On Monday, President Obama and Treasury Secretary Tim Geithner jointly announced a new tax “crack down” aimed at U.S. corporations that benefit from the more favorable tax treatment accorded their foreign subsidiaries. Assuring us that the initiative targets only villainous corporate tax cheats, Geithner (perhaps an ironic messenger given his own high-profile tax troubles) lauded the measure as an important step toward strengthening the American economy “by ending indefensible tax breaks and loopholes which allow some companies and some well-off citizens to evade the rules that the rest of America lives by.” Obama offered a similarly demonizing sentiment, saying, “We are beginning to crack down on Americans who are bending or breaking the rules, and we're helping to ensure that all Americans are contributing their fair share.”
Each employs an effective bit of rhetorical misdirection in their phrasing. This is an unassailable campaign against “evasion” and “rule-breakers” after all, for which some 800 new IRS agents will be recruited. In truth, however, while the bundle of proposals does include strengthening enforcement of existing tax laws, its biggest teeth constitute significant increases in the tax burden levied against law-abiding, rule-observing U.S. companies and individuals who make rational and responsible use of the domestic and international tax code.
Specifically, the scheme would – among other things – accelerate the time frame within which domestic companies (with limited exceptions, as divined by the federal government) must pay U.S. taxes on income earned overseas and disallow U.S. businesses from claiming credit for foreign taxes paid. The administration estimates the plan, which would go into effect in 2011, would haul in an additional $210 billion in federal tax revenues over the following decade. And it uses a curious word to describe the incremental confiscation: “savings.”
In light of the roughly $10 trillion cumulative budget deficit foreseen over the next decade, one can be forgiven for succumbing to the government-centric perspective required to perceive higher taxation as “savings”. Nonetheless, it's a grossly euphemistic perspective that belies the more pernicious and inescapable result of raising the effective corporate tax rate: capital will flee, and jobs will follow.
At 35 percent, the federal corporate tax rate in the United States is already the second highest in the world, behind only Japan. Add the state tax burden, and the combined rate is frequently higher than anywhere outside the country. Indeed, a convoluted tax code, rife with loopholes and exemptions, enables well-heeled companies and individuals to reduce their effective tax rates. And simplification of the tax code is a worthy pursuit. But simplifications like these, without a simultaneous reduction in the marginal rate, necessarily increases the effective rate.
The President claims his tax plan seeks to make American companies and the American economy more competitive. But increasing the cost of doing business in America will quite plainly have the opposite effect. Obama tells us that our tax code gives an advantage to companies that invest overseas. And on that point, he's quite right. From there, it's no arduous mental leap to arrive at the conclusion that we might be mistreating these engines of wealth creation. Capital (and the decision-makers who deploy it) will continue to act rationally. The flight of capital to offshore tax havens is an easily predictable symptom of America's unduly punitive treatment of wealth creation. Ratcheting up the severity of such punishment seems like an dubious prescription. If the administration is truly concerned with making American companies more competitive and encouraging capital to repatriate, it can take the very simple step of lowering the corporate tax rate to a level more in line with the global average (some ten percentage points below our own) or at least – say – that of the world's remaining communist and post-communist states, each of which confiscates corporate wealth less hungrily than does our federal government.
To presume that the planned tax hikes might make domestic companies more competitive with their global counterparts requires the same reasoning that might argue for grounding a child who'd been staying out past curfew to avoid his nightly beating. The child's liable to wise up and run away. U.S. companies shield income overseas (sometimes illegally, though predominantly legally) because it's mistreated domestically. Strong-arming them into synthetically repatriating that income isn't going to make them more competitive. It's only going to give them a more powerful incentive to relocate elsewhere. Americans for Tax Reform noted, “It’s a relatively simple matter for a U.S. company with an Irish subsidiary to become an Irish company with a U.S. Subsidiary.”
As unseemly as it is beneath its thin rhetorical veneer, this latest in a series of creative new ways to tax wealth creation and thwart productivity is likely of little surprise to those who've counted the zeroes in the stimulus bills and deficit projections. The nascent administration has spent itself into a trillion-dollar-a-year hole, and it will require at least a few more “savings” plans to fill it in.
Flip Pidot's Bio
Flip Pidot is the author of the financial/political blog SuitablyFlip.com, a Best Business Blog finalist in the 2008 Weblog Awards. He is also co-founder and CEO of the American Civics Exchange, a futures market enabling companies and investors to hedge their exposure to political outcomes. Flip holds a BA in Economics from Notre Dame and an MBA from UVA’s Darden Business School and is a Certified Fraud Examiner (CFE) and a CFA Charterholder...
Posted
05-07-2009 7:07 AM
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