Monday, May 04, 2009

Obama Tax Proposal Will Lower Stock Prices

Obama now pushes to end the possibility of U.S. based multinational companies to defer taxation of their foreign earnings, something which he claims is a "tax break for companies that shifts jobs overseas". An assertion which is not true, unless you define "tax break" as absence of double taxation. The earnings he refer to are already taxed in the countries where the operations are performed, but now Obama wants to tax them in the U.S. as well. As I wrote before:

"This kind of practice [The tax rules that Obama wants to do away with] exist almost everywhere as it otherwise would put a country's multinational companies at a great disadvantage, having to first pay corporate tax in the country it operates in, and then in the country where it is headquartered. This practice means first of all that foreign profits aren't taxed until it is repatriated to the country where the company is headquartered and secondly that a company can deduct taxes it has paid offshore so as to avoid double taxation. If that is what he means by "tax breaks that shift jobs overseas", then doing away with that would greatly damage American multinational corporations, and so also lower stock prices. This together with a proposed "tax credits" for companies that increase domestic operations relative to foreign might perhaps increase the willingness of American companies to move foreign production to America, but the main effect would be to simply damage the competitiveness of these companies as they are forced to choose production alternatives which are less competitive. And as they in effect amount to tariffs on products produced outside America by American companies, they will damage the global economy as a whole and the rest of the world."


And, as this Business Week story points out, a major effect of this will be to make many companies move their headquarters from other countries, where they won't face double taxation.

Most companies will however probably not move their headquarters, but as that will mean that they will have to pay a lot higher taxes or use less cost efficient solutions, this will mean that their net profits will fall, something which in turn will lower the fundamental value of stocks. And once the U.S. stock market experiences another Wile E. Coyote moment and realizes this, stock prices will fall.

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