Monday, December 13, 2010

The corporate tax

Last week the American Enterprise Institute held a panel discussion on President Obama's stated goal of doubling US exports over the next five years. Interestingly, the factor cited most often in holding exports back was the corporate income tax.

Barry Bosworth of the Brookings Institution said the following (1:01 mark of the video at the link):
Another reason [the US exports don't reach their potential] is because the United States has become a very high cost place to produce because the corporate tax rate is so much higher than in other countries. It used to be we were in the middle of the pack. But particularly after Ireland began to move this whole discussion towards a lower tax on corporations to attract corporate business other countries responded to what was going on in Ireland and lowered their tax rates.
Capital has become increasingly mobile and more and more firms feel they are in the position to do this. And I think the examples you find in the United States that just stand out is Apple computer does its development in the United States because it gets to deduct the development expenses against a very high corporate tax rate. So the federal government pays for about half of their R&D costs. But when it comes time to produce the product Apple produces nothing in the United States. It does not have a single production facility in the United States. It does it overseas, it does it largely in Asia.

Similarly, Microsoft develops Windows in the United States. It sells Windows domestically in the United States, but Windows to the rest of the world, there are no exports out of the United States by Microsoft, they go out of Ireland, because it is the low tax [inaudible]. So you transfer your intellectual property to a low tax country and use that as the basis for production.
For years that is what American companies have done, relocating production facilities of drugs. There are none in the United States. They're either in Puerto Rico, Ireland or Singapore. Why? You develop the drugs and patents here in the United States, ship the intellectual property to some other low-cost, low-tax state and produce there. And so in that respect, I think our tax policy has become a significant barrier to trying to encourage American firms to produce in the United States.
Grant Aldonas of the Center for Strategic and International Studies then followed that up with some comments about corporate taxes (starting around the 1:09:57 mark) which included this bit:
Trying to create an environment that's attractive to capital rather than forcing capital offshore would seem to be the prudent thing to do, and at this point our tax code forces capital offshore. The sad thing is, for anybody who's a CFO or tax manager, if you asked them and they were honest, they would not incorporate in the United States if they were launching their business today. They would incorporate elsewhere and take advantage of the fact that only their effectively connected income in the United States would be taxed subject to our high corporate rate rather than worldwide income.
The next speaker, Gary Hufbauer of the Peterson Institute for International Economics, went on to note that the US corporate tax rate is so high that a 10 point reduction would be required just to bring the US in line with its competitors.

These days we hear a lot of hand-wringing from members of Congress over the need to boost employment, but precious little about the pernicious role of the corporate income tax in stifling job creation. My suspicion is that were any serious reduction of the tax proposed, much kicking and screaming would ensue from the Democratic base over alleged giveaways to the rich and soulless corporations. An approach to taxation guided by evidence and reality instead of emotion, however, reveals the corporate tax for what it is: simply another burden on the American worker.

Update: Japan, the only country with a corporate tax rate higher than the US, has announced plans for a 5 point reduction.

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