The Public Policy
Suppressing Our Economic Power
Is America supposed to be proud that its corporate tax rates are the world’s highest?
Sweden may be best known among Americans as home of the Nobel Prize and IKEA but astute politicians would be wise to take a closer look at what this Scandinavian nation is doing economically.
Last month, Sweden announced plans to lower its corporate tax rate to 22% from 26.3%. In making the move, Sweden’s Minister for Enterprise Annie Lööf said reducing the tax rate would “provide a stimulus for both small and large businesses,” with the Swedish government predicting “the significant reduction of the corporate tax is expected to strengthen the investment climate and growth in Sweden.”
With all the talk of stimulus and jobs in the closing weeks of this political season, the time is ripe for elevating the issue of corporate tax policy as a means of improving America’s overall economic health and creating jobs. At 35%, the United States has the highest federal corporate tax rate in the industrialized world. This tax rate applies to all corporate income, regardless of whether it is earned in the U.S. or overseas, the only difference being that income earned outside the country is taxed twice. It’s first taxed by the nation in which it is earned and again when it returns to the U.S., with Uncle Sam providing a credit for taxes paid overseas.
Corporate taxes further rise when state and local taxes are added to the equation. In the U.S., this combined tax amounts to 39.1% and when any nation has such a high corporate tax rate, they are automatically disadvantaged in attracting new business. Consider a European corporation contemplating a new facility in North America. Will it be more prone to consider locating in Mexico, with a 30% combined corporate tax rate; Canada, with a 26.1% rate; or the United States, where income will be taxed at 39.1%? Granted, there are myriad factors involved in determining where to locate any manufacturing operation — everything from local tax breaks to public/private partnerships — but a topline look at tax policy places America at a disadvantage.
The treatment of money earned overseas by American companies has a similarly perverse effect on investment. Income that is taxed by the country in which it was earned, followed by a second layer of taxation when it returns to the U.S., results in American companies being incentivized to keep that money where it is; anywhere but America. This tax structure prevents American companies from bringing that money home where it could be used to invest in U.S. operations, create new jobs or increase dividends for retirees, pension holders, and others who own stock in a company.
A reduction of the corporate tax rate to 25%, an exemption on most income earned abroad and eliminating tax loopholes would provide a much needed incentive to invest in America while remaining revenue-neutral. It would put America on a level playing field with other industrialized nations while unleashing an estimated $1.5 trillion to invest in America, providing a significant boost to US employment.
Good policy is good politics. The benefits of corporate tax reform transcend traditional party politics and it’s an issue that can resonate with all voters. Some will dispute this but it’s clear to others around the world. When Japan lowered its corporate taxes earlier this year, a member of that nation’s House of Representatives, Mieko Nakabayashi, described the landscape, saying, “With most of the world, Japan included, cutting corporate tax rates and employing territorial tax systems to remain competitive, the U.S. must surely know that its hesitancy to do these things is handing the advantage to its international competitors.”
And the price for failing to act? Nakabayashi summed it up, saying America “will suffer from that hesitancy while we and others outside the U.S. will benefit.” Whether the United States will suffer or benefit from corporate tax policy is up to those who seek to hold the public trust.
Letter to the Editor View all comments (14) | Leave a comment
More Articles From The Public Policy
http://spectator.org/archives/2012/10/01/suppressing-our-economic-power
Follow us:
ADVERTISEMENT
The Spectacle Blog
The #FreeKate Narrative Melts Down: Lies Exposed in Florida Teen Sex Case
Robert Stacy McCain | 5.25.13
SPONSORED LINKS
FLASHBACK TO: 1995
-
Pope Culture
A man of faith in a godless age is hitting Americans where it hurts.
-
Why the GOP Does Not, Like, Totally Suck
Mr. and Mrs. American Spectator Reader, let P.J. O’Rourke talk sense to your kids.
-
Dames at Sea
-
In the Absence of Guns
In Britain, defending your property can get you life.
-
The Metaphysical Martini
-
Counting the Costs of Clintonism
The debacle of this president’s administration is both a cause and a symptom of the decline of American values. Unless Congress impeaches him, that decline will go on unchecked. An eminent jurist surveys the damage and assesses the chances for the recovery of our culture.
-
Chuck McHagel
It won’t take long for conservatives to scratch this presidential wannabe off their 2008 scorecard.
-
The Legacy of Old John and Mother Fresh-Roasted
-
It’s the Best Time of the Year
The American Christmas, like the songs that celebrate it, makes room for everybody under the rainbow. Is that why so many people seem to be hostile to it?
-
The Bush Crack-Up
Was the President done in by the economy, or by the politics of the economy?
Clip of the Day
H/T to National Review Online
ADVERTISEMENT
Pecos Pete| 10.1.12 @ 7:13AM
A corporate tax rate of 0% would make the USA the most competitive country in the world. Corporations don't pay taxes ... they simply collect taxes for the various governments imposing taxes. A 0% corporate tax rate would immediately reduce prices as taxes are simply included with all other costs to arrive at a selling price.
For companies to create more jobs we have to reduce tax rates and eliminate over regulation.
Maxwell| 10.1.12 @ 8:35AM
Pecos Pete, I cannot tell you how many times I have gotten into a 'discussion' with people telling them that corporations don't pay taxes but the tax is figured into the price of a product & passed on to the end user.
Sometimes (actually most of the time) I like to piss people off by asking, what business or accounting courses did you take in college knowing full well they were a liberal arts major. I even ask, did you have Intro, Intermediate, or Cost Accounting because of you did you would know the correct answer.
Cannot fix stupid!
PolishKnight| 10.1.12 @ 9:53AM
OK, call me stupid but this argument doesn't make sense. Income taxes are an arbitrarily defined concept of net profit where revenue (easily defined) and expenses (which are endlessly subject to political quibbling.) In theory, paid corporate dividends to shareholders should be recognized as repaid debt and the shareholders pay income taxes individually. Otherwise, a poor person with a single share of Apple stock pays the same "corporate" tax rate as Steve Wozniak.
In any case, I digressed a bit since this is all irrelevant to the price of a product which is based upon the cost to manufacture which is usually a clear deduction under corporate income taxes. Increasing the price helps to address net cost of manufacture, but until a profit is made there is no income tax (obviously). Reducing the corporate income tax rate therefore is unlikely to affect the price.
However, reducing corporate income tax does help motivate investment and to bring jobs back onshore. Offshore companies needn't pay double income tax rates if they simply incorporate in that country. This is what the cigarette manufacturers did when they decided to sell their poison to children in Eastern Europe and Asia. They are now based in Switzerland I believe.
Pecos Pete| 10.1.12 @ 7:33PM
PK: Under certain circumstances you could be correct in the calculation of cost of mfg, selling price and gross profit. The rule of thumb in most profitable businesses is to calculate the true cost of mfg, and then divide that number by some percentage that will return the gross profit necessary to cover selling and admin expenses and income taxes (both federal and state). Usually a business will strive for an after tax profit percentage on net sales that is comparable to competing companies.
Of course, competitive pressures may require lower pricing or may allow for higher pricing, it all depends upon the growth strategy of the company.
I appreciate your comments and also the comment by Maxwell.
PolishKnight| 10.2.12 @ 9:55AM
Hello Pecos. I appreciate I could have phrased the "net cost of manufacture" better. That includes, of cource, the sales and administration costs. However, the "income taxes", as I said, only kick in after the corporate makes a defined legal profit so it's impossible to include them in the calculation of a product's price in order to make a profit. What's the best term for this? "Recursive?"
Taxguy| 10.1.12 @ 7:43AM
Uhhh, just what tax loopholes are you referring to? Hint, there aren't any, except one esoteric one that is difficult to use. If 15% is good enough for capiatal gain income, then it is good enough for ordinary corporate, and individual income, to.
JoeS| 10.1.12 @ 8:06AM
My company is a very small closely held corporation. There is a perverse incentive to spend down all available cash at the end of the year on expense items in order to avoid the very punitive 35% tax. The 179 deduction encourages it and helps makes it possible. So, we buy things we do not really need (it is like getting a 35% discount on everything we buy) and pay employees generous bonuses just to zero out profits. Every year, rinse and repeat.
PolishKnight| 10.1.12 @ 9:51AM
Having worked at a financials company and seen major corruption, I can tell you they have a trick to both avoid the tax AND reward cronies and nepotism. They have relatives who own or have interests in such companies and they get their companies to blow their end year money on them either for products they don't need, or boondoggles. The losers are often the shareholders and taxpayers (for taxpayers who help fund these "too big to fail" institutions.
BrianColvin| 10.1.12 @ 3:18PM
Walter, simply debating corporate tax rates is a moot point when you extract them from the whole picture. In an economy where US corporations are making record profits, and high level execs are experiencing an exponential growth in their incomes while entry level jobs are paying ever less, corporate tax rates are only a small part of the problem. Lowering tax rates on corporations will serve nothing but to line their pockets with even more capital which is not translating to better paying jobs for anyone except the very top. It's funny when talk of tax comes up, other countries (which have different labor and trade laws) are used as examples by the right, however when you bring up health care, when the left states the US is the only 1st world country without universal healthcare, the right dismisses it because you cannot compare the US to other countries.
PolishKnight| 10.1.12 @ 3:48PM
I agree with Brian's point about corporate tax rates. It's a political no-win to cry about tax rates on corporations when they're making record profits, massive CEO compensation, and low wages/hiring.
Regarding comparing US healthcare to other countries: It's useful to remind them that the USA healthcare is NOT private but rather a combination of "universal healthcare" (for seniors, undocumented immigrants, and the poor) and the middle class. So claims that the USA's healthcare system is "expensive" are valid but the "universal healthcare" costs need to be factored in. Considering the culture war the USA is in right now, universal healthcare here would cost several times more than in Europe. Let's try this comparison: Go to West Germany and drive on a road. Now drive on one here. Both systems are supposedly the "same". Both are government run and operated roads with corporate bidders. Yet, Germany's roads are like butter while the USA's is collapsing and no doubt we spend a lot more. Think of the reasons WHY and apply them to healthcare...
BrianColvin| 10.1.12 @ 3:30PM
And Maxwell, the de-regulation of industries will not lead to job creation. It will lead to higher profits for corporations, and therefore higher profits for the top 1%. Want to push for something that will create jobs, push for the US to withdraw from the WTO, NAFTA and CAFTA, all of which make it easier for US corporations to ship jobs outside the US to take advantage of lower wages, lower cost of overhead due to less human rights laws, and lower import tarrifs. If we had trade agreements that protected the worker regardless of their country, we could compete.
biomedlives| 10.1.12 @ 10:16PM
"..bringing that money home where it could be used to invest in U.S. operations, create new jobs or increase dividends for retirees, pension holders, and others who own stock in a company." I agree with the point about increasing dividends, but not with investing in U. S. operations or creating new jobs. With interest rates at such low levels,virtually any profitable U. S. - based company could borrow money to invest in financially attractive projects that would create jobs in this country. Returning overseas profits to the U. S. would not be necessary for those investments. In addition, I agree with briancolvin that a lot of the returned profits would wind up in the pockets of upper management.
I would favor a Race to the Top approach. Companies could submit proposals stating how they would invest returned profits and how many jobs they would create with them. The companies with the best proposals would be able to bring back profits at a low tax rate and invest them. Any company that created the promised number of jobs would owe nothing more in taxes, but any company that missed would pay at a much higher rate.
drmaddogs| 10.2.12 @ 9:23AM
Seems to be quite a few holes in this article.
Effective rates paid would be the place to start in a discussion of corporate tax rates.
These constant statements to America having the "highest rates" mean nothing other than headline grabbing, when talking about international companies.
Since main street media and our Representatives have been captured by the big buiss corps, we will not see the mom and pop(millions thereof) corps or truely 'small buis'(far less than the '500 employee' mark) be advantaged in tax code reform or rates.
These are the corporations that do not have access to congressional members, cannot afford a number of subchapters overseas with the only 10% rates if revs are offshored for 365 days, cannot afford schemes like the Double Irish Sandwich like Google to pay two percent effective
in the U.S..... and are the real hiring engines in a recovery.
'Mom and Pop can double their workforce with a couple employees, multiply that by a million S corps and see how fast job growth happens.
But the stories will continue to be brought concerning mostly public companies, top 500, Russel 2000 ect, that utilize loopholes.
The idea that foriegn companies will come here for reduced rates(tax), is an ingenuine attempt to sway. Foriegn companies only come here if it shortens supply lines versus the labor costs elsewhere... and wage slaves exist in huge numbers other than America.
drmaddogs| 10.2.12 @ 9:25AM
Unsaid are the ramifications possible in todays world concerning todays standards of globilization and the direction of the exchange rate for the dollar... when it comes to all counties, including America with constantly dropping tax rates(corporate).
Where does the elimination of surplus M1 supply happen then...keeping M3 and the value of the U.S. dollar up, on international markets? How does the 'Fed' reclaim credit outbounds?
Or is the final outcome to just ignore whereby 'main street' will become more indebted, wages not to rise above Fed inflation(and essentially stay as flat as since the early 90's)?
With science, mechanization,robotics and reduction in labor forces, big buiss is just fine as it is now.
But maybe some kind of trickle down to the masses of small corps that gross over 250K$ but net 50K$ in owner earnings will happen if international companies get another 'tax holiday' where those billions are brought home at 10% rates... 'course the last time 60-70% of the monies brought home left the corporate coffers towards insiders, bondholders and via stock shelf offerings... and thus was not 'reinvested'.
The million small corps actually American bound, can only dream about access to such tax shemes.