Document originally published in Tax Notes
on April 14, 2008.

The employment patterns of U.S. multinational corporations are undergoing a major transformation. As we showed you last week, between 1999 and 2005, U.S. multinationals increased their foreign employment by a little more than 1 million jobs while eliminating an almost equal number of jobs in the United States. That represents a distinct break from the recent past, when U.S. multinationals steadily created U.S. jobs. ("Offshore Jobs and Taxes: Will Democrats Attack?" Tax Notes, Apr. 7, 2008, p. 24, Doc 2008-7379 , or 2008 TNT 68-13⁾.)

This week, as we focus our attention on where those jobs are going, another interesting fact has come to light: In recent years, the pace of multinational job creation in low-tax countries and low- wage countries has accelerated. U.S. multinational job creation has been faster in those mostly emerging economies than in industrialized G-7 countries — those high-tax, high-wage locations where multinationals have traditionally based most of their foreign operations.

Those findings are consistent with the argument — now most prominently made by presidential candidates Sen. Hillary Rodham Clinton, D-N.Y., and Sen. Barack Obama, D-Ill., — that U.S. tax rules favoring foreign over domestic investment may have some adverse impact on U.S. jobs.

Mixed Bag

The table on the next page is a summary of data available from the U.S. Commerce Department on the activities of U.S. multinational corporations. The countries are ranked by the number of jobs created by U.S. multinationals from 1999 through 2005. The tax rates of "low-tax countries" (those with an average tax rate of less than 25 percent) and compensation rates of "low-wage countries" (those with average annual compensation of $30,000 or less) are bold.

It is hard to discern from a table like this what effect taxes and wage rates have on employment. China, in the top slot, which saw 237,000 new jobs from U.S. multinationals between 1999 and 2005, has both low taxes and low wages. At number 2, India — where U.S. multinationals created an additional 117,000 jobs — has low wages but a tax rate nearly identical to the overall foreign average. The U.K., in third place (101,000 jobs created), has both high wages and high taxes. Fourth-place Canada (75,000 jobs created) is neither low- tax nor low-wage (by our definition), but its wages and tax rates are considerably lower than the U.K.'s.

In the rest of the top 40, we find:

• Four countries with low taxes and low wages: Chile, Costa Rica, the Dominican Republic, and Poland;
• Ten countries with low wages (but not low taxes): Brazil, Colombia, the Czech Republic, Egypt, Indonesia, Mexico, Peru, Russia, South Africa, and Thailand; and
• Ten countries with low tax rates (but not low wages): Australia, Austria, the Cayman Islands, Hong Kong, Ireland, Israel, Korea, Luxembourg, Switzerland, and the United Arab Emirates.

If you want to argue that countries with low wage rates attract jobs, there are plenty of examples. If you want to argue that countries with low taxes attract jobs, there is plenty of evidence for that as well. But the lack of a clear pattern also indicates that there is a lot more than wages and taxes driving offshore job creation. How else can you explain U.S. corporations' continued investment and hiring in Canada, France, Italy, Japan, and the U.K., where wage rates are high and tax rates, although often lower than in the past, are higher than the foreign average? Among the leading possibilities is that U.S. multinationals move to those locations because they want access and proximity to important product markets. Financial firms, for example, must have a presence in London. Software makers must customize software for their target markets. Specialized maintenance must be performed on exported machinery.

Effect of Low Taxes on Jobs

If we sort the same data by tax rate, the relative importance of low tax rates can be more easily discerned. Figure 1A shows that of the total of nearly 9 million jobs offshore, 2.2 million (25 percent) were in countries with tax rates below 25 percent, and 1.6 million of those (18 percent of total offshore jobs) were in countries with tax rates below 20 percent.

Figure 1B shows that of the 1.2 million offshore jobs created by U.S. multinationals between 1999 and 2005, 521,000 (44 percent) were in countries with tax rates below 25 percent; of those, 367,000 (31 percent) were in countries with tax rates below 20 percent.

    Foreign Employment by U.S. Multinational Corporations in 2005 and Growth
                             Between 1999 and 2005
              (by country, ranked by growth between 1999 and 2005)

                                    Employment

                                  Growth     Percentage
                                Between 1999   Change     2005    2005 Average
                  Level in 2005   and 2005  Between 1999 Average     Annual
                   (thousands)  (thousands)   and 2005   Tax Rate Compensation

 All countries        8,955.8     1,190.0       15%       28.7%       $38,958
 1  China               489.6       237.2       94%       18.7%        $8,750
 2  India               179.1       116.9      188%       28.2%       $11,167
 3  United Kingdom    1,160.6       101.0       10%       46.9%       $60,403
 4  Canada            1,079.1        74.9        7%       26.2%       $39,453
 5  Mexico              838.4        57.6        7%       27.2%       $13,459
 6  France              584.1        53.7       10%       33.2%       $49,351
 7  Brazil              393.3        44.5       13%       34.3%       $19,367
 8  Indonesia           102.7        41.1       67%       41.8%       $10,750
 9  Italy               225.5        37.3       20%       39.9%       $51,601
 10 Korea                83.0        36.9       80%       22.5%       $38,819
 11 Poland               94.4        35.9       61%       14.8%       $16,123
 12 Japan               242.0        34.7       17%       40.2%       $83,566
 13 Sweden              104.8        32.4       45%       58.0%       $63,254
 14 Australia           283.9        31.4       12%       16.7%       $50,049
 15 Russia               55.7        26.7       92%       29.2%       $14,219
 16 Spain               192.2        25.7       15%       30.8%       $46,436
 17 Netherlands         184.3        18.8       11%       31.9%       $61,042
 18 Switzerland          72.7        18.0       33%       13.0%       $83,301
 19 Thailand            119.6        17.3       17%       25.8%        $8,955
 20 Czech Republic       59.6        16.1       37%       23.1%       $16,762
 21 Hong Kong           108.4        14.6       16%       19.7%       $36,827
 22 Chile                57.2        13.6       31%       20.5%       $16,031
 23 Finland              25.9        10.7       70%       29.4%       $50,541
 24 South Africa         65.2        10.2       19%       31.7%       $27,086
 25 Costa Rica           35.5        10.2       40%       12.3%       $13,324
 26 Peru                 29.4         8.9       43%       29.2%       $16,599
 27 Israel               40.9         7.9       24%       20.8%       $43,936
 28 Egypt                21.1         7.8       59%       45.4%       $11,232
 29 Taiwan               78.8         7.5       11%       23.4%       $25,749
 30 Philippines          85.5         7.4        9%       31.6%        $8,094
 31 Dominican Republic   22.2         6.6       42%       17.6%       $11,306
 32 Denmark              39.0         5.6       17%       45.9%       $60,615
 33 Colombia             48.6         4.7       11%       26.3%       $16,914
 34 Ireland              89.0         4.2        5%        6.6%       $52,146
 35 New Zealand          39.9         4.1       11%       40.6%       $37,694
 36 Greece               16.8         3.8       29%       40.4%       $42,202
 37 Austria              36.3         3.5       11%       15.6%       $64,408
 38 Cayman Islands       10.5         3.0       40%       10.8%       $42,857
 39 Luxembourg           12.2         2.8       30%        3.9%       $51,311
 40 United Arab
    Emirates              7.0         1.6       30%       51.2%       $50,429
 41 Panama               15.8         1.1        7%       21.0%       $16,582
 42 Honduras             18.9         0.8        4%       22.5%        $9,524
 43 Turkey               31.0         0.3        1%       32.1%       $29,032
 44 Barbados              1.0        -0.2      -17%        6.3%       $30,000
 45 Belgium             117.0        -0.3        0%       16.9%       $71,726
 46 Nigeria               7.8        -0.8       -9%       82.3%       $37,436
 47 Hungary              52.3        -0.8       -2%       11.6%       $18,509
 48 Bermuda               2.9        -1.5      -34%       10.8%       $78,276
 49 Argentina            92.0        -1.8       -2%       42.4%       $16,902
 50 Singapore           112.5        -2.3       -2%        6.0%       $34,711
 51 Malaysia            116.3        -2.8       -2%       20.8%       $13,087
 52 Ecuador               7.2        -3.4      -32%       28.2%       $23,333
 53 Saudi Arabia          3.7        -3.8      -51%      221.3%       $49,459
 54 Portugal             30.0        -8.3      -22%       23.3%       $35,467
 55 Venezuela            53.2       -10.0      -16%       28.7%       $21,711
 56 Norway               28.5       -20.2      -41%       60.4%       $76,421
 57 Germany             590.0       -50.6       -8%       66.7%       $67,110
 Other countries by region
    Other Europe        108.1      63.30       141%       24.2%       $14,246
    Other Africa         59.8      10.80        22%       41.3%       $17,776
    Other Asia           22.4       3.00        15%       14.3%       $13,839
    Other Central
     America             36.0      17.50        95%       23.6%        $8,861
    Other South
     America             11.3      -0.20        -2%       31.2%       $14,425
    Other Western
     Hemisphere          16.4       2.20        15%       16.8%       $29,695
    Other Middle East     8.2       1.80        28%       52.8%       $43,537

That low-tax countries account for a larger share of the growth in employment rather than of the overall levels of employment indicates a shift in U.S. multinational employment toward low-tax countries. Our data show that between 1999 and 2005, U.S. multinationals' employment in countries with tax rates below 25 percent was nearly three times higher than in the rest of the world - - that is, 31 percent in low-tax countries compared with 11 percent in other countries.
Effect of Low Wages on Jobs

Taxes, alas, are not everything. When we do a similar analysis and sort the data by annual employee compensation, we see that low wages are also a major attraction for U.S. multinationals.

Figure 2A shows that of the total of nearly 9 million jobs offshore, 3.4 million — or 38 percent — were in countries with average annual compensation below $30,000, and 3.2 million of those (35 percent of total offshore jobs) were in countries with annual wages below $20,000.

Figure 2B shows that of the 1.2 million jobs created between 1999 and 2005, 750,000 — or 63 percent — were in countries with average annual compensation below $30,000; of those, 743,000 (62 percent) were in countries with annual wages below 20 percent. Given those data, it appears that low wages are an even more important factor than low taxes for attracting multinational investment.

The apparently larger effect of wages over corporate taxes on multinational investment should come as no surprise to anybody familiar with the cost structure of a typical business. Wages are almost always a much larger expense for businesses than income taxes. Our data indicate that in 2005, foreign subsidiaries of U.S. multinational corporations paid employees 4.2 times what they paid foreign governments in income taxes.

Conclusion

The U.S. Labor Department reports 145.97 million employed and 7.82 million unemployed in the United States as of March 2008. Between 1999 and 2005 (the period covered in the data above), the U.S. economy generated 4.2 million new jobs, even though manufacturing jobs declined by 3.1 million over the same period. Even if all 521,000 jobs created by U.S. multinational corporations in low-tax countries over that period were magically transplanted to the United States, the overall employment picture would not be very different. The United States would still have lost a ton of manufacturing jobs. The national unemployment rate would be 4.8 percent instead of 5.1 percent.

But that figure of 521,000 jobs surely would be a considerable overstatement of the effect of favorable U.S. international tax rules on U.S. employment. Many of those jobs in low-tax countries (particularly in low-wage countries) would still be there — or in some other foreign location — even without the tax benefits. And from an employer's view, foreign employment is not always a one-for- one substitute for U.S. employment. So if higher taxes on foreign affiliates of U.S. corporations reduced foreign employment, that change would not necessarily result in more U.S. employment.

In summary, the data presented here strongly suggest that taxes play a role in multinationals' decisions about where to invest and create jobs. But taxes are only one of many factors, and the effect in terms of overall U.S. employment is probably marginal. The data are telling us that U.S. international tax rules have some impact on U.S. jobs, but it is likely that any job losses are measured in thousands rather than millions.

Notes on Data and Calculations

The two sources for most of the data in this article are data sets described in:

• U.S. Department of Commerce, Bureau of Economic Analysis, "U.S. Direct Investment Abroad, Final Results of the 1999 Benchmark Survey," Mar. 2004.
• U.S. Department of Commerce, Bureau of Economic Analysis, "U.S. Direct Investment Abroad: Operations of U.S. Parent Companies and Their Foreign Affiliates, Preliminary 2005 Estimates," undated.

The best starting point on the Web for working with these data is the files listed under "Comprehensive Financial and Operating Data" at http://www.bea.gov/scb/account_articles/international/iidguide.htm#USDIA1.

All data presented here are for majority-owned affiliates of U.S. multinational corporations.

The effective tax rate is the ratio of foreign income tax to before-tax profit. Before-tax profit is equal to net income minus income from equity investments plus income taxes. Those data come from Table 3E1 of the 1999 and 2005 surveys.

Average annual compensation is total employment compensation divided by the number of employees. Those data come from Table 3H1 of the 1999 and 2005 surveys.

The calculations presented in the figures are derived directly from the data shown in the table, sorted by tax rate (for figures 1A and 1B) and by wage rate (for figures 2A and 2B).

Employment statistics for the U.S. economy as a whole and for the manufacturing sector come from the Labor Department's Bureau of Labor Statistics (http://www.bls.gov).