60 Minutes recently ran a story about how American companies are moving certain business assets and operations out of the country to places where the corporate tax rates are lower than they are here.
At a time when America is in desperate need of jobs, our corporate tax rate is the second highest in the industrialized world at 35%. Only Japan has a higher rate.
Canada and the countries of western Europe all have more inviting tax systems for businesses to locate there.
Two examples that have been in the news recently are Switzerland (and, specifically, the town of Zug) and Ireland.
The corporate tax rate in Zug is around 15%. The tax rate for businesses in Ireland is 12.5%.
Guess what? American businesses are moving money and jobs out of the U.S. and to business-friendly venues such as Zug and Ireland.
In the 60 Minutes piece (http://www.cbsnews.com/video/watch/?id=7376852n&tag=cbsnewsMainColumnArea.5), there are 2 interviews that are fascinating and very revealing. The first is with Congressman Lloyd Doggett (D-TX). He voices consternation about U.S. companies, many of whom have been based in the Houston area, moving their corporate headquarters overseas to effect a tax savings.
Although the actions of companies to save on taxes by moving to countries with more favorable tax laws is completely legal, Congressman Doggett suggested changing the U.S. tax law to impose the higher U.S. corporate tax rate on companies who have made such a move but whose corporate executives still reside in the United States.
Even though Congressman Doggett’s proposal was merely that–a proposal that has not been enacted into law–several companies have moved their corporate executives to Switzerland as a proactive measure. More high earners exiting the U.S in response to the antiquated U.S. corporate tax structure! Isn’t there a lesson here about trying to be more business friendly rather than less business friendly in an attempt to keep companies and those with an ability to stimulate the economy here rather than sitting at some sidewalk cafe in Geneva?
The second interview was with the CEO of Cisco. He was quite frank and outspoken about the disincentive that the U.S. corporate tax structure poses for American businesses. Cisco, like so many other American companies, have moved assets and business operations of a number of their related companies to places like Ireland. Indeed, Dublin and its environs looks like Silicon Valley circa 1990.
A major downside to all of the exodus to places like Switzerland and Ireland is that business profits of the companies that have gone there becomes trapped there–the companies cannot bring the money back into the U.S. without being subject to the punitive U.S. corporate tax rate of 35%.
There have been proposals floated in some circles of having a one-time moratorium on the imposition of the U.S. corporate tax on profits brought back in the country. The Cisco CEO said in the 60 Minutes interview that his company has $40 billion trapped overseas. It has been estimated that $1.2 trillion in corporate profits is trapped outside the U.S.
In addition to the 60 Minutes story, today’s Wall Street Journal had a front-page article about Zug and the large number of businesses that have relocated there.
Can’t our politicians learn from what is happening here?
Two actions should be taken now to spur on the economy of our country and to make it more competitive in the global marketplace with countries that are more welcoming to business than we have become.
First, we should allow for corporate profits in overseas companies to be brought into the U.S. without any tax or at a very low tax rate. Can you imagine the stimulus to the economy that this would provide? And, there is no downside because these overseas profits are not being taxed in the U.S. now anyway, so there would be no loss of tax revenue.
Second, we should lower our corporate tax rates to be competitive with those of the other industrialized nations. Surely we can have a tax system that is no greater than that in Canada or France.
If we do these two things, the benefits to our economy would be immediate and dramatic. It would be a major political victory for President Obama if he were to persuade those in his party to go along with these proposals. Not only would he be doing the right thing for America, but he would reap the benefits of a sudden improvement in the economy.