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Does Mitt Romney love outsourcing?

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“President Obama’s clean-energy initiatives have helped create jobs for projects across America, not overseas.”

“What about Mitt Romney? As a corporate CEO, he shipped American jobs to places like Mexico and China. As governor, he outsourced state jobs to a call center in India. He’s still pushing tax breaks for companies that ship jobs overseas.”

— Ad from President Obama’s re-election campaign

President Obama’s campaign team fired back with this ad after the conservative political advocacy group Americans for Prosperity ran a commercial saying billions of dollars in stimulus funds went toward foreign jobs. We awarded that claim Four Pinocchios in a previous column, and the Obama crew quoted us in its rebuttal.

We certainly appreciate the mention, but we can’t let that stop us from checking the claims in this ad. Is presumptive GOP presidential nominee Mitt Romney really such a fan of outsourcing? Let’s look at his record and proposals.

The Facts

The Obama campaign pointed us to a series of SEC filings and news accounts showing that three companies within Bain Capital’s portfolio sent jobs overseas. Romney served as chief executive of the firm, which specialized in private-equity investment and leveraged buyouts during his tenure there. He left the company in February 1999 to become president and chief executive of the committee that organized the 2002 Olympics in Salt Lake City.

One example of outsourcing came from the Holson Burns Group, a manufacturer of photo albums and picture frames. The company opened and then closed several new U.S. plants before outsourcing most of its production to the Far East by 1993, six years after Bain took control of the business.

The Obama campaign also mentioned Canadian electronics maker SMTC Manufacturing, which announced in March 2001 that it planned to move one of its production operations, then located in Denver, to Chihuahua, Mexico.

A third company, Modus Media, announced in June 2000 that it would open a plant in Guadalajara, Mexico after cutting 200 jobs from a plant in Fremont, Calif.

Notice a problem with the last two examples? The outsourcing occurred in 2000 and 2001. Romney left Bain in early 1999.

We’ve gone over this problem with the Obama campaign before, awarding three Pinocchios to a January memo the team released blaming Romney for job losses and bad deals that took place after the former executive had stopped working for Bain.

We discovered that Romney’s name appeared on Bain SEC filings between 1999 and 2002. But a 2002 statement the former executive filed with the Massachusetts State Ethics Commission said he was a “passive, limited partner [with] no management capacity” in the Bain entities in which he held ownership.

We also learned that the creditors who sued some of Bain’s companies and executives over dividend payments around the time in question did not name Romney in their lawsuit. Plaintiffs generally try to list as many people as possible as defendants to encourage settlement, so it’s highly unlikely that Romney had any involvement with Bain’s businesses during this period.

These facts essentially exonerate Romney from allegations that he was responsible for any outsourcing, bad deals and layoffs that occurred with Bain’s companies in the early 2000s. (Note: it may make a difference if the initial investment took place while Romney was actively running Bain Capital, but that is not the case here.) So that leaves just one possible example of outsourcing out of scores of investments made by Bain under Romney’s leadership.

The Obama campaign did not answer questions about why the presumptive GOP nominee deserves blame for outsourcing that occurred after he gave up his leadership role at Bain.

As for the notion that Romney shipped jobs to India while serving as governor of Massachusetts, we’ve dealt with that claim as well. We determined in a previous column that Vice President Joe Biden deserved Two Pinocchios for claiming the former governor had outsourced call-center work that provided customer service for food-stamp recipients.

What happened is that Romney vetoed a 2004 budget provision that would have prohibited Massachusetts from contracting with companies that outsourced the state’s work to other countries. He argued at the time that the policy would cost lots of money without preventing jobs from simply going to other states instead of overseas.

The Democrat-led legislature did not override Romney’s veto as it had done with 117 others, suggesting few lawmakers were willing to fight hard for the provision. Massachusetts at the time was paying $160,000 per month for Citigroup to operate a system of food-stamp cards that included a customer-support center in India.

The Massachusetts Department of Transitional Assistance insisted that the call-center jobs return stateside when the contract expired, but the work just ended up in Utah. Only 18 jobs remained in India during Romney’s last year in office.

In terms of Romney promoting federal tax breaks for outsourcers, that claim relates to Romney’s support for a territorial tax system that would allow U.S.-based companies to bring foreign earnings back home without being taxed domestically.

We should mention that the U.S. corporate tax rate of 35 percent is highest in the world, although the effective tax rate — the rate after all the breaks and loopholes take effect — is considerably lower for most companies.

The primary goal of the territorial tax is to provide an incentive for multinational companies to repatriate their funds. The current U.S. system actually discourages this practice by requiring corporations to make up the difference between foreign taxes and U.S. taxes whenever they bring their money home. Think of it this way: if your company earned profits in Ireland, you probably wouldn’t bring those funds back to the U.S. for a second round of taxation instead of investing them back in low-tax Ireland.

For what it’s worth, the territorial system is highly common among industrialized nations, although most have added provisions to collect on certain foreign earnings such as investment interest, royalties and income earned in tax havens.

The Obama ad described Romney’s territorial-tax proposal as a break for companies that outsource jobs, and it cited a New York Times article in doing so. But that piece didn’t characterize Romney’s plan the same way. In fact, it barely touched on the topic of foreign earnings, and mostly dealt with Romney’s calls for a lower domestic tax rate for U.S. corporations.

The only mention of territorial taxation comes at the end of the article, when the author notes that Obama has pitched a minimum tax on foreign earnings as part of his broad plan for overhauling the corporate tax system. At the end of the article, Romney economic advisor Glenn Hubbard criticizes the president’s plan.

Here’s the only reference to territorial taxation:

“Mr. Hubbard, accusing the administration of a “full-throttle attack on multinationals”, said Mr. Romney would propose shifting to a territorial system that would not tax corporate income earned overseas.”

The word “outsource” never appears in the article, and the word “job” only shows up in a quote in which Hubbard criticizes the proposed tax plan from former GOP presidential candidate Rick Santorum.

Technically, outsourcers could receive tax breaks under Romney’s plan, but only if they decide to bring home some of their foreign earnings. This could play out one of three ways: they could invest the funds domestically, potentially creating jobs and increasing profits; they could hand more money over to shareholders; or they could do a combination of both.

Romney’s plan, which calls for a corporate tax rate of 25 percent, could make outsourcing less attractive, but taxes would still be lower in a lot of other countries. It also offers at least the possibility that U.S.-based multinationals will repatriate some of their money, although many economists doubt that they would create jobs with it. Harvard economist Robert Pozen told us that repatriated funds would likely go toward shareholder dividends, and not to new U.S. investments, since the income from those investments would still be taxed at a fairly high rate domestically.

Regardless, there is virtually no incentive for repatriating money under the current system. Pozen has recommended converting to a system of territorial taxation, with no exemptions for “mobile” income or money placed in tax havens, and a minimum tax of at least 20 percent so U.S.-based multinationals have to pay that combined rate no matter where they do business. Theoretically, this would discourage companies from moving their operations to nations with super-low rates that the U.S. can’t match without blowing a massive hole in its budget.

Obama campaign spokeswoman Kara Carscaden had this to say about the Obama team’s ad: “In the private sector and the public one, Romney had opportunities to keep American jobs at home and didn’t take them. Romney owned and profited from Bain even while running the Olympics, still profits from it today and can’t wash his hands of the actions taken under his ownership. Whether it’s shipping public jobs to India or outsourcing private ones to Mexico and China, Romney’s record is clear.”

The Pinocchio Test

Two wrongs don’t make a right. The Obama campaign is rebutting a truly misleading ad by resorting to old tricks and ignoring our previous rulings.

For one thing, the ad blames Romney for moves that Bain Capital made when he was no longer working for the firm. It also recycled a claim that we debunked earlier about the GOP candidate outsourcing jobs to India while he was governor of Massachusetts.

In terms of tax breaks for outsourcers, the ad is technically right. But it failed to acknowledge one of the primary goals of territorial taxation, which is repatriation of money. This is a case of telling just part of the story while ignoring the other side -- not the worst sin in our book, but not something we overlook either.

On balance, the Obama ad earns Two Pinocchios. Its misleading claims overcompensate for the whoppers from the Americans for Prosperity commercial.

Two Pinocchios

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