April 01, 2004,
Included in the supporting materials for John Kerry's corporate-tax plan is a surprising testimonial: that of Kevin Hassett, an economist who works at the American Enterprise Institute. Hassett, as you would expect given his work address, is a free-market conservative. He writes often for TechCentralStation and National Review. He has co-written articles with Glenn Hubbard, who led President Bush's Council of Economic Advisers. So I was a little surprised that Hassett was listed as an economist who agreed with the premises of the Kerry plan.
Kerry wants to raise taxes on some of the unrepatriated profits that American companies make overseas. He argues that the status quo (and therefore Bush) offers tax breaks that reward companies for outsourcing. The Kerry campaign suggests that Hassett believes the same thing. It quotes Hassett as saying that the current tax code does indeed create an incentive for American companies to go abroad. So, I wondered, does Hassett support the Kerry plan?
I called him up. It turns out that he doesn't support the Kerry plan. He doesn't think that the government should be taxing the foreign earnings of American companies at all. (He wants to move toward a "territorial" tax system, which most countries have, rather than our current "worldwide" one.) Moreover, he wasn't saying what the Kerry campaign thinks he was saying.
The Kerry campaign relied on a Wall Street Journal story. Here's the relevant passage from the article, by Steve Liesman: "As if U.S. workers didn't have enough going against them. Turns out there really are provisions in the tax code that seem to encourage sending jobs offshore. . . . Turns out Mr. Kerry is right. Even more compellingly, a couple of conservative economists I called agree with him. 'The U.S. tax code definitely provides a strong incentive for sending jobs overseas,' says Kevin Hassett, an economist at the conservative American Enterprise Institute."
Hassett says that his conversation with Liesman (which took place before the Kerry plan was released) drew heavily on an argument about corporate-tax competition that he first raised in a paper with Eric Engen. They argued that American corporate taxes, being much higher than those of other countries, encourage firms to locate activity overseas as much as possible. That view yields support for one element of Kerry's plan, his tiny reduction in the corporate tax rate. But it does not at all lead to support for higher taxes on American companies' overseas earnings. Indeed, the logic of Hassett's position militates against that idea. He believes that Kerry's tax will lead some American companies to move their headquarters overseas to escape it, and will lead to foreign acquisitions of American companies for the same reason. He is not, however, sure what the magnitude of that effect would be.
Finally, he thinks that reducing overseas investments by American companies is a foolish goal. "If you look at the literature on how foreign investment affects U.S. domestic activity," he says, "it generally finds that it's complementary. It's not the case that if U.S. firms are increasing their overseas activity then domestic employment goes down." That overseas investment may, for example, create management positions here.
Hassett does not seem upset by the Kerry campaign's use of him. "It's just terrific that they feel that quoting me somehow benefits them," he says with a laugh. "I must matter. I'm somebody!"