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Mr. Obama's remedy could hurt more workers than it helps.

Sunday, August 17, 2008; B06

BARACK OBAMA says that he would "end tax breaks for corporations that ship jobs overseas" and blasts John McCain for refusing to condemn such loopholes. But the offshoring issue is more complicated than Mr. Obama's rhetoric suggests. Indeed, while there's no doubt that some individuals and communities are hurt by corporate decisions to shift manufacturing or other operations overseas, overall job creation may well benefit. Economists Mihir Desai, Fritz Foley and James Hines looked at U.S. manufacturers that expanded foreign operations between 1982 and 2004 and found that they tended to grow domestically as well, hiring more U.S. employees, paying them more and spending more on research. "While there may be considerable individual variation," they concluded, "the average experience of all U.S. manufacturing firms over the last two decades is inconsistent with the simple story that all foreign expansions come at the cost of reduced domestic activity."

Mr. Obama is correct that U.S. tax policy favors American companies operating overseas: Income earned abroad is not subject to immediate taxation, as domestic income is. However, it's not clear that the tax code -- as opposed to other factors, such as lower wages or technological advances -- plays a big role in companies' decisions to move jobs elsewhere or that leveling the playing field between foreign and domestic income, as Mr. Obama proposes, would do much to save or return jobs to the United States. Mr. Obama's proposal would change the provision in which U.S.-based companies don't have to pay taxes on their earnings abroad until that income is "repatriated" -- brought back into the United States, for example as dividend payments. This deferral is meant to protect U.S. companies from being disadvantaged compared to foreign competitors operating under much lower corporate tax rates. However, this encourages U.S. companies to invest in foreign countries with lower taxes. It also gives companies an incentive to shift around income so that it is attributed to the lowest-taxing jurisdictions, draining the federal Treasury of potential revenue.

Mr. Obama has not been precise about how he would alter the rules other than to say he would end "permanent deferral" of income abroad. One possibility would be to let corporations delay paying tax on foreign income for a set time or on a share of the income. This would diminish, to some extent, the competitiveness problems the change would create. So would a reduction in the overall corporate tax rate, something Mr. Obama has said that he would consider so long as it could be done as part of a package without losing revenue. Nonetheless, U.S. companies operating abroad already labor under a bigger tax burden than most foreign competitors. Mr. Obama's suggested fix would make it even harder for them to compete abroad -- ultimately hurting workers and others here.