On April 1, the AFL-CIO began running television and radio advertisements in 19 congressional districts supporting a $16 billion per year tax increase on U.S. multinational corporations, with the additional revenue targeted for school construction. The proposal would end the current practice of allowing U.S. firms a credit for taxes paid in foreign countries. This provision exists in order to prevent double taxation of the same income. It has been part of the tax code since 1918 and virtually every other country on Earth has the same provision in its tax law. Instead, firms would only be allowed to deduct such taxes. (Deductions reduce taxable income while credits reduce taxes directly.) The proposal would also tax all profits of foreign subsidiaries regardless of whether they are repatriated to the United States. Under current law, profits earned abroad are only subject to U.S. taxes when they are brought home.
The AFL-CIO has long been concerned about these tax provisions, because it believes they encourage U.S. firms to invest abroad; in effect exporting jobs to other countries. But as the figure shows, foreign investment does not come at the expense of domestic investment. Historically, the annual return on foreign investment well exceeds the flow of new investment. Thus foreign investment adds to U.S. income, rather than detracts from it.
Furthermore, most foreign investment simply comes out of foreign earnings. In 1995, 57 percent of U.S. foreign direct investment (FDI) came from reinvested earnings on foreign operations. And most of the rest is raised in foreign capital markets. Martin Feldstein of Harvard estimates that only about 20 percent of all U.S. FDI came from the U.S. originally. …