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Text File | 1993-04-08 | 6KB | 120 lines

                                                                                BUDGET, Page 39

The Foreigner-Tax Folly


Clinton's plan to raise $45 billion from non-U.S. companies
is a pipe dream, economists say, and reflects a shortsighted
view of outside investment

By S.C. GWYNNE/WASHINGTON


    Maybe Bill Clinton really believed that the numbers in
his economic plan would add up. Or maybe he was exercising the
political campaigner's God-given right to fudge and exaggerate.
Either way, those days are gone. Now that he's President-elect,
his relatively pain-free prescriptions face a stark reality as
they make the transition from promise to practice.

    Probably Clinton's most dubious budget idea is his
proposal to squeeze foreign companies doing business in the U.S.
for $45 billion in taxes over four years. He would rely on that
measure to provide nearly one-third of all the new taxes he will
need to finance his program to reduce the deficit and increase
public investment. The stratagem is characteristically
Clintonian: an apparently painless (for Americans) way of
generating revenue without raising unpopular levies like the
gasoline tax or touching popular spending programs like
Medicare.

    Clinton's intention is to clamp down on non-U.S. companies
that have been illegally shifting their profits abroad. Some
companies do this by inflating their transfer prices, which are
the amounts they charge their American subsidiaries for goods
and services. This scheme boosts the profits of the parent
companies back home and reduces the taxable earnings of the
domestic affiliates. Clinton's advisers, who extrapolated their
numbers from a study by a House Ways and Means subcommittee, are
confident that they can generate enormous new revenues by
stopping or penalizing those practices.

    The problem with this plan, many economists say, is that
it vastly overestimates the extent to which non-U.S. companies
have been evading taxes. "The $45 billion number is out of
sight," observes Gary Hufbauer, an economist at the Institute
for International Economics in Washington. "He might get $6
billion in additional revenues." Says economist Rudolph Penner,
the former director of the Congressional Budget Office: "The
numbers are so far off what is reasonable that it's difficult
to know where to begin -- $1 billion seems more likely than $45
billion." Aside from Clinton's proposal, the highest estimate
of the revenue to be gained by closing loopholes on foreign
companies comes from the Internal Revenue Service: at most, $13
billion over four years.

    The main reason that Clinton's idea will not work is that
foreign companies like Honda, which invested in auto and
motorcycle plants in Ohio in the 1980s and helped create
thousands of new U.S. jobs, have little motivation to move their
profits elsewhere. Germany's corporate tax rate is 51% and
Japan's is 46%, while the rate in the U.S. is only 34%. "There's
just not much incentive for these companies to move their
profits to higher-tax countries," says Hufbauer.

    Although some non-U.S. companies surely do evade American
taxes, the IRS's previous efforts to crack down on violators
have borne relatively little fruit. Earlier this month the
Japanese electronics giant Matsushita, which sells products in
the U.S. under the Panasonic and Quasar brand names, reached an
agreement with the IRS to pay a settlement in that kind of
dispute. The amount was a mere $4.8 million. At least 47
Japanese companies in the U.S. have been involved in similar
cases within the past five years. Many such companies are now
taking Matsushita's accommodating approach, which will produce
as much as $6 billion in new U.S. revenue over the next four
years, far short of what Clinton's camp has hoped for.

    Clinton's miscalculation of the gains to be had from
taxing foreign firms masks a larger problem: a shortsighted view
of outside investment in the U.S. "We're in a real struggle for
foreign capital, and we're going to need huge amounts of it,"
says Jeffrey Garten, a professor at Columbia University's
business school. "If the U.S. tries the gunboat approach, we're
going to put the country at a huge disadvantage."

    Given the poor return he is likely to get from trying to
collect these taxes under the current laws, Clinton's second
strategy might be to impose a "presumptive tax" of some sort,
possibly a minimum levy on the total sales -- rather than
profits -- of foreign companies in the U.S. But that kind of
policy could backfire mightily. Germany has declared that if
Clinton imposes such new taxation, Bonn will retaliate against
local subsidiaries of American firms. With global trade tensions
already at a fever pitch and foreign companies increasingly
unhappy with conditions in the U.S., any further discouragement
of outside capital might cause real harm to American economic
growth. "Foreign investors have been very frustrated over the
past two years," says Robert Hormats, vice chairman of Goldman
Sachs International. "They're amazed that we're not dealing with
the underlying problems of the economy, like the deficit and the
educational system. They want to be reassured that we're going
to fix them."

    What foreign companies do not want is to pay a huge chunk
of the bill for repairing these problems. Soaking the
foreigners may have sounded to Clinton and his advisers like a
politically painless program, but it could cost the U.S. a lot
more in lost capital investment than it would gain in taxes.
"Clinton is just going to have to rethink his policies on
international taxation," says Garten. If Clinton does so, he
will probably have to find the money elsewhere -- or come to
realize that his spending plan is too ambitious.