Obama's protectionist folly

Protectionism comes in many forms. Always, however, it is explained by politicians as something that will either protect jobs or bring new ones home.

All it really does, however, is bring votes to the politicians, because the promises sound good and because, to the uninformed, they make sense. In reality, protectionism can cost jobs, and it surely will lead to higher prices and a less vibrant economy. The politician, however, seldom takes the blame, because the public fails to connect the cause and effect.

President Barack Obama's ringing denunciation this week of U.S. companies seeking offshore tax havens was nothing more than an argument for protectionism. And, true to form, if such arguments carry the day, the economy will suffer.

Obama introduced a plan that, if approved by Congress, would curtail the tax deductions companies currently claim if they earn profits in nations with low tax rates. It would end a loophole that legally allows those companies to claim they are paying taxes in other countries, when in fact they are not. He also would hire an additional 800 IRS investigators to crack down on all those big, bad businesses that dare to maximize their profits.

This completely ignores how those profits eventually find their way into the U.S. economy, lifting everyone's standard of living. Or as Richard W. Rahn, a former board member of the Cayman Islands Monetary Authority, wrote recently in the Wall Street Journal, "The so-called tax havens are for the most part no more than way-stations to temporarily collect savings from around the world until they are invested in productive projects, such as building a new shopping center or semi-conductor plant in the U.S." In other words, he said, they help the economies of the world to grow.

They also foster international tax-rate competition, which is something liberal social engineers hate. And yet, like it or not, large corporations do compete in a global marketplace. Because many other countries do not tax their corporations for earning profits elsewhere, Obama's plan would put U.S. corporations at a competitive disadvantage.

The real way to grow the economy would be for the United States to lower its corporate tax rates. The top rate currently is 35 percent. Compare that to Hong Kong, which has a top rate of 17.5 percent, or tax-happy Sweden, where it is 28 percent.

There is another reason Obama is pushing this plan. It would raise an estimated $210 billion over the next decade. That wouldn't come close to paying for health-care reform, but it beats telling the voters you want to raise their income taxes. Of course, those revenue projections could turn out to be much lower if U.S. companies can't compete, or if they are taken over by foreign buyers who can make them more profitable.