America’s Corporate Tax Nightmare

Take a look at this chart and weep.  Somehow over the past two decades, the restof the developed world has learned that corporate taxes need to be low and theresult has been a steady reduction.  The USA has missedout on this process.

During the same time, the rest ofthe world has deployed a VAT consumption tax that works wonderfully.

Continuing tax reform will likelysee just about all economic activity been taxed at a low set rate.  This could include incomes and interest.  This makes the organized economy effectivelya tax farmer for the government largely eliminating much of the collection costborne by government and industry.

The USA is out of step and this resultsdirectly both the fiscal deficit and the trade imbalance.

There is nothing easier to fixthan the USeconomy.  That economy is actuallycapable of running at a sustained ten percent growth  for several years during which the economy ofMexicowould be subsumed and brought into the modern world.

 America’s corporatetax nightmare

Terence Corcoran  February23, 2011 – 8:08 pm

High U.S.tax rates are distorting ­investment decisions

In his State of the Union address and in comments since, U.S. PresidentBarack Obama has demonstrated a remarkable ability to talk around the corporatetax policy nightmare taking shape across America. Not only are U.S. corporate tax rates now essentially thehighest in the world, other elements of U.S. tax policy are distortinginvestment decisions.

Much has been said about the fact that U.S. corporations are sitting on asmuch as US$2-trillion in cash. But some new research suggests as much asUS$1-trillion may be sitting on U.S.corporate books outside the United States,money that American businesses are reluctant to bring home to distribute orinvest — because high U.S.corporate tax rates and rules discourage repatriation of foreign profits.

The President’s idea of corporate tax reform is to get out a shotgunand hunt down corporate loopholes that he and other Democrats claim aredraining U.S.government coffers and undermining growth.

He was at it again last week, taking aim at his favourite corporatetarget: “We shouldn’t provide special treatment to the oil industry whenthey’ve been making huge profits,” he said, ignoring the fact that there are nospecial oil industry loopholes to be found. As for across-the-board cuts in U.S.corporate taxation, Mr. Obama said he wouldn’t sign on to any reductions incorporate tax rates until the existing loopholes are removed.

In Mr. Obama’s view, Americaneeds high corporate tax rates to reduce astronomical deficits — a fiscal strategythat plays to the anti-corporate crowd that still seems to dominate the Obamaadminstration. But here’s an idea: If the administration doesn’t like U.S. corporate interests influencing the debate,maybe they’ll take some guidance from a Canadian, Jack Mintz, head of the School of Public Policyat the University of Calgary.

In a paper releasedyesterday by the Cato Institute in Washington, Mr. Mintz produced the latestdata on corporate taxation around the world. For some countries, including Canada, thenumbers look good. Since 2005, the marginal corporate tax rate on new capitalinvestment has dropped by five  percentage points to 20.5%. In othercountries, from Germany to Italy and Denmark, marginal corporate rateshave been cut by as much as nine percentage points.

As the nearby table shows, the result is an American disaster in themaking. And as such, there is no reason for complacency in Canada. Eventhough Canadian corporate tax rates have dropped and are expected to continueto fall in coming years, the high U.S. corporate tax rate remains athreat to the health of the Canadian economy.

Ina speech in Toronto yesterday, Mr. Mintz noted that Canada is part of a North American economicregion that very much depends on U.S. economic expansion andsuccess. Canada’s lower tax rate might provide a competitive advantage againstthe United States, but the gains from that advantage will be slim if the U.S. corporatetax rate remains outrageously uncompetitive with the rest of the world. “A pooreconomic environment in the United Statescan hurt Canadathrough trade. Canada and Mexicobenefit from a competitive North American region.”

If the U.S. fails toattract investment due to high marginal tax rates on corporate profits, Canadawill lose out. In political terms, Canadians should have as great an interestin pushing U.S.corporate tax reform as they have in lowering Canadian rates.

The perverseness of the U.S.high-tax regime was reinforced by a recent paper from the Sloan Schoolof Management’s Michelle Hanlon. In the paper — The Real Effects ofAccounting Rules: Evidence from Multinational Firms’ Investment Location andProfit Repatriation — Ms. Hanlon and others demonsrate that U.S. corporatetax rules and the world’s highest corporate tax rates shape U.S. corporateinvestment decisions.

The high marginal tax rate — almost 35% — is a problem in itself. Butthe United Statesis the only country in the world that taxes its corporations on the basis ofworld profits. Every dollar earned abroad must bear a 35% tax rate. If theprofits are earned in Canada,the corporation would pay 20.5% to Canadian governments, but then be forced topay 14.5% more when profits are distributed back to the United States.

To avoid paying that U.S.tax, corporations are allowed to defer payment and also keep the profitsabroad, where the money continues to earn income at reduced foreign tax rates.The perverse effect is to promote cash hoarding by U.S. corporate interests abroad.Some say as much as US$1-trillion may be sitting offshore, tax deferred, asexecutives continue to make money without paying U.S. tax.

Mr. Obama may be hoping to get his hands on that cash storehouse tolower the U.S.deficit. But if he does, it would be a major blow to U.S. corporate balance sheets. AsJack Mintz suggests in his Cato report, closing loopholes isn’t the answer.“The aim of corporate tax reforms should be to create a system that has acompetitive rate and is neutral between different business activities.” Hecalled for a sharp drop in U.S.corporate rates of 10 percentage points — something that would be as good forCanadians as it would be for America.