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Busch: Paying The Check

As the stimulus from China and the United States continues to help slow the descent of the global economy, the Obama administration's decision to re-write the international tax code on its own may come as a surprise to those that haven't been watching spending.

At a press conference yesterday, President Obama outlined his reasoning for the tax changes. Currently, the US does not tax the foreign subsidiaries of US parent corporations until those earnings are repatriated to the US. Watch the language that Obama uses to cloak his tax hike. "The U.S. tax code has made it "all too easy for a...small number of individuals and companies to abuse overseas tax havens , to avoid paying any taxes at all. And it's a tax code that says you should pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, New York."(WSJ)

Note how he wraps the tax hike decision around a populist message to the American people. Very powerful leverage and language to use which has an "American jobs first" protectionist theme to it. This is certain to raise our trade and tax partners ire.

Already, the US business community is upset. Business Roundtable President John Castellani had this reaction: "The overseas operations of U.S. multinational companies support jobs and higher living standards here at home."In anticipation of the move, 200 companies and trade groups including the U.S. Chamber of Commerce sent congressional leaders a letter opposing changes to the "deferral" provision in March. The letter made the point that the firms would not be on a level playing field with international rivals, many of which are not required to pay taxes at home on overseas entities. The irony is that many OECD countries have or will soon adopt a territorial regime that does not tax the active foreign earnings of the subsidiaries of their multi-national corporations.

With all political analysis, you have to ask the question why? To me, the dire need to raise funds to pay for all the programs to assist the economy and to pay for the White House's social agenda means that serious political capital is about to be risked.

As an example of this spending, here's a provocative statistic from USA Today : Uncle Sam (federal government) has supplanted sales, property and income taxes as the biggest source of revenue for state and local governments. This spending pattern creates a federal-house-of-cards vibe to the current "green shoots" recovery and shows the need to raise revenue at all costs.....including the multinational companies that supported Obama for president.

With energy, education, and health care programs to be paid for, the Obama administration and the Democrats in Congress will continue to push the envelope of raising revenue via tax hikes. They make the incorrect conclusion that government creates jobs for an economy and will need to be funded to continue those programs. The reality is that at best government is an inefficient transfer mechanism of income to provide short term support. At worst, they can suck out capital from the private sector and cut off future growth via tax hikes.

I think you know the direction we're going in.......

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Andrew Busch
Andrew Busch

Andrew B. Busch is Global FX Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece andreach him here and you can follow him on Twitter at http://twitter.com/abusch .