To The Daily Sun,
Tax inversions. Have you ever heard of them? You should have heard about them from your political leadership because their impact on tax revenues is important to you. Tax inversions illustrate a large structural problem within America's corporate tax system. A tax inversion is a strategic maneuver an increasing number of companies are choosing to undertake in response to a competitive disadvantage. The way it works is that, most often, an American company first buys or sometimes merges with a foreign rival. Then the new corporate entity shifts its domicile abroad in order to reap tax benefits. The new company is based outside the United States.
Don't get mad at the companies. They are making a sound rational financial decision based on the situation forced on them by the American government. Here's why it makes financial sense for these companies to leave America. America has a combined federal and state tax rate on corporations of about 40 percent. (In New Hampshire it is higher than that because the New Hampshire corporate taxes are higher than the national average.) In the rest of the developed world (OEDC) the corporate tax rate is an average of about 25 percent. Making matters worse, America taxes the income made by American companies whether the money is made in the U.S. or whether it is made abroad, should the money flow back to the U.S. ever. The companies can increase their bottom line by up to 60 percent by changing their home country.
This puts a lot of dollars at risk for companies. It keeps capital made by American companies off shore, which means it will not be reinvested in America, lowering future domestic growth which costs jobs and reduces opportunity. Taxes are not the only factor in play in these deals but it is a large motivator. The higher the percentage of earnings that come from off-shore the higher the probability the company will leave. This is what happens when lawyers try to do social engineering without a grasp of economics. It is called the "Hassan approach" to economic development. If you do not believe in America and prefer to be citizen of the world perhaps this makes sense to you. If however you live here it and have to deal with the consequences your enthusiasm might be ... dampened.
Politically this is a tough nut because a politician intent on solving the problem of companies leaving America has to explain why we have been using the tax code to shift jobs off shore, an unpopular topic. Then they are going to have to explain why not taxing the income of U.S. companies earned in other countries is a bad idea, another an unpopular topic. Then they are going to have to explain why we can no longer support the level of spending to which we have become accustomed yet another very unpopular topic. Finally, they will have to tell the voters that their personal tax rates are going up and benefits are going down because corporate tax dollars are declining ... if they are honest.
This is a self-inflicted wound. It is serious and it is growing. It could not come at a worse time. The answer put forward by the administration so far ... is to vilify the companies which is patently unfair. Neither political party is eager to tackle the issue because they will have to admit complicity in its establishment. The time has come for serious consideration of the fiscal and monetary position of the nation and this is but one of the issues.
- Category: Letters
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