Rand Paul Debunks the Shameful Demagoguery against Apple

Senator Rand Paul is perhaps even better than I thought he would be.

The Founding Fathers would be proud

He already is playing a very substantive role on policy, ranging from his actions of big-picture issues, such as his proposed budget that would significantly shrink the burden of government spending, to his willingness to take on lower-profile but important issues such as repealing the Obama Administration’s wretched FATCA law.

But he also plays a very valuable role by articulating the message of liberty and refusing to allow leftist politicians to claim the moral high ground and use false morality to cloak their greed for other people’s money.

And there’s no better example than what he just did at the Senate hearing about Apple’s tax burden.

Wow. I thought I hit on the key issues in my post on the anti-Apple demagoguery, but Senator Paul hit the ball out of the park.

If you want other video examples of Senator Paul in action, click here to see him grill a TSA bureaucrat and click here to see him rip an Obama appointee on whether Americans should be free to choose the light bulb they prefer.

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Four Reasons to Applaud Apple’s Tax Planning

The Senate is holding a Kangaroo Court designed to smear Apple for not voluntarily coughing up more tax revenue than the company actually owes.

Here are four things you need to know.

Apple is fully complying with the tax law. There is no suggestion that Apple has done anything illegal. The company is being berated by politicians for simply obeying the law that politicians have enacted. What’s really happening, of course, is that the politicians are conducting a show trial in hopes of creating an environment more conducive to tax increases on multinational companies (this is in addition to the OECD effort to impose higher tax burdens on multinational firms).

Left-wing whining

It is better for Apple to retain its profits than it is for politicians to grab the money. If Harry Reid, Barack Obama, and the rest of the crowd in Washington are able to use this fake issue as an excuse to raise taxes, the only things that changes is that the tax system becomes more onerous and politicians have more money to spend. Neither of those results are good for growth, particularly compared to the potential benefits of leaving the money in the productive sector of the economy.

Apple shouldn’t pay any tax to the IRS on any of its foreign-source income. A few years ago, Google was criticized for paying “only” 2.4 percent tax on its foreign-source income, but I explained that was 2.4 percentage points too high. Likewise, when Apple earns money overseas, that should not trigger any tax liability to the IRS since the income already is subject to all applicable foreign taxes (much as, say, Toyota pays tax to the IRS on its US-source income). Good tax policy is based on the common-sense notion of “territorial taxation,” which means governments only tax income and activity within their national borders. Unfortunately, the American tax system is partially based on the anti-competitive policy of “worldwide taxation,” which means the IRS gets to tax income that is earned – and already subject to tax – in other nations. Fortunately, we have a policy called “deferral,” which allows companies to postpone this second layer of tax.

If Apple is trying to characterize US-source income into foreign-source income, that’s because the US corporate tax system is anti-competitive. Multinational companies often are accused of “abusing” transfer-pricing rules on intra-company transactions to inappropriately turn US-source income into foreign-source income. To the extent this happens (and always with IRS approval), it is because the American corporate tax rate is now the highest in the developed world (and the second highest in the entire world), so companies naturally would prefer to reduce their tax burdens by declaring income elsewhere. So the only pro-growth solution is lowering the corporate tax rate.

It’s worth noting, by the way, that the Tax Foundation recently estimated that the revenue-maximizing corporate tax rate is 14 percent.

So if the anti-Apple lynch mob actually wants more revenue, they should learn a Laffer Curve lesson and slash the corporate tax rate.*

*I want to maximize growth, not maximize revenue.

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OECD Study Admits Income Taxes Penalize Growth, Acknowledges that Tax Competition Restrains Excessive Government

I have to start this post with a big caveat.

OECD bureaucrats get tax-free salaries but urge higher taxes for everyone else

I’m not a fan of the Paris-based Organization for Economic Cooperation and Development. The international bureaucracy is infamous for using American tax dollars to promote a statist economic agenda.

Most recently, it launched a new scheme to raise the tax burden on multinational companies, which is really just a backdoor way of saying that the OECD (and the high-tax nations that it represents) wants higher taxes on workers, consumers, and shareholders.

But the OECD’s anti-market agenda goes much deeper.

• The OECD has allied itself with the nutjobs from the so-called Occupy movement to push for bigger government and higher taxes.
• The OECD, in an effort to promote redistributionism, has concocted absurdly misleading statistics claiming that there is more poverty in the US than in Greece, Hungary, Portugal, or Turkey.
• The OECD is pushing a “Multilateral Convention” that is designed to become something akin to a World Tax Organization, with the power to persecute nations with free-market tax policy.
• The OECD supports Obama’s class-warfare agenda, publishing documents endorsing “higher marginal tax rates” so that the so-called rich “contribute their fair share.”
• The OECD advocates the value-added tax based on the absurd notion that increasing the burden of government is good for growth and employment.

Now that there’s no ambiguity about my overall position, I can admit that the OECD isn’t always on the wrong side. Much of the bad policy comes from its committee system, which brings together bureaucrats from member nations.

The OECD also has an economics department, and they sometimes produce good work. Most recently, they produced a report on the Swiss tax system that contains some very sound analysis – including a rejection of Obama-style class warfare and a call to lower income tax burdens.

Shifting the taxation of income to the taxation of consumption may be beneficial for boosting economic activity (Johansson et al., 2008 provide evidence across OECD economies). These benefits may be bigger if personal income taxes are lowered rather than social security contributions, because personal income tax also discourages entrepreneurial activity and investment more broadly.

I somewhat disagree with the assertion that payroll taxes do more damage than VAT taxes. They both drive a wedge between pre-tax income and post-tax consumption.

But the point about income taxes is right on the mark.

Interestingly, the report also endorses tax competition as a means of restraining the burden of government spending.

Evidence also suggests that tax autonomy may lead to a smaller and more efficient public sector, helping to limit the tax burden and improve tax compliance… Efficiency-raising effects of tax autonomy and tax competition on the public sector have also been reported in empirical research with Norwegian and German data… Tax autonomy generates opportunities to choose the level of public service provision and taxation, although in practice such “voting with your feet” seems mostly limited to young, highly educated and high-income households. Decentralised tax setting also fosters benchmarking of the performance of jurisdictions belonging to the same government level by voters, even in the absence of “voting with your feet”.

The report also notes that tax competition has reduced corporate tax rates.

Tax competition is likely to have contributed significantly to lowering corporate tax rates in Switzerland over the past 25 years. Indeed, empirical evidence shows that the responsiveness of sub-national governments to tax changes of other subnational governments (“tax mimicking”) is the strongest in the case of corporate taxation (Blöchliger and Pinero Campos, 2011). …Progressive corporate income taxes harm incentives for businesses to grow. Since growing businesses are likely to be high performers in terms of productivity, such disincentives are likely to hit high-performing businesses the most, with losses to aggregate productivity performance, which has been modest in Switzerland relative to best-performing high-income countries.

P.S. This isn’t the first time the economists at the OECD have broken ranks with the political hacks that generally control the bureaucracy. In a 1998 Economic Outlook (see page 166), they wrote that “the ability to choose the location of economic activity offsets shortcomings in government budgeting processes, limiting a tendency to spend and tax excessively.”

And in another publication (see page 1), the economists noted that “legal tax avoidance can be reduced by closing loopholes and illegal tax evasion can be contained by better enforcement of tax codes. But the root of the problem appears in many cases to be high tax rates.”

These passages sound like they could have been authored by Pierre Bessard!

P.P.S. I hasten to add that none of this justifies handouts from American taxpayers to the Paris-based bureaucracy any more than occasional bits of rationality from the World Bank (on government spending), IMF (on the Laffer Curve), or United Nations (also on the Laffer Curve) justify subsidies to those organizations.

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New GAO Study Mistakenly Focuses on Make-Believe Tax Expenditures

I’m very leery of corporate tax reform, largely because I don’t think there are enough genuine loopholes on the business side of the tax code to finance a meaningful reduction in the corporate tax rate.

That leads me to worry that politicians might try to “pay for” lower rates by forcing companies to overstate their income.

Based on a new study about so-called corporate tax expenditures from the Government Accountability Office, my concerns are quite warranted.

The vast majority of the $181 billion in annual “tax expenditures” listed by the GAO are not loopholes. Instead, they are provisions designed to mitigate mistakes in the tax code that force firms to exaggerate their income.

Here are the key findings.

In 2011, the Department of the Treasury estimated 80 tax expenditures resulted in the government forgoing corporate tax revenue totaling more than $181 billion. …approximately the same size as the amount of corporate income tax revenue the federal government collected that year. …According to Treasury’s 2011 estimates, 80 tax expenditures had corporate revenue losses. Of those, two expenditures accounted for 65 percent of all estimated corporate revenues losses in 2011 while another five tax expenditures—each with at least $5 billion or more in estimated revenue loss for 2011—accounted for an additional 21 percent of corporate revenue loss estimates.

Sounds innocuous, but take a look at this table from the report, which identifies the “seven largest corporate tax expenditures.”

To be blunt, there’s a huge problem in the GAO analysis. Neither depreciation nor deferral are loopholes.

I wrote a detailed post explaining depreciation earlier this month, citing three different experts on the issue. But if you want a short-and-sweet description, here’s how I described depreciation in my post on corporate jets.

If a company purchases a jet for $20 million, they should be able to deduct – or expense – that $20 million when calculating that year’s taxable income… A sensible tax system defines profit as total revenue minus total costs – including purchases of private jets. But today’s screwy tax code forces them to wait five years before fully deducting the cost of the jet (a process known as depreciation). Given that money today has more value than money in the future, this is a penalty that creates a tax bias against investment (the tax code also requires depreciation for purchases of machines, structures, and other forms of investment).

In other words, businesses should be allowed to immediately “expense” investment expenditures. What the GAO refers to as “accelerated depreciation” is simply the partial mitigation of a penalty, not a loophole.

The same is true about “deferral.” Here’s what I wrote about that issue in February 2010.

Under current law, the “foreign-source” income of multinationals is subject to tax by the IRS even though it already is subject to all applicable tax where it is earned (just as the IRS taxes foreign companies on income they earn in America). But at least companies have the ability to sometimes delay when this double taxation occurs, thanks to a policy known as deferral.

I added to those remarks later in the year.

From a tax policy perspective, the right approach is “territorial” taxation, which is the common-sense notion of only taxing activity inside national borders. It’s no coincidence that all pro-growth tax reform plans, such as the flat tax and national sales tax, use this approach. Unfortunately, America is one of the world’s few nations to utilize the opposite approach of “worldwide” taxation, which means that U.S. companies face the competitive disadvantage of having two nations tax the same income. Fortunately, the damaging impact of worldwide taxation is mitigated by a policy known as deferral, which allows multinationals to postpone the second layer of tax.

Simply stated, the U.S. government should not be trying to tax income earned in other countries. “Deferral” is the mitigation of a penalty, not a loophole.

So why would the GAO make these mistakes? Well, to be fair to the bureaucrats, they simply relied on the analysis of the Treasury Department.

But why does Treasury (and the Joint Committee on Taxation) make these mistakes? The answer is that they use the “Haig-Simons” tax base as a benchmark, and that approach assumes bad policies such as the double taxation of income that is saved and invested. If you want to get deep in the weeds of tax policy, I shared late last year some good analysis on Haig-Simons produced by my colleague Chris Edwards.

By the way, properly defining loopholes also is an issue for reform on the individual portions of the tax code. I’ve previously pointed out the flawed analysis of the Tax Policy Center, which put together a list of the 12 largest “tax expenditure” and included six items that don’t belong.

To conclude, the right tax base is what’s called “consumed income.” But that’s simply another way of saying that the system should only tax income one time, and it’s how income is defined for both the flat tax and national sales tax.

One final comment about GAO. It’s understandable that they used the Treasury Department’s methodology, but they also should have produced a list of tax expenditures based on a consumed-income tax base. That’s basic competence and fairness.

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Targeting Multinationals, the OECD Launches New Scheme to Boost the Tax Burden on Business

I’ve been very critical of the Organization for Economic Cooperation and Development. Most recently, I criticized the Paris-based bureaucracy for making the rather remarkable assertion that a value-added tax would boost growth and employment.

But that’s just the tip of the iceberg.

• The OECD has allied itself with the nutjobs from the so-called Occupy movement to push for bigger government and higher taxes.
• The OECD, in an effort to promote redistributionism, has concocted absurdly misleading statistics claiming that there is more poverty in the US than in Greece, Hungary, Portugal, or Turkey.
• The OECD is pushing a “Multilateral Convention” that is designed to become something akin to a World Tax Organization, with the power to persecute nations with free-market tax policy.
• The OECD supports Obama’s class-warfare agenda, publishing documents endorsing “higher marginal tax rates” so that the so-called rich “contribute their fair share.”

Now the bureaucrats have concocted another scheme to increase the size and scape of government. The OECD just published a study on “Addressing Base Erosion and Profit Shifting” that seemingly is designed to lay the groundwork for a radical rewrite of business taxation.

In a new Tax & Budget Bulletin for Cato, I outline some of my concerns with this new “BEPS” initiative.

…the BEPS report…calls for dramatic changes in corporate tax policy based on the presumption that governments are not seizing enough revenue from multinational companies. The OECD essentially argues that it is illegitimate for businesses to shift economic activity to jurisdictions that have more favorable tax laws. …The core accusation in the OECD report is that firms systematically—but legally—reduce their tax burdens by taking advantage of differences in national tax policies.

Ironically, the OECD admits in the report that revenues have been trending upwards.

…the report acknowledges that “… revenues from corporate income taxes as a share of gross domestic product have increased over time. …Other than offering anecdotes, the OECD provides no evidence that a revenue problem exists. In this sense, the BEPS report is very similar to the OECD’s 1998 “Harmful Tax Competition” report, which asserted that so-called tax havens were causing damage but did not offer any hard evidence of any actual damage.

To elaborate, the BEPS scheme should be considered Part II of the OECD’s anti-tax competition project. Part I was the attack on so-called tax havens, which began back in the mid- to late-1990s.

The OECD justified that campaign by asserting there was a need to fight illegal tax evasion (conveniently overlooking, of course, the fact that nations should not have the right to impose their laws on what happens in other countries).

The BEPS initiative is remarkable because it is going after legal tax avoidance. Even though governments already have carte blanche to change business tax policy.

…governments already have immense powers to restrict corporate tax planning through “transfer pricing” rules and other regulations. Moreover, there is barely any mention of the huge number of tax treaties between nations that further regulate multinational taxation.

So what does the OECD want?

…the OECD hints at its intended outcome when it says that the effort “will require some ‘out of the box’ thinking” and that business activity could be “identified through elements such as sales, workforce, payroll, and fixed assets.” That language suggests that the OECD intends to push global formula apportionment, which means that governments would have the power to reallocate corporate income regardless of where it is actually earned.

And what does this mean? Nothing good, unless you think governments should have more money and investment should be further penalized.

Formula apportionment is attractive to governments that have punitive tax regimes, and it would be a blow to nations with more sensible low-tax systems. …business income currently earned in tax-friendly countries, such as Ireland and the Netherlands, would be reclassified as French-source income or German-source income based on arbitrary calculations of company sales and other factors. …nations with high tax rates would likely gain revenue, while jurisdictions with pro-growth systems would be losers, including Ireland, Hong Kong, Switzerland, Estonia, Luxembourg, Singapore, and the Netherlands.

Since the United States is a high-tax nation for corporations, why should Americans care?

For several reasons, including the fact that it wouldn’t be a good idea to give politicians more revenue that will be used to increase the burden of government spending.

But most important, tax policy will get worse everywhere if tax competition is undermined.

…formula apportionment would be worse than a zero-sum game because it would create a web of regulations that would undermine tax competition and become increasingly onerous over time. Consider that tax competition has spurred OECD governments to cut their corporate tax rates from an average of 48 percent in the early 1980s to 24 percent today. If a formula apportionment system had been in place, the world would have been left with much higher tax rates, and thus less investment and economic growth. …If governments gain the power to define global taxable income, they will have incentives to rig the rules to unfairly gain more revenue. For example, governments could move toward less favorable, anti-investment depreciation schedules, which would harm global growth.

You don’t have to believe me that the BEPS project is designed to further increase the tax burden. The OECD admits that higher taxes are the intended outcome.

The OECD complains that “… governments are often under pressure to offer a competitive tax environment,” and that “failure to collaborate … could be damaging in terms of … a race to the bottom with respect to corporate income taxes.” In other words, the OECD is admitting that the BEPS project seeks higher tax burdens and the curtailment of tax competition.

Writing for Forbes, Andy Quinlan of the Center for Freedom and Prosperity highlights how the BEPS scheme will undermine tax competition and enable higher taxes.

…the OECD wants to undo taxpayer gains made in recent decades thanks to tax competition. Since the 1980′s, average global income taxes on both individuals and corporations have dropped significantly, improving incentives in the productive sector of the economy to generate economic growth. These pro-growth reforms are the result of tax competition, or the pressure to adopt competitive economic policies that is put on governments by an increasingly globalized society where both labor and capital are mobile. Tax competition is the only force working on the side of taxpayers, which explains the organized campaign by global elite to defeat it. …If taxpayers want to preserve gains made thanks to tax competition, they must be weary of the threat posed by global tax cartels though organizations such as the OECD.

Speaking of the OECD, this video tells you everything you need to know.

The final kicker is that the bureaucrats at the OECD get tax-free salaries, so they’re insulated from the negative impact of the bad policies they want to impose on everyone else.

That’s even more outrageous than the fact that the OECD tried to have me thrown in a Mexican jail for the supposed crime of standing in the public lobby of a public hotel.

P.S. I just gave a speech to the Anguilla branch of the Society for Trust and Estate Professionals, and much of my remarks focused on the dangers of the BEPS scheme.

I took this picture from my balcony. As you can see, there are some fringe benefits to being a policy wonk.

And I travel to Nevis on Sunday to give another speech.

Tough work, but somebody has to do it. Needless to say, withe possibility of late-season snow forecast for Monday in the DC area, I’m utterly bereft I won’t be there to enjoy the experience.

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If Obama Wants More Tax Revenue, He Should Lower the Corporate Tax Rate

Regular readers know that I’m a big advocate of the Laffer Curve, which is the common-sense notion that higher tax rates will cause people to change their behavior in ways that reduce taxable income.

But that doesn’t mean “all tax cuts pay for themselves.” Yes, that happened when Reagan lowered tax rates on the “rich” in the 1980s, but there are also tax cuts that generate little or no revenue feedback.

The key thing to understand is that revenue feedback is driven by the degree to which a tax cut leads to more taxable income. And you tend to get bigger changes in taxable income when you lower rates on taxpayers who have considerable control over the timing, level, and composition of their income.

Who are those taxpayers?

Most of us don’t fall in that category. Cutting my tax rate, for instance, probably won’t have much impact on taxable income. My salary from Cato is already established, so there’s not much opportunity for a “supply-side” effect. Every so often I can earn some extra money by writing an article or giving a speech, but (unfortunately!) not enough for it to make a difference even if my incentives are altered.

But investors, entrepreneurs, corporate managers, and small business owners are among those who do have considerable flexibility to respond when incentives change.

Consider this new research from the Tax Foundation, which finds big “supply-side” responses from a lower corporate tax rate. Let’s start with their description of the problem.

The United States currently imposes the highest statutory corporate tax rate in the developed world. …the steep rate discourages U.S. companies from investing as much as they would otherwise and reduces their competitiveness in international markets. …A major barrier to cutting the U.S. corporate tax rate, however, is the reported revenue cost. According to conventional revenue analyses, such as those performed by Congress’s Joint Committee on Taxation (JCT), a lower corporate tax rate would be an expensive revenue loser.

The Tax Foundation then explains why the current revenue-estimating system is misguided.

In reality, the trade-off posited by conventional revenue estimates is misleading. The estimates overstate the revenue cost of cutting the corporate rate and overstate the potential revenue gains from increasing it, because they ignore tax-induced growth effects. Most notably, Congress’s JCT has adopted the static assumption that tax changes have absolutely no impact, for good or ill, on total production, employment, investment, consumption, and other macroeconomic aggregates. …The static assumption has the advantage of simplicity, and it is not too far from the truth for tax changes that either have little impact on incentives at the margin or affect parameters that do not respond much to incentives. This is an extremely unrealistic assumption, however, in the case of the corporate income tax rate.

Bingo. You can click here for more information on why the Joint Committee on Taxation is wrong, and you may be interested to know that fewer than 15 percent of CPAs agree with the JCT’s assumptions.

Using more realistic assumptions, the Tax Foundation calculates the real-world impact of a lower corporate tax rate.

The Tax Foundation’s dynamic simulation model provides quantitative estimates of the growth and revenue effects. The model estimates, for example, that cutting the federal corporate tax rate from 35 percent to 25 percent would raise GDP by 2.2 percent, increase the private-business capital stock by 6.2 percent, boost wages and hours of work by 1.9 percent and 0.3 percent, respectively, and increase total federal revenues by 0.8 percent.

Indeed, they look at a wide range of options and show us “static” estimates based on JCT-type methodology and “dynamic” estimates based on a model that includes changes in taxable income.

One very important point is that the Tax Foundation looks at the impact of a lower corporate tax rate on all forms of tax revenue.

Federal receipts include many taxes, fees, and payments other than the corporate income tax, such as the personal income tax, payroll taxes, and excises. The size of the economy strongly influences the amounts these taxes, fees, and other payments collect. This is relevant because of the corporate income tax’s big GDP effects. A wide range of federal receipts will expand when a lower corporate income tax rate grows the economy but shrink when a higher corporate income tax downsizes the economic pie.

The study then mentions that the revenue-maximizing corporate tax rate is 14 percent, but warns that this doesn’t mean policy makers should make that their goal.

Although a corporate rate of 14 percent would maximize federal receipts, counting all types of federal revenue, it would not be the optimal rate for the economy unless very little value is placed on people’s incomes and the quantities of goods and services they can consume or invest. The model estimates that while cutting the corporate rate from the revenue-maximizing rate of 14 percent to zero would cost $9 billion of federal revenue, GDP would rise by roughly $300 billion, a payoff of about 33 to 1.

Amen to that point. Our goal isn’t to maximize revenue for the clowns in Washington. The ideal point on the Laffer Curve is where you maximize growth.

If you want my two cents on the topic, you maximize growth when you raise the revenue needed to finance the legitimate functions of government – and that requires a lots less revenue than we’re collecting now according to scholarly evidence on the “Rahn Curve.”

Finally, the Tax Foundation research points out that there’s a difference between the short-run revenue-maximizing rate and the long-run revenue-maximizing rate.

The federal corporate income tax is unusual because the feedbacks there are so strong that cutting the tax’s rate would, over a broad range, more than pay for itself in terms of federal revenues, with the bonus of lifting the incomes and productivity of people throughout the economy. Nevertheless, a corporate rate cut would reduce federal revenues during a transition period, because the rate cut would begin immediately, while it would take several years for the capital stock to expand sufficiently in response to the new incentives to generate the growth needed to return revenues to their prior level.

This chart illustrates this point, using the example of a 25 percent rate.

In other words, the goal of good policy should be to improve the economy’s long-run performance. Over time, that results in more taxable income – a point that even the Congressional Budget Office acknowledges.

The one partial exception to this relationship between good tax policy and long-run tax revenue is the capital gains tax. Lowering that levy can cause big changes to short-run revenue because investors have complete control over when to sell assets. But the reason to lower – or ideally eliminate – that tax is to boost long-run prosperity.

So why aren’t policy makers embracing a lower corporate tax rate? On the right, there should be lots of support because of hostility to high tax rates. And on the left, there should be lots of support because of a desire for more tax revenue. Seems like a match made in Heaven.

But that assumes that folks on the left are motivated by a desire to maximize tax revenue. If you want to know the biggest obstacle to sensible tax policy, pay close attention beginning at the 4:34 mark of this video.

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What’s the Best Response when Crony Capitalists from Big Business Endorse Higher Taxes on their Small Business Competitors?

I’m a big fan of lower corporate tax rates.

I also want to eliminate worldwide taxation so American companies can be on a level playing field when competing for market share around the world.

And I want to get rid of the double taxation of dividends and capital gains in part because these reforms will boost business investment.

Given this track record, I don’t think anybody could accuse me of being an anti-big-business activist.

But I do get very irritated when politically connected corporations use cronyism to guard their interests at the expense of other taxpayers and the overall economy.

That’s why, in this interview with Larry Kudlow on CNBC, I spend most of the time advocating for pro-growth policies, but near the end I slam corporate CEOs from the Business Roundtable for endorsing higher tax rates for small businesses.

For those who don’t follow the intricacies of business taxation, most small companies – such as sole proprietorships, partnerships, and S-corps – are taxed through the personal income tax.

So it’s a bit outrageous when corporate CEOs endorse higher personal income tax rates, knowing that their smaller competitors will get reamed.

I don’t think they’re doing it just for that purpose. As I say in the interview, it’s more a case of feeding somebody else to the sharks out of a narrow, short-term sense of self preservation.

But this also explains why I am such a strong believer in the no-tax-hike pledge. Once “revenue enhancement” is part of the discussion, taxpayers lose their sense of unity and begin to throw each other overboard.

And this isn’t just something that happens among Washington insiders. I’ve previously explained that ordinary Americans get very tempted to support class-warfare tax hikes once they realize someone is going to be raped and pillaged by Washington.

This is why, to discourage talk of tax hikes (especially by crony capitalists), I am willing to make a special exception and support an excise tax on CEO salaries. Anybody who endorses higher taxes should be first in line for the guillotine.

P.S. I apologize for the poor quality of the video. The guy at Cato who does these things is out for the holidays, and you see the suboptimal results when I dabble in technical things. And since I’m acknowledging my shortcomings, I should have said “obediently” instead of “appropriately” at the 3:44 mark.

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Debunking Obama’s Flawed Assertions on Tax Deductions and Corporate Welfare

In a violation of the 8th Amendment’s prohibition against cruel and unusual punishment, my brutal overseers at the Cato Institute required me to watch last night’s debate (you can see what Cato scholars said by clicking here).

Tweedle Dee and Tweedle Dum

But I will admit that it was good to see Obama finally put on the defensive, something that almost never happens since the press protects him (with one key exception, as shown in this cartoon).

This doesn’t mean I like Romney, who would probably be another Bush if he got to the White House.

On the specifics, I obviously didn’t like Obama’s predictable push for class warfare tax policy, but I’ve addressed that issue often enough that I don’t have anything new to add.

I was irked, though, by Obama’s illiteracy on the matter of business deductions for corporate jets, oil companies, and firms that “ship jobs overseas.”

Let’s start by reiterating what I wrote last year about how to define corporate income: At the risk of stating the obvious, profit is total revenues minus total costs. Unfortunately, that’s not how the corporate tax system works.

Sometimes the government allows a company to have special tax breaks that reduce tax liabilities (such as the ethanol credit) and sometimes the government makes a company overstate its profits by not allowing it to fully deduct costs.

During the debate, Obama was endorsing policies that would prevent companies from doing the latter.

The irreplaceable Tim Carney explains in today’s Washington Examiner. Let’s start with what he wrote about oil companies.

…the “oil subsidies” Obama points to are broad-based tax deductions that oil companies also happen to get. I wrote last year about Democratic rhetoric on this issue: “tax provisions that treat oil companies like other companies become a ‘giveaway,’…”

I thought Romney’s response about corrupt Solyndra-type preferences was quite strong.

Here’s what Tim wrote about corporate jets.

…there’s no big giveaway to corporate jets. Instead, some jets are depreciated over five years and others are depreciated over seven years. I explained it last year. When it comes to actual corporate welfare for corporate jets, the Obama administration wants to ramp it up — his Export-Import Bank chief has explicitly stated he wants to subsidize more corporate-jet sales.

By the way, depreciation is a penalty against companies, not a preference, since it means they can’t fully deduct costs in the year they are incurred.

On another matter, kudos to Tim for mentioning corrupt Export-Import Bank subsidies. Too bad Romney, like Obama, isn’t on the right side of that issue.

And here’s what Tim wrote about “shipping jobs overseas.”

Obama rolled out the canard about tax breaks for “companies that ship jobs overseas.” Romney was right to fire back that this tax break doesn’t exist. Instead, all ordinary business expenses are deductible — that is, you are only taxed on profits, which are revenues minus expenses.

Tim’s actually too generous in his analysis of this issue, which deals with Obama’s proposal to end “deferral.” I explain in this post how the President’s policy would undermine the ability of American companies to earn market share when competing abroad – and how this would harm American exports and reduce American jobs.

To close on a broader point, I’ve written before about the principles of tax reform and explained that it’s important to have a low tax rate.

But I’ve also noted that it’s equally important to have a non-distortionary tax code so that taxpayers aren’t lured into making economically inefficient choices solely for tax reasons.

That’s why there shouldn’t be double taxation of income that is saved and invested, and it’s also why there shouldn’t be loopholes that favor some forms of economic activity.

Too bad the folks in government have such a hard time even measuring what’s a loophole and what isn’t.

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America’s Corporate Tax Rate Is so Punitive that Companies Are even Moving to Welfare States like the U.K. to Be more Competitive

I was a bit surprised couple of years ago to read that an American company re-located to Canada to benefit from better tax policy.

But I wasn’t totally shocked by the news because Canada has been lowering tax rates, reducing the burden of government spending, and taking other steps to make its economy more competitive.

But I am downright stunned to learn that America’s high corporate tax rate is such an outlier that companies are even moving to welfare states such as the United Kingdom.

Here are some excerpts from a story in the Wall Street Journal.

More big U.S. companies are reincorporating abroad despite a 2004 federal law that sought to curb the practice. One big reason: Taxes. Companies cite various reasons for moving, including expanding their operations and their geographic reach. But tax bills remain a primary concern. … Aon plc…relocated to the U.K. in April. Aon has told analysts it expects to reduce its tax rate, which averaged 28% over the past five years, by five percentage points over time, which could boost profits by about $100 million annually. Since 2009, at least 10 U.S. public companies have moved their incorporation address abroad or announced plans to do so, including six in the last year or so, according to a Wall Street Journal analysis of company filings and statements. …Eaton, a 101-year-old Cleveland-based maker of components and electrical equipment, announced in May that it would acquire Cooper Industries PLC, another electrical-equipment maker that had moved to Bermuda in 2002 and then to Ireland in 2009. It plans to maintain factories, offices and other operations in the U.S. while moving its place of incorporation—for now—to the office of an Irish law firm in downtown Dublin. …Eaton’s chief executive, Alexander Cutler, has been a vocal critic of the corporate tax code. “We have too high a domestic rate and we have a thoroughly uncompetitive international tax regime,” Mr. Cutler said on CNBC in January. …In moving from Dallas to the U.K. in 2009, Ensco followed rivals such as Transocean Ltd., Noble Corp. and Weatherford International Ltd. that had relocated outside the U.S. The company said the move would help it achieve “a tax rate comparable to that of some of Ensco’s global competitors.”

Wow. I can understand moving to Ireland, with its 12.5 percent corporate tax rate, but I wouldn’t have thought that the U.K.’s 24 percent rate was overly attractive.

But compared to the punitive 35 percent rate in the United States, I guess 24 percent doesn’t look that bad.

So what’s the solution? The obvious answer is to lower the corporate tax rate. But it also would help to eliminate worldwide taxation, as noted in the article.

Lawmakers of both parties have said the U.S. corporate tax code needs a rewrite and they are aiming to try next year. One shared source of concern is the top corporate tax rate of 35%—the highest among developed economies. By comparison, Ireland’s rate is 12.5%. …Critics of the tax code also say it puts U.S. companies at a disadvantage because it taxes their profits earned abroad. Most developed countries tax only domestic earnings. While executives would welcome a lower tax rate and an end to global taxation, some worry their tax bills could rise under other measures that could be included in a tax-overhaul package.

Both Obama and Romney have said that they favor a slightly lower corporate rate, but I’m skeptical about their true intentions. In any event, neither one of them is talking about a low rate, perhaps 15 percent of below.

For more information, here’s my video on corporate taxation.

And the issue of worldwide taxation may sound arcane, but this video explains why it also is important.

Let’s close by noting that there are two obstacles to pro-growth reform. First, any good reform will deprive politicians of tax revenue. And since they’ve spent the country into a fiscal ditch, that makes it very difficult to enact legislation that – at least on paper – means less money flowing to Washington.

Second, politicians are very reluctant to lower tax rates on groups that can be demagogued, such as “rich people” and “big corporations.” This is the destructive mentality that drives class-warfare tax policy.

So America faces a choice. Jobs, investment, and growth or big government, class warfare, and stagnation. The solution should be obvious…unless you’re a politicians interested in preserving power in Washington.

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Since Leftists Don’t Like Corporate Loopholes, They Should Support the Flat Tax

I appeared on CNBC a couple of days ago to discuss a new report which claims that some big U.S. companies “only” paid 9 percent of their income to the government.

While I’m a bit skeptical of the numbers (did it include the taxes paid to foreign governments, for instance, which can be substantial for multinational firms?), I confess I didn’t read the report.

So I focused on the best way of getting rid of corrupt loopholes while simultaneously boosting the competitiveness of America companies.

In other words, I said we should rip up the wretched internal revenue code and implement a simple and fair flat tax.

As is my habit, allow me to emphasize a few points from the interview.

1. It’s good to keep money in the productive sector of the economy because we shouldn’t feed the spending addiction in DC.
2. If tax rates are low, there’s much less incentive for companies to lobby for loopholes.
3. The only feasible and desirable tax reform is to simultaneously eliminate tax breaks while lowering tax rates.
4. The marginal tax rate is what determines incentives for new investment and job creation, which is why America’s highest-in-the-world 35 percent corporate tax rate is a major problem even if average tax rates are much lower.

Sadly, I’m not holding my breath expecting improvements.

Even though tax reform should appeal to well-meaning liberals, Obama seems committed to the class-warfare approach . Romney, meanwhile, mostly wants to tinker with the current system (when he’s not saying worrisome things about a value-added tax).

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If We Care about Jobs and Competitiveness, “The Tax Blob” Should Be an X-Rated Film

Since I’ve already complained about America having the highest corporate tax rate in the developed world, I’m going to give two thumbs up to this video produced by the Chamber of Commerce.

That being said, I feel a bit unclean for publicizing this video. Like so many business lobbies, the Chamber is hardly a consistent defender of good policy. Indeed, it supported both TARP and the faux stimulus.

But at least they’re in favor of lower taxes for their own members, so I’ll accept them as a temporary – albeit impure – ally.

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With Washington Now Imposing the World’s Highest Corporate Tax Rate, Every Day is April Fool’s Day for American Companies

Last year, I expressed skepticism that the White House was serious about reducing the corporate tax rate. And, sure enough, when the Obama Administration produced a plan earlier this year, it was a disappointing mix of a few good provisions and several unpalatable proposals.

This is unfortunate because the United States has one of the most punitive corporate tax systems in the developed world. Indeed, every singe European welfare state has a lower corporate tax rate than America – even leftists nations such as France and Sweden!

For a long time, only Japan imposed a more onerous tax rate than the United States. But even that now has changed. After toying with the idea since 2010, the Japanese government finally pulled the trigger and reduced the nation’s tax rate.

Here’s a brief blurb from Reuters.

The United States will hold the dubious distinction starting on Sunday of having the developed world’s highest corporate tax rate after Japan’s drops to 38.01 percent… Japan’s reduction , prompted by years of pressure from Japanese politicians hoping to spur economic growth, will give that country the world’s second-highest rate. …The average 2012 corporate tax rate for the 34 developed countries is 25.4 percent, according to the Organization for Economic Co-operation and Development.

That leaves America in the unenviable position of having the developed world’s highest corporate tax rate, somewhere between 39 percent-40 percent. This video explains why this isn’t a good idea.

It was my very first video, so it’s not a polished product, but the information is right on the mark.

The moral of the story is very straightforward. A high corporate tax rate is a self-imposed wound to American competitiveness. But that’s only part of the story. America also has a “worldwide” tax system, which forces U.S. companies to suffer a big disadvantage when trying to compete for market share in other nations.

No wonder even officials from the Clinton Administration have begun to argue that the corporate tax rate should be significantly lowered.

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Forget the Moochers on Wall Street, Shareholders Should Occupy Washington

Most of us are aware that America has a punitive corporate tax system, but here’s a sobering bit of analysis. Corporations pay more money to governments than they do to their shareholders.

Here’s a chart from a recent Tax Foundation analysis.

Now here’s something even more important to understand. Corporations don’t actually pay all those taxes.

Yes, they collect the taxes and forward them to various tax authorities, but the burden of business taxes is borne by workers, consumers, and shareholders.

Something to keep in mind as the moochers and looters demand higher taxes on companies.

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Ireland Is Considering a Lower Corporate Tax Rate, so How Come I’m not Happy?

It’s not often that I am unenthusiastic about the possibility of a nation reducing its corporate tax rate. But when the country is doing the right thing for the wrong reason, I hope that feelings of ambivalence are understandable.

In this case, some Irish politicians are talking about using a lower corporate tax rate as a weapon to extract more favorable bailout terms from other European nations. That’s an embarrassment, and it makes good tax policy seem like some sort of scam.

Indeed, I’m quite irritated with everything that’s happened in Ireland in the past couple of years. For a period of time, the nation was a positive example of the benefits of lower corporate tax rates and spending restraint. But Irish politicians did not handle prosperity well, and they went on a spending binge with all the tax revenue that was generated by a rapidly growing economy.

And the icing on this unpalatable cake was the decision to engage in the “Mother of all Bailouts” when the big banks became insolvent. That meant not just holding depositors harmless, but also bailing out all bondholders as well.

Given these unfortunate developments, I hope you will share my lack of excitement about the possibility of a lower corporate tax rate in the land of my ancestry.

Here’s the relevant part of a story in the Irish press.

The Government’s failure to secure a cut in the penal interest rate being charged on Ireland’s so-called ‘bailout’ and worsening diplomatic relations with France over corporation tax have been the catalyst for a surprising increase in Euro-scepticism within Government circles. Last week in Europe, Finance Minister Michael Noonan — who has previously been markedly restrained in his comments — sharply criticised the current ECB bailout strategy and, for the first time, openly asked if it offered a realistic road to success. Now, the Sunday Independent has learned that senior political figures are not ruling out the possibility that the under-fire Irish corporation tax rate of 12.5 per cent might be cut to 10 per cent or an even lower rate — rather than being increased — if the Irish Government does not soon receive a similar cut to that secured by Greece to the interest rate being on its bailout.

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America’s Number One! America’s Number One!…Oops, Never Mind

Sometimes it’s not a good idea to be at the top of a list. And now that Japan has announced a five-percentage point reduction in its corporate tax rate, the United States will have the dubious honor of imposing the developed world’s highest corporate tax rate. Here’s an excerpt from the report in the New York Times.

Japan will cut its corporate income tax rate by 5 percentage points in a bid to shore up its sluggish economy, Prime Minister Naoto Kan said here Monday evening.Companies have urged the government to lower the country’s effective corporate tax rate — which now stands at 40 percent, around the same rate as that in the United States — to stimulate investment in Japan and to encourage businesses to create more jobs. Lowering the corporate tax burden by 5 percentage points could increase Japan’s gross domestic product by 2.6 percentage points, or 14.4 trillion yen ($172 billion), over the next three years, according to estimates by Japan’s Trade Ministry. …In a survey of nearly 23,000 companies published this month by the credit research firm Teikoku Data Bank, more than 44 percent of respondents cited lower corporate taxes as a prerequisite to stronger economic growth in Japan. …A 5 percentage-point tax rate cut is unlikely to do much to solve Japan’s woes, however. An effective corporate tax rate of 35 percent would still be higher than South Korea’s 24 percent or Germany’s 29 percent, for example. …Meanwhile, the government is trying to offset lost tax revenue with tax increases elsewhere, which could blunt the effect of reduced corporate tax burdens.

I suspect the Japanese government’s estimate of $172 billion of additional output is overly generous. After all, the corporate tax rate in Japan will still be very high (the government originally was considering a bigger cut). And foolish Japanese politicians will probably raise taxes elsewhere. But there will be some additional growth since the corporate tax rate is an especially damaging way to collect revenue.

But I’m not losing sleep about Japan’s economic future. I hope they do well, of course, but my bigger concern is the American economy. The U.S. corporate tax rate of nearly 40 percent (including state corporate burdens) already is far too high, particularly since America adds to the competitive disadvantage of U.S.-domiciled firms by being one of the few nations to impose an extra layer of tax on foreign-source income. Japan’s proposed rate reduction, however,  means the high tax rate in America will be an even bigger hindrance to job creation.

It’s also worth noting that the average corporate tax rate in Europe has now dropped to less than 24 percent, so even welfare states have figured out that a high tax burden on business doesn’t make sense in a competitive global economy.

Sometimes you can fall farther behind if you stand still and everyone else moves forward. That’s a good description of what’s happening in the battle for a pro-growth corporate tax system. By doing nothing, America’s self-destructive corporate tax system is becoming, well, even more destructive.

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Don’t Blame Ireland’s Mess on Low Corporate Tax Rates

Ireland is in deep fiscal trouble and the Germans and the French apparently want the politicians in Dublin to increase the nation’s 12.5 percent corporate tax rate as the price for being bailed out. This is almost certainly the cause of considerable smugness and joy in Europe’s high-tax nations, many of which have been very resentful of Ireland for enjoying so much prosperity in recent decades in part because of a low corporate tax burden.

But is there any reason to think Ireland’s competitive corporate tax regime is responsible for the nation’s economic crisis? The answer, not surprisingly, is no. Here’s a chart from one of Ireland’s top economists, looking at taxes and spending for past 27 years. You can see that revenues grew rapidly, especially beginning in the 1990s as the lower tax rates were implemented. The problem is that politicians spent every penny of this revenue windfall.

When the financial crisis hit a couple of years ago, tax revenues suddenly plummeted. Unfortunately, politicians continued to spend like drunken sailors. It’s only in the last year that they finally stepped on the brakes and began to rein in the burden of government spending. But that may be a case of too little, too late.

The second chart provides additional detail. Interestingly, the burden of government spending actually fell as a share of GDP between 1983 and 2000. This is not because government spending was falling, but rather because the private sector was growing even faster than the public sector.

This bit of good news (at least relatively speaking) stopped about 10 years ago. Politicians began to increase government spending at roughly the same rate as the private sector was expanding. While this was misguided, tax revenues were booming (in part because of genuine growth and in part because of the bubble) and it seemed like bigger government was a free lunch.

But big government is never a free lunch. Government spending diverts resources from the productive sector of the economy. This is now painfully apparent since there no longer is a revenue windfall to mask the damage.

There are lots of lessons to learn from Ireland’s fiscal/economic/financial crisis. There was too much government spending. Ireland also had a major housing bubble. And some people say that adopting the euro (the common currency of many European nations) helped create the current mess.

The one thing we can definitely say, though, is that lower tax rates did not cause Ireland’s problems. It’s also safe to say that higher tax rates will delay Ireland’s recovery. French and German politicians may think that’s a good idea, but hopefully Irish lawmakers have a better perspective.

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What Can’t America Copy Europe’s Welfare States and Have a Low Corporate Tax Rate?

I tangle with my old nemesis Christian Weller, one of the statists at the Center against American Progress, in a debate on whether the corporate tax rate should be reduced. I was somewhat amused that Christian defended the current system because companies currently are earning profits. Maybe I’ll eventually convince him to be a capitalist.

The debate was fairly uneventful, but I was a bit disappointed that my comment about the Laffer Curve got buried at the end of the segment. The fundamental point is that America has a very high corporate tax rate by world standards, yet we collect relatively little revenue. My argument, not surprisingly, is that revenues are low because the tax rate is high.

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Thanks to Tax Competition, Corporate Tax Rates Continue to Fall in Europe

Many people assume that Europe is the land of high-tax welfare states and America is an outpost of laissez-faire capitalism. We should be so lucky. The burden of government in America is still lower than it is in the average European nation, but the United States is a lot closer to France than it is to Hong Kong – and the trend is not comforting.
 
We recently endured the embarrassing spectacle of President Obama arguing with Europeans that they should increase the burden of government spending. Now we have a new report from the European Commission indicating that the average corporate tax rate in member nations of the European Union has plummeted to just 23.5 percent while the corporate tax rate in the U.S. has stagnated at 35 percent. In the past dozen years alone, as the chart illustrates, the average corporate tax rate in the European Union has dropped by nearly 12 percentage points. To make matters worse, the corporate tax rate in America actually is closer to 40 percent if state tax burdens are added to the mix.  

 

This is not to say that European politicians are reading Hayek and Friedman (or watching Dan Mitchell videos on corporate taxation). Almost all of the positive reforms are because of tax competition. Thanks to globalization, it is increasingly easy for labor and (especially) capital to cross national borders to escape bad policy. As such, nations now have to compete for jobs and investment, and this liberalizing process is particularly powerful among nations that are neighbors. 

Not surprisingly, European politicians despise tax competition and instead would prefer to impose a one-size-fits-all policy of tax harmonization. These efforts to create a tax cartel have a long history, beginning even before Reagan and Thatcher lowered tax rates and triggered the modern era of tax competition. The European Commission originally wanted to require a minimum corporate tax rate of 45 percent. And as recently as 1992, there were an effort to require a minimum corporate tax rate of 30 percent.  

 

Fortunately, the politicians did not succeed in any of these efforts. As such, tax competition remains alive and corporate tax rates continue to fall. What remains to be seen, however, is whether America will join the race to lower corporate tax rates – and more jobs and investment.

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While Obama Fiddles, Ukraine and Taiwan Reduce Corporate Tax Burdens

The United States has the world’s worst corporate tax system, with a job-killing tax rate of about 40 percent. In the European Union, the average rate is about 25 percent, but that’s just one part of the world that is moving in the right direction. My Cato colleague recently did a blog post about Taiwan’s politicians lowering that nation’s corporate tax rate to 17 percent. Now Tax-news.com is reporting that Ukraine’s government is doing something similar, reducing the corporate tax rate from 25 percent to 17 percent.

Ukraine’s new Prime Minister, Mykola Azarov has announced his government’s intention, in a revised tax code, to slash the country’s corporate income tax rate starting 2011, and then further on a transitional basis through 2014 to enhance the nation’s economic performance and fiscal attractiveness. According to the Prime Minister, the corporate income tax will be cut from 25% to 20% in 2011, and cut 1% annually from then on, until 2014 when the rate will stand at 17%. The Value Added Tax is to also to be reduced on a progressive basis over a similar timescale. Explaining the government’s methodology, Azarov was quoted by the national radio station NCRU as saying: “This innovative document is a real tax reform that will improve the investment climate in Ukraine and will improve the nation’s attractiveness for conducting business.”

It’s worth noting that a low corporate tax rate is not a silver bullet for an economy with other bad policies. Ukraine has one of the world’s most repressive economies, so reducing the corporate tax rate is just one of many reforms that is needed. But, all other things being equal, lower tax rates always are a good idea.

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America Will Now Be the Unquestioned World Leader…But in the Wrong Way

The United States has a very anti-competitive corporate tax regime. The federal tax rates is 35 percent and the average of state corporate tax systems brings the rate to nearly 40 percent. In Europe, by contrast, the average corporate tax rate is about 25 percent. Depending on which measure is used, the United States and Japan have been rivals for the dubious prize of having the highest corporate tax rate in the developed world. But that’s about to change. According to a story that I saw linked on the Tax Foundation blog, the new Japanese government intends to lower its corporate tax rate by 10 to 15 percentage points. This means America will have no rivals in the contest for having the most anti-growth business tax system in the world. This is something to keep in mind the next time you hear a politician complaining about jobs going to China and India.

Japan’s new government plans to cut corporate tax closer to international norms as it tries to haul Asia’s biggest economy out of a long slump, the economy minister said in a report Friday. The government is aiming to cut tax on company earnings by five percentage points next fiscal year, from an effective 40 percent now, the Nikkei business daily quoted Economy, Trade and Industry Minister Masayuki Naoshima as saying. “It’s a fact that international corporate tax rates are 10 to 15 points lower than Japan’s,” said Naoshima, who is part of Prime Minister Naoto Kan’s new cabinet sworn in this week. “Over the medium term, the government will aim to bring the rate down to around the global standard,” he said. …”It is now the time to decide (on cutting corporate tax) for the sake of future economic vitality, employment and securing increased tax revenues,” the minister said. “Japan’s economy has basically been in a slump for the past 20 years and people have been overwhelmed by a sense of stagnation.”

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Obama’s Big Tax Hike on U.S. Multinationals Means Fewer American Jobs and Reduced Competitiveness

The new budget from the White House contains all sorts of land mines for taxpayers, which is not surprising considering the President wants to extract at least another $1.3 trillion over the next ten years. While that’s a discouragingly big number, the details are even more frightening. Higher tax rates on investors and entrepreneurs will dampen incentives for productive behavior. Reinstating the death tax is both economically foolish and immoral. And higher taxes on companies almost surely is a recipe for fewer jobs and reduced competitiveness.

The White House is specifically going after companies that compete in foreign markets. Under current law, the “foreign-source” income of multinationals is subject to tax by the IRS even though it already is subject to all applicable tax where it is earned (just as the IRS taxes foreign companies on income they earn in America). But at least companies have the ability to sometimes delay when this double taxation occurs, thanks to a policy known as deferral. The White House thinks that this income should be taxed right away, though, claiming that “…deferring U.S. tax on the income from the investment may cause U.S. businesses to shift their investments and jobs overseas, harming our domestic economy.”

In reality, deferral protects American companies from being put at a competitive disadvantage when competing with companies from other nations, and therefore protects American jobs. This video has the details.

The American Enterprise Institute just held a conference last month on deferral and related international tax issues. Featuring experts from all viewpoints, there was very little consensus. But almost every participant agreed that higher taxes on multinationals will lead to an exodus of companies, investment, and jobs from America. Obama’s proposal is good news for China, but bad news for America.

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Politicians Fiddle While America’s Corporate Tax System Burns

KPMG has released its annual global survey of corporate tax systems. For the 10th-consecutive year, the average corporate tax rate fell, and it is now down to 25.5 percent (just 23.2 percent in the European Union!).

In the United States, unfortunately, the corporate tax rates remains stuck at about 40 percent. Only one developed nation, Japan, has a more punitive regime.

Something to keep in mind the next time a politician complains that jobs are going to China (corporate tax rate of 25 percent).

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Switzerland Winning the Battle for Company Investment

Business Week reports on how low taxes are helping to attract jobs and investment – a lesson that increasingly seems too complex for politicians in the United States and United Kingdom:

As governments around the globe struggle to contain huge deficits, companies and executives are bracing for higher taxes. And increasingly they are turning to Switzerland for relief. …Swiss cantons are openly and legally urging multinationals to relocate. This fall, U.S. fast-food giant McDonald’s (MCD) will move its European headquarters to Geneva from London, joining Kraft Foods (KFT), Yahoo! (YHOO), and Nissan. They’ve all relocated their main Europe offices to Switzerland in the last two years to take advantage of low corporate taxes. …”There is a lot of interest from companies looking to shift their taxable profit to countries with lower rates,” says Andreas Müller, an international corporate tax partner at KPMG in Zurich. Meanwhile, Britain and Ireland are increasing personal income tax rates for top earners. In the U.S., tax hikes seem inevitable. Switzerland has no such plans, says Stéphane Garelli, professor of competitiveness at IMD Business School in Lausanne. The 26 Swiss cantons are free to set their own rates, so Swiss-based companies’ effective average tax rates range from 10.8% to 24% of net income (those effective rates include federal taxes, which are the same throughout the country). Ten cantons even cut rates in 2008 to lure investment. After slashing its corporate rate to 6.6% in 2006, the canton of Obwalden lowered rates to 6% last year, just after the nearby canton of Appenzell Ausserrhoden did the same. “A company might pay 50% less tax just by moving 30 miles down the road,” says Martin Naville, CEO of the Swiss-American Chamber of Commerce in Zurich. …While the Swiss court companies, the British unwittingly help the Swiss out. As of last year, foreigners living in the U.K. for seven years or more must pay tax on income and capital gains earned outside Britain or fork over an annual $49,000 on top of what they ordinarily owe the government. And starting next April, the top income tax rate will jump to 51.5%, including social security payments. That’s up from 40% for anyone, citizen or foreign resident, earning more than $245,000. The hikes have prompted some hedge funds and private equity firms to head to Switzerland, analysts say. Krom River, a commodities fund with $750 million under management, moved to the canton of Zug last year. The lure: Swiss stability. “Companies can be sure that once they invest, there won’t be any surprises,” says Naville.

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