Observations on Politics outside of the US.

US Coporate Taxes

This blog is taken, in part, from WSJ letters to the Editor, specifically from a Frederick C. Van Bennekom and Colin S. Jackson.

At issue in recent Presidential debate is the discussion of taxes, and more specifically, taxes incentivized companies to move off-shore. This was President Obama’s statement, to which Mitt Romney replied, “Mr. President, I have been in business for over 25 years, and I don’t even know what you are talking about”. While I tend to believe Mr. Romney, I still wanted to research it.

Here’s what I have come up with.

There are three things in play when one looks at the corporate tax policies:

1. the taxing of overseas profits earned by US firms
2. the deferral of that tax
3. the overall corporate tax rate.

First of all, the US is the only major country that taxes overseas profits, effectively creating an un-level playing field for US-based companies.

The deferral discourages US-based companies from investing in America (because if they bring the money back (repatriate) into the US, they pay taxes on it AND a penalty), which in turn encourages them to invest it elsewhere.   The folly of this is seen when a company is repatriating profits from a country with a lower tax rate than ours.  If it was your company located in Ireland, would you bring the profits back to the US to face the 35% corporate tax rate PLUS the 22% penalty repatriation penalty, or would you invest your profits in the local facility and face just a tax rate of 22.5%?  Think of the hiring you could do there, the equipment, the automation, the advancement of your processes! So you effectively BUILD your business there, to take advantage of where your money can be best put to work.

Had the President’s Bowles-Simpson commission’s recommendations to move to a territorial tax system been followed, this would hav eliminated this issue, leveling the playing field.

However, at the same time, the US also has the highest corporate tax rate of any major nation. This tax is levied on profits earned in the US by foreign firms, effectively discouraging these foreign firms from outsourcing to America.

It is offered that high corporate tax rates are the “currency of politicians”, as they use these rates to create loopholes for their favored groups.  This corrupts at all levels, and undermines everything we are working for.

In 1994, there were 10 OECD (Organization for Economic Cooperation and Development www.oecd.gov) countries with higher corporate tax rates than the US.  In 2012, there are none.

Bottom line, without serious corporate tax reform, the US losing out on investments, revenues, and jobs.