges to move
the United States toward a "territorial" tax system. What this
means is that instead of paying a deferred tax on their
foreign profits, U.S. corporations would pay no U.S. tax.
Exempting overseas profits from tax would be a tax cut for
multinational corporations of $130 billion over 10 years. When
combined with Romney's proposal to slash the top corporate
rate from 35 percent to 25 percent, which would cost more than
$900 billion, it pushes the total corporate tax cuts in the
Romney plan to over $1 trillion.

A bigger reward for shipping U.S. jobs abroad

Exempting U.S. corporations' foreign profits would sweeten the
tax code's already-rich inducements to move investments and
jobs overseas. A U.S. company deciding whether to build a
factory in the United States or elsewhere would know that the
returns from its investment, if made abroad, would be
permanently free of U.S. tax - not merely tax deferred, as
under our current system. That would result in a large tax cut
for some U.S. multinationals, but it would run counter to the
interests of U.S. workers. In recent testimony, Congressional
Research Service economist Jane Gravelle explained that a
territorial system:

	... would make foreign investment more attractive.
	That would cause investment to flow abroad, and that
	would reduce the capital with which workers in the
	United States have, so it should reduce wages. [A
	territorial system] will increase the after-tax rate
	of return that firms see abroad, so they will want to
	move their investments--they would want to make
	investments abroad, instead of the United States.

Gravelle concludes that because a territorial tax system
distorts investment decisions, pushing investment offshore, it
is "not neutral or efficient."

An analysis by Reed College economist Kimberly Clausing
similarly finds that "the tax incentive to locate jobs in low-
tax countries would increase significantly." Clausing
estimates that investment and profits would migrate to low-tax
countries, resulting in 800,000 jobs in low-tax countries and
potentially displacing U.S. jobs. A windfall to companies that
have already shifted jobs, investments, and profits overseas

Romney wants to exempt from U.S. taxes not just future foreign
profits, but also profits that corporations are already
storing overseas. That would provide a pure windfall to the
very companies that have been most successful in avoiding U.S.
tax by shifting jobs, investments, and profits overseas. U.S.
corporations claim that they have more than $1.4 trillion in
earnings "permanently reinvested" overseas (though a
congressional survey found that a large portion of these
earnings are actually deposited in U.S. banks). Much of these
earnings have not been subject to any appreciable tax in the
foreign countries where they were reported, which means that
the U.S. taxes that these companies would eventually pay under
current rules would not be offset by foreign tax credits.

Consequently, the companies that have been most aggressive and
most successful in avoiding foreign taxes by shifting profits
to tax-haven countries such as Bermuda and the Caymans stand
to receive the biggest windfall under Romney's plan.

An invitation to greater abuse of tax havens

Romney's proposal would also invite increased corporate tax
haven abuse in the future. In 2008, U.S. multinationals
artificially shifted as much as $250 billion in profits
overseas, largely to tax-haven countries, reducing their taxes
by as much as $90 billion, according to one study. The reward
for such legal and accounting gamesmanship under our current
system is that U.S. taxes are deferred. In a territorial
system, the taxes on profits shifted overseas "would not
simply be deferred; they would be completely erased," explains
economist Kimberly Clausing. "This would eliminate existing
constrains on shifting income abroad."

Clausing estimates that under a territorial tax system, even
more profits of U.S.- based companies would shift to tax haven
countries such as Bermuda, Luxembourg,Switzerland, and the
U.K. Islands (including the Caymans).

Romney's economic plan briefly alludes to the need for anti-
abuse rules but provides no hint of details. And on the
campaign trail the all but certain Republican presidential
candidate has rejected a sound proposal for addressing tax
haven abuse: a minimum tax on corporate profits. A minimum tax
would ensure that corporate profits that are subject to
unusually low levels of tax - for example when booked in no-
tax countries such as Bermuda - are subject to at least some
U.S. tax in the year they are earned.

President Obama called for such a minimum tax in his framework
for business tax reform. And the president is not alone in
proposing such a mechanism. The Republican Chairman of the
Ways and Means Committee, Dave Camp (R-MI), put forward a
somewhat similar proposal as one of three potential options to
prevent the "erosion" of the tax base from a shift to a
territorial system. Many foreign countries already have
similar mechanisms to prevent abuse.

A shift to "territorial" without strong anti-abuse mechanisms
is a dangerous invitation to greater corporate tax haven
abuse.

Whose competitiveness?

Romney claims that a territorial system would make the U.S.
economy more competitive. But this line of thinking mistakes
the interests of U.S.-based multinational corporations with
the interests of U.S. workers and the broader U.S. economy,
which are not always aligned. The evidence is that U.S.-based
multinationals are not disadvantaged, in general, under our
existing tax code. In fact, a recent study of the 100 largest
companies based in the United States with their European Union
counterparts found that the European companies pay higher
taxes, on average.

There might be an argument for subsidizing overseas investment
if such investment leads to greater domestic investment and
job creation. But there is little evidence that this
"complementary" effect outweighs the "substitution" effect
that occurs when foreign investment takes the place of
domestic investment and American jobs go overseas. Under the
tax code's existing incentives for foreign investment, U.S.
multinationals have created jobs abroad while shedding them at
home. Between 1998 and 2008, U.S. multinationals decreased
U.S. employment by 1.9 million jobs while increasing foreign
employment by 2.4 million.

Romney's tax and budget plan would harm the U.S. economy in
other ways, too. A massive $1 trillion corporate tax cut would
require deeper cuts in public investments such as education,
infrastructure, research and development, and other areas.
Large and unnecessary cuts in public investments would kill
jobs and hamper future economic growth and competitiveness.

The flawed "lock-out" theory

Romney's proposal to adopt a territorial system ignores the
incentives that U.S. corporations would have to invest abroad,
and focuses solely on the so-called lockout effect. In his
view, our current system "penalizes" U.S. companies that bring
back profits from abroad because they must pay the U.S.
corporate tax (less a credit for foreign taxes) when the funds
are returned to the United States. Romney's theory is that
exempting foreign profits would unlock the earnings that U.S.
corporations are keeping abroad to avoid U.S. tax, thereby
increasing investment and jobs in the United States.

This theory is based on the flawed belief that some of the
world's largest corporations would invest more in the United
States if only they had more cash at their disposal. Yet large
corporations already are holding onto near-record levels of
cash - $1.7 trillion at the end of 2011 - and are also able to
borrow at historically low rates. Given a windfall tax cut on
their foreign earnings, they are likely simply to buy back
shares or pay dividends to investors.

That's exactly what happened when Congress enacted a one-time
"tax holiday" for foreign profits in 2004: Corporations used
the tax-amnestied profits for share buybacks and dividend
payouts rather than investment or job creation in the United
States. Many corporations claiming the tax break actually shed
jobs. Romney is undisturbed by this history. He acknowledges
and even welcomes the prospect that U.S. corporations would
once again use the funds from a tax holiday to pay out
dividends to shareholders rather than investing in their
businesses.

Romney's lock-out theory also ignores the fact that if a
corporation is allowed to bring its profits back to the United
States tax-free, its decision on how to reinvest those profits
is still distorted by the tax code's pro-offshore bias - a
distortion that would be made worse under Romney's territorial
system. "[T]here would remain an incentive to reinvest foreign
subsidiary earnings in lower-taxed offshore jurisdictions,"
according to international tax expert Stephen Shay.

A stark contrast

Romney's proposal to move the United States to a territorial
tax system, without identifying any potential safeguards to
deter the outflow of American jobs or profit shifting abroad,
contrasts sharply with President Obama's agenda on corporate
taxes. In advancing a framework for comprehensive business tax
reform, President Obama rejected a "pure territorial" system.
The president's framework explained:

If foreign earnings of U.S. multinational corporations are not
taxed at all, these firms would have even greater incentives
to locate operations abroad or use accounting mechanisms to
shift profits out of the United States.

Instead, President Obama proposes to reduce these existing
perverse incentives and crack down on profit shifting. He
proposes:

    * A minimum tax on corporate profits to ensure that
    multinational corporations cannot avoid taxes by
    exploiting tax havens. The minimum tax is aimed at
    ensuring that corporations cannot exploit weaknesses in
    the U.S. tax system and overseas tax havens to avoid
    taxes. By ensuring that corporations pay some tax abroad
    it will reduce the rewards for shipping jobs overseas and
    shifting income to foreign tax havens, making investments
    in the U.S. more competitive. The president also proposes
    more specific anti-abuse measures to address areas of
    rampant profit shifting.

    * Curtailing tax deductions that subsidize foreign
    investment. One of the most illogical aspects of our
    current tax system is that companies can take immediate
    deductions against U.S. taxes for expenses that support
    tax-deferred overseas profits. In other words, if they
    borrow funds in the U.S. which support offshore
    investment, they can take the interest deduction now but
    pay taxes on the resulting income later, if at all. This
    is a clear subsidy for foreign investment, and President
    Obama proposes to eliminate it.

    * Denying deductions for expenses associated with
    outsourcing jobs abroad while providing a credit for
    "insourcing." The "Bring Jobs Home Act," which would do
    just that, has been introduced in the Senate by Sen.
    Debbie Stabenow (D-MI) (S. 2884) and in the House by Rep.
    Bill Pascrell (D-NJ) (H.R. 5542). Companies that return
    jobs and business activity to the United State would
    qualify for a 20 percent tax credit for their "insourcing"
    costs.

Conclusion

President Obama's international tax plan and that of his
presidential rival Romney offer a clear contrast. By exempting
the foreign profits of U.S. corporations from U.S. tax,
Romney's plan would reward and potentially accelerate the
shift of jobs and profits overseas. President Obama's plan, by
contrast, helps level the playing field for job creation here
at home.

[Seth Hanlon is Director of Fiscal Reform at the Center for
American Progress Action Fund.]

Download this issue brief (pdf)
http://www.americanprogressaction.org/issues/2012/07/pdf/hanlon_outsourcing_2.pdf

==========

Romney's Bain Yielded Private Gains, Socialized Losses

By Anthony Luzzatto Gardner 

Bloomberg.com 
Opinion
July 15, 2012 

http://www.bloomberg.com/news/2012-07-15/romney-s-bain-yielded-private-gains-socialized-losses.html

	"While Bain Capital wasn't alone in using financial
	engineering to turbo-charge its returns, it was among
	the most aggressive under Romney's leadership.
	Enriching investors by taking leveraged bets isn't a
	qualification for a job requiring long- term vision
	and concern for public welfare. It is appropriate to
	point that out to voters."

Mitt Romney touts his business acumen and job-creation record
as a key qualification for being the next U.S. president.

What's clear from a review of the public record during his
management of the private-equity firm Bain Capital from 1985
to 1999 is that Romney was fabulously successful in generating
high returns for its investors. He did so, in large part,
through heavy use of tax-deductible debt, usually to finance
outsized dividends for the firm's partners and investors. When
some of the investments went bad, workers and creditors felt
most of the pain. Romney privatized the gains and socialized
the losses.

What's less clear is how his skills are relevant to the job of
overseeing the U.S. economy, strengthening competitiveness and
looking out for the welfare of the general public, especially
the middle class.

Thanks to leverage, 10 of roughly 67 major deals by Bain
Capital during Romney's watch produced about 70 percent of the
firm's profits. Four of those 10 deals, as well as others,
later wound up in bankruptcy. It's worth examining some of
them to understand Romney's investment style at Bain Capital.

In 1986, in one of its earliest deals, Bain Capital acquired
Accuride Corp., a manufacturer of aluminum truck wheels. The
purchase was 97.5 percent financed by debt, a high level of
leverage under any circumstances. It was especially burdensome
for a company that was exposed to aluminum-price volatility
and cyclical automotive production. Casino Capitalism

Forty-to-one leverage is casino capitalism that hugely
magnifies gains and losses. Bain Capital wisely chose to flip
the company fast: After 18 months, it sold Accuride,
converting its $2.6 million sliver of equity into a $61
million capital gain. That deal, which yielded a 1,123 percent
annualized return, was critical to Bain Capital's early
success and led the firm to keep maximizing the use of
leverage.

In 1992, Bain Capital bought American Pad & Paper by financing
87 percent of the purchase price. In the next three years,
Ampad borrowed to make acquisitions, repay existing debt and
pay Bain Capital and its investors $60 million in dividends.

As a result, the company's debt swelled from $11 million in
1993 to $444 million by 1995. The $14 million in annual
interest expense on this debt dwarfed the company's $4.7
million operating cash flow. The proceeds of an initial public
offering in July 1996 were used to pay Bain Capital $48
million for part of its stake and to reduce the company's debt
to $270 million.

From 1993 to 1999, Bain Capital charged Ampad about $18
million in various fees. By 1999, the company's debt was back
up to $400 million. Unable to pay the interest costs and
drained of cash paid to Bain Capital in fees and dividends,
Ampad filed for bankruptcy the following year. Senior secured
lenders got less than 50 cents on the dollar, unsecured
lenders received two- tenths of a cent on the dollar, and
several hundred jobs were lost. Bain Capital had reaped
capital gains of $107 million on its $5.1 million investment.

Bain Capital's acquisition in 1994 of Dade International, a
supplier of in-vitro diagnostic products, was 81 percent
financed by debt. Of the $85 million in equity, about $27
million came from Bain with the rest coming from a group of
investors that included Goldman Sachs Group Inc.

From 1995 to 1999, Bain Capital tripled Dade's debt from about
$300 million to $902 million. Some of the debt was used to pay
for acquisitions of DuPont Co.'s in-vitro diagnostics division
in May 1996 and Behring Diagnostics, a German medical- testing
company, in 1997. But some was used to finance a repurchase of
half of Bain Capital's equity for $242 million -- more than
eight times its investment -- and to pay its investors almost
$100 million in fees. Bankruptcy Filing

Dade was left in a weakened financial condition and couldn't
withstand the shocks of increased debt payments when interest
rates rose and revenue from Europe fell because of a decline
in the value of the euro. The company filed for bankruptcy in
August 2002, because of its inability to service a $1.5
billion debt load. About 1,700 people lost their jobs while
Bain Capital claimed capital gains (net of its losses in the
bankruptcy) of roughly $216 million, an eightfold return.

There are many other examples of this debt-fueled strategy. In
the two years following the acquisition in 1993 of GS
Industries, a steel mill, for $8 million, Bain Capital
increased the company's debt to $378 million on operating
income of less than a 10th of that amount. Some of this was
used to pay Bain Capital a $36 million dividend in 1994. That
degree of leverage was excessive in light of the cyclicality
and capital-intensive nature of the steel industry.

By the time the company went bankrupt in 2001, it owed $554
million in debt against assets valued at $395 million. Many
creditors lost money, and 750 workers lost their jobs. The
U.S. Pension Benefit Guaranty Corp., which insures company
retirement plans, determined in 2002 that GS had underfunded
its pension by $44 million and had to step in to cover the
shortfall.

Bain Capital's acquisition of Stage Stores, a department-
store chain, in 1988 was 96 percent financed by debt (mostly
in junk bonds) -- an extreme level for a cyclical and very
competitive low-margin business. Bain sold a large part of its
stake in 1997 for a $184 million gain, three years before the
company filed for bankruptcy because of its inability to
service its $600 million debt.

Success, entrepreneurship, risk taking and wealth creation
deserve to be celebrated when they are the result of fair play
and hard work. President Barack Obama is correct in
distinguishing the patient creation of value for the benefit
of investors through genuine operational improvements and
growth -- the true mission of private equity -- from the form
of rigged capitalism that was practiced by some in the
industry in the past when debt was cheap and plentiful.

While Bain Capital wasn't alone in using financial engineering
to turbo-charge its returns, it was among the most aggressive
under Romney's leadership. Enriching investors by taking
leveraged bets isn't a qualification for a job requiring long-
term vision and concern for public welfare. It is appropriate
to point that out to voters.

[Anthony Luzzatto Gardner works at Palamon Capital Partners, a
private equity fund based in London, and was director of
European affairs in the U.S. National Security Council in
1994-95. The opinions expressed are his own.]

==========

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