Obama proposes bringing jobs home from overseas. Would his plan work?

To achieve his goal of 'insourcing,' Obama proposes rewarding firms that create jobs in the US while imposing higher effective taxes on profits earned by overseas operations.

President Obama used a Milwaukee factory Wednesday as the venue to amplify his call for the US to create more manufacturing jobs – including by enticing companies to move jobs back to the US from overseas.

After years in which American workers faced challenging trends labeled "outsourcing" and "off-shoring," some people use the word "insourcing" to describe this goal.

The president proposed a blend of tax-code carrots and sticks. Companies would face higher effective taxes on profits earned by overseas operations, and Obama proposes using the proceeds to reward firms that create jobs in the US. Obama also outlined what appears to be a tougher stance on enforcing current trade laws against China, a policy that could aid the cause of US-based factories.

Mr. Obama won loud cheers from workers at the Master Lock plant where he spoke. But many independent economists, while applauding the general goals Obama espoused, doubt whether the policies he framed in Milwaukee would work.

“The president is absolutely right to focus on this [manufacturing issue],” says Robert Atkinson, who heads the Information Technology and Innovation Foundation, a policy think tank in Washington. But he says he's “not really enamored” of Obama's proposals.

A central problem for US manufacturers, Mr. Atkinson says, is that they are currently asked to pay higher tax rates than their overseas competitors. He argues that what's needed is an overhaul of the corporate tax system to bring rates lower, making the US a more attractive place to invest.

Obama, instead, offered proposals that create new incentives for investment at home, but would also penalize multinational manufacturers based in the US:

"No American company should be able to avoid paying its fair share of taxes by moving jobs and profits overseas," Obama said. "From now on, every multinational company should have to pay a basic minimum tax.  And every penny should go towards lowering taxes for companies that choose to stay and hire in the United States of America."

Obama cited Master Lock as an example of a nascent revival for US manufacturing. It has moved about 100 jobs, previously outsourced offshore, back to Milwaukee since the middle of 2010, according to the White House.

Some tax-policy analysts say Obama is right to seek disincentives for firms that shift jobs overseas.

The group Citizens for Tax Justice, for instance, decries a current loophole that allows American corporations to defer US taxes on their offshore profits until those profits are brought home. They pay taxes in the overseas nation. But if they don't "repatriate" the profits, they may avoid the current tax code's goal of having them pay enough US tax to make up the difference between the foreign-country and US-side tax rates.

"This ... provides an incentive for US corporations to shift operations and jobs to a lower tax country, or just use accounting gimmicks to make their US profits appear to be 'foreign' profits," a recent report by Citizens for Tax Justice said.

Other economists, however, say the US needs to tread carefully on tax policy, and that the main problem is that the US corporate tax rates exceed those in other nations.

Gary Hufbauer, at the Peterson Institute for International Economics, says in an audio commentary on the issue that when US firms invest abroad they also tend to create export demand for their products made in the US. If you try to get them to bring their jobs "home," the result may be that they lose a foothold in foreign markets, which can ultimately benefit US workers.

Currently, US corporations pay an effective tax rate of about 27 percent of profits, compared with an average of about 20 percent for many other advanced nations, Mr. Hufbauer says. If that tax-rate gap persists, and if the US cracked down on the deferral loophole, it might encourage more US firms to be bought by corporations based overseas, over time, to get around the higher tax.

Atkinson says Obama is "long overdue" in pursuing tougher enforcement of trade laws against China.