PUBLIC OPINION POLL (multiple choice): Do you think it makes sense for U.S. tax laws to encourage high-tech American firms to move their manufacturing plants abroad?
(c) Hell, no!
Don't spend too long trying to choose between (b) and (c). The official correct answer -- or at least the apparent consensus among elected officials in Washington -- is (a).
To be sure, most of our representatives don't want to encourage a shift of manufacturing jobs overseas. Instead, they think they're promoting American research and technology.
So-called "Atari Democrats," along with most Republicans, are the leaders in inadvertently promoting answer (a), so it's appropriate that last spring's decision by Atari, Inc. to lay off 1,700 American workers and transfer its computer assembly operations to Hong Kong offers an apt illustration of the perverse impact of current tax rules.
Certainly the lure of cheap labor was a factor in Atari's going abroad. But the tax code clearly provided additional incentives.
U.S. companies can defer taxes on foreign profits while still taking advantage of generous tax breaks for the R&D investments which create that income.
Consider Atari, which invests lots of money researching and developing new products in this country. It is allowed tax deductions for those costs, and in some cases also gets a federal R&D tax credit. The deduction saves Atari about 50 cents in federal and state taxes for every dollar invested, and the credit can add another 25 cents in tax savings. This leaves Atari's out-of-pocket cost for a dollar's worth of R&D somewhere between 25 and 50 cents.
If Atari uses its know-how to manufacture products in California, the government will tax the profits. But it's still a sweet deal for Atari. The company keeps at least half the profits, while putting up as little as a quarter of the capital outlays.
By shifting its production offshore, however, Atari has found a way to do even better. The government will continue to pay for 50 to 75 percent of Atari's R&D, but now it will get no share of the profits the R&D generates. As long as Atari reinvests its earnings abroad, U.S. taxes are indefinitely deferred. And, since Atari has carefully chosen to put its runaway plants in low-tax or tax-haven countries like Hong Kong, Ireland, and Taiwan, it won't have to pay any significant foreign taxes either.
But, you may say, now that the Atari situation is a cause celebre, the administration and Congress will certainly figure out what's going on and crack down on tax subsidies for exporting jobs. Don't bet on it. Our lawmakers seem intent on making things worse.
Last month, the Treasury Department recommended giving a couple of hundred million dollars a year in extra foreign tax credits to multinational firms that -- you guessed it -- do research in the United States to support foreign manufacturing operations.
The purpose of this tax break, its numerous congressional supporters claim, is to stimulate R&D here at home. What they fail to consider, however, is that the real incentive can be to shift manufacturing jobs offshore. By definition, the added tax credits are available only to companies with large foreign operations.
The foreign tax credit bonus at issue would extend a "temporary" measure enacted in 1981 and scheduled to expire this year. Pushed by Atari Democrats and ITT, this measure blocked the IRS for two years from enforcing its "Section 861" regulations -- rules promulgated in 1977 to try to curb tax subsidies for foreign manufacturing.
The 1981 law required the Treasury to analyze the impact of suspending the 861 regulations and report its findings to Congress this year. In May, Treasury staff dutifully completed a draft study that found the loophole unjustified. But then politics intervened.
Under pressure from congressional Republicans and multinational companies, Treasury Secretary Donald Regan ordered a last minute reversal of the report's conclusion.
Among other things, Treasury's analysis shows that almost all the money from the tax subsidies goes to 24 giant corporations and that the extra tax credits provide minimal stimulus to American R&D.
Treasury also found that the loophole is of virtually no value to "small, relatively young high-technology companies." These firms don't benefit because they haven't yet started exporting jobs.
If we wanted to stop paying companies to ship jobs overseas, the best first step would be to repeal the rule allowing deferral of taxes on foreign profits, as suggested by Presidents Kennedy, Carter and the AFL-CIO. Short of that, we could at least stop Atari-USA from transferring its patent and know-how to Atari-Hong Kong tax-free. Current law is vaguely supposed to limit such tax-avoiding transfers, but in practice it rarely succeeds.
In addition, Congress should allow the IRS to enforce its suspended foriegn tax credit regulations -- preferably in strengthened form.
Preserving American jobs ought to be politically popular, but, unfortunately, subsidies for "high tech" are the current rage in Washington.