Good Luck, Congress, Taxing Multinationals

Larry Price
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Wednesday - August 18, 2010
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Summoned back from summer break, the House pushed through an emergency $26 billion jobs bill last week that President Barack Obama immediately signed into law.

I chatted with U.S. Rep. Mazie Hirono last week. She wanted the residents of Hawaii to know she was voting on the bill that would send many millions of dollars to Hawaii to be used for Medicaid and schoolteachers.

In the process of hailing the feat of helping get the bill through Congress, she stressed that it would be paid for by plugging a loophole in our tax laws that allows, even encourages, multinational corporations to enjoy special tax breaks for outsourcing manufacturing jobs overseas. When asked what corporations were benefiting from the loophole in the U.S. law, Hirono referred me to the Internal Revenue Service.

Hirono’s counterpart, Republican U.S. Rep. Charles Djou, specifically opposes financing the measure by eliminating tax credits for overseas income of multinational corporations and by cutting almost $12 billion for nutrition assistance to the poor beginning in 2014. The bill they are arguing over will spend $15 billion on Medicaid and another $10 billion nationwide to support teacher salaries.

At this moment, Hawaii is in line for $86 million in Medicaid funding and $39 million for education.

How do politicians go about plugging a loophole in a tax law? By passing another law designated to fix a flaw in existing legislation.

Make no mistake, this is a big problem for multinational corporations, but it’s a game they know how to play. One example: Nike.

Studying the manufacturing history of multinational corporations is very interesting. In 1990, Nike became the biggest sports and fitness company in the world, displacing its longtime German rival Adidas. From 1964 until 1973, Nike manufactured shoes exclusively in Japan. In 1973, costs in Japan rose sharply as a result of the oil-price shock the year before and the resulting yen revaluation. Both the Nippon Rubber company, Nike’s Japanese sub-contractor, and Nike started looking outside Japan for new manufacturing sites. Every link in Nike’s supply chain was being challenged constantly to deliver higher product volumes and more product introduction. Nike’s distribution system brought shoes to retailers and was centralized around a small number of regional distribution centers. The search for newer and more cost-effective vendors was on. Nike courted South Korea and Taiwan, which were developing rapidly with the help of Nippon Rubber.

While this was going on, production in the U.S. remained small, concentrating on prototype shoe development. The moment a new shoe was developed and tested, it was transferred overseas to a more cost-efficient production environment. In 1981, Nike again surveyed possible new sources of shoe production and lower cost, and China came out on top. Nike struck a deal with the government to source from seven state-owned factories in Tianjin, Guangzhou, Fujian and Shanghai. By 1985, it appeared that Nike was making shoes everywhere. At that point the company had 60 individual factory relationships, but then, as multinational corporations are designed to do, it decided to concentrate on five Asian countries: Korea, Taiwan, China, Indonesia and Thailand. Nike is really an efficiently run multinational corporation.

If Congress thinks it can close a tax loophole for multinational corporations without a serious floor fight, it should think again. Multinationals rule the global marketplace and are willing and able to accept any governmental challenge to rescinding tax credits.

I wouldn’t start spending the money generated from closing those loopholes too quickly.

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