For years, some politicians have proposed to increase the tax burden on the profits earned by American companies outside the United States, and Congress is now considering legislation that would sharply limit the "deferral" rules that protect U.S. businesses from bearing much higher tax burdens on their earnings abroad than their foreign competitors. Economic research has established, however, that in the global networks of America's international companies, these foreign investments and jobs do not cut into investment and jobs at home, but rather increase them. As a result, the current proposal to substantially restrict "deferral" would end up reducing American jobs and investment and could impair our economic recovery. 

This study analyzes the economic effects of repealing the deferral rules that have governed the way we tax the foreign earnings of U.S. companies since the advent of the corporate income tax in 1913. The administration proposal would not repeal deferral completely, but it does move significantly in that direction. The results will be same - making U.S. companies less competitive in global markets and costing American jobs. 

Repealing deferral would lead to the following negative effects for the U.S. economy: 

• It would cost at least 159,000 jobs or $7.3 billion in payments to workers, the equivalent of all the health care workers in Colorado. Under certain conditions, ending deferral could affect as many as 2.2 million jobs, or nearly one of every 60 American workers. 

• Investments in the United States in plant, equipment and property could fall by as much as $84.2 billion. 

• Those who believe that repealing or sharply limiting deferral would generate large tax revenues would be sorely disappointed, since the large job losses, wage cuts and lower investments would reduce tax revenues. 

This analysis is based on new economic research that establishes that most of the investments and sales by the foreign subsidiaries of U.S. companies are driven by the fast-growing size of those foreign markets and the development of efficient global production and distribution networks to serve them. Applying the very high, U.S. corporate tax rates to worldwide income, which currently is deferred from tax until it is paid directly to the U.S. parent company, would leave our own companies at a severe competitive disadvantage, since the vast majority of their foreign competitors are based in countries with "territorial" tax systems that never tax business profits earned outside the home country. 

Recent research has shown that the foreign and domestic investments, jobs and general operations of U.S. companies complement each other. From 1989 to 2004, 2 

increases in the total assets, sales and investments in property, plant and equipment by foreign affiliates of U.S. companies were consistently accompanied by increases in those same categories at the parent companies in the United States. These linkages are especially strong in manufacturing, mining, wholesale and retail trade, and for all industries considered together. 

The close linkages between these foreign and domestic investments and job creation mean that while reducing or repealing deferral may be tempting politically, it would produce significant, negative economic consequences. The policy goal of changing the deferral is ostensibly to make the United States a more desirable place for investment and job creation, but such changes would have the opposite effect of reducing domestic investment and job creation. 

The Administration and the Congress should take this opportunity to conduct a serious review of the tax code and identify broad reforms that take account of the actual dynamics of the global economy and the need to support the integrated operations and international competitiveness of American companies.