How Obama is driving U.S. corporations to flee America

Cain TV.com ^ | July 17, 2014 | Dan Calabrese

[Kaslin]

No hint of changing America's highest corporate tax rate.

This has been a major theme of our boss for some time - and it's not just a matter of reducing the corporate tax rate. It's a matter of ripping the entire tax code up from its roots and establishing a new, simpler one with low rates on a very few things, without all the deductions and loopholes.

In the context of that discussion, we look at one of the truly counterproductive effects of the tax rate we now have: A 35 percent federal corporate tax rate is a major competitive disadvantage for U.S. corporations, and not only as they go up against global competitors. It is also a major disadvantage as they deal with their own costs, market challenges, labor force dynamics . . . you simply can't create wealth in an economy that intentionally hamstrings those set up to be wealth producers.

So U.S. corporations are doing what it only makes sense to do, which is to find a way to reduce those costs. Democrats are shocked - shocked! - to learn that this often leads to the practice of inversion, which is to merge with a company in a nation with lower tax rates, and then establish your headquarters in that country. We told you recently about Walgreens making this move, and there are plenty of others. The response of the White House? Not to reduce the tax rate to keep these companies in America, silly! No, they're demanding "economic patriotism" of corporations, which means they want them to bite the big one and watch all that revenue go out the door so they can stuff Treasury's pockets at the expense of their own vitality.

And don't buy the predictable nonsense about how no one really pays the 35 percent rate because of all the shelters and loopholes. That's a load of crap for two reasons, one of which the Wall Street Journal explains here:

There's a liberal canard that the U.S. statutory tax rate is high but companies pay only a few cents on the dollar in reality. That's true in some cases in which companies are able to exploit loopholes (especially green-energy subsidies) or deduct big losses over several years. We've written about Whirlpool WHR +0.45% , for example.

But the claim is obviously false in general given deals like Mylan's proposed acquisition of overseas generic drug businesses from Abbott Laboratories. ABT -0.29% The new combined company will be based in the Netherlands, where the corporate tax rate is a high but not insane 25%. Even a 10-percentage-point rate cut is enough of an incentive to relocate.

Mr. Lew doesn't know much about economics or he'd realize that his rush to block these inversions will have the perverse effect of driving even more deals in the coming months. If CEOs think Congress will close the inversion possibility, and that tax reform is dead until Mr. Obama leaves office, more of them will decide to move while they still can.

As for "economic patriotism," Mr. Lew also doesn't understand that foreclosing inversions would only make U.S. firms more vulnerable to foreign takeovers. If executives can't reduce their tax disadvantage by moving abroad, more of them will choose to serve shareholders by offering to be purchased by foreign firms that have a lower world-wide tax rate. And even if CEOs resist a foreign offer, shareholders might prefer the higher after-tax return on their investment. Who's the real Benedict Arnold of tax policy here?

The other reason this argument is nonsense is that, even when it does apply, it still requires corporations to engage in behavior deemed favorable by politicians in order to reduce their tax rate. Just because you take advantage of a deduction doesn't necessarily mean you did what was in the best interests of your company, your employees or your shareholders. Consider the example of Whirlpool, mentioned above in the WSJ excerpt. Yeah, they were able to deduct losses, but before you can do that, you have to lose money. That may get you more favorable tax treatment under the current U.S. tax code, but it's not exactly a model for corporate success.

What we need is a simple low corporate tax rate that doesn't reward one type of behavior over others, and certainly one that doesn't reward and encourage losses.

Now this is where Democrats will tend to argue that that corporate losses are no big deal because big corporations like Whirlpool just view it as a write-off. That is exactly the type of thinking that leads to such an insane tax code. Any company would rather pay taxes on profits than write off losses, but the people who produce goods and services while employing people are still going to do better if the tax rate they pay on their profits is lower.

Democrats seem to have received their information about write-offs from Kramer:

Write Off Seinfeld Good Quality

[Soul of the South]

Well, is our economy larger or smaller than it was in 1994?

The economy is larger but so is the population and there has been inflation as well. It is more instructive to compare the growth rate of the US economy for the 20 year period prior to trade liberalization to the growth rate since.

In the 20 year period from 1974 to 1994 the US economy (nominal GDP in 2013 dollars, adjusted for inflation) grew by 371.9%. The US population grew by 23% during that 20 year period. The economic growth rate of the most recent 20, when the US has been exporting its industrial infrastructure, is only 1/3 of the economic growth rate of the previous 20 years when US industry was protected with higher tariff rates and quotas on imports.

During the 20 year period from 1994 to 2014 the US economy (nominal GDP in 2013 dollars) grew by 129% or 1/3 the rate of the previous 20 years. During this period the US population grew by 20%.

Currently the average tariff applied by China (mean of tariff applied to all imports) is 4.5%. For the USA it is 1.5%. With respect to apparel specifically the average rate on clothing imports into China is 10% to 23%. The average duty rate applied by the US on imports of clothing ranges from 1.2% to 16%. In addition, the Chinese government provides an export credit (i.e. direct subsidy) to its domestic factories of on the value of exports, as well as tax incentives and other direct subsidies for capital improvements, advertising, brand development, R&D. This is the “free trade” system we are operating under. US tariffs 1/2 or less than the foreign competitor, the foreign competitor is heavily and directly subsidized by its government, and the foreign competitor’s effective tax rate is 1/2 or less that of the US competitor. This is before lower labor rates and lighter regulation is factored in.

If we continue practicing this type of “free trade”, we will continue to lose jobs, our economic growth rate will continue to slow, our economy will be unable to supply jobs for all of the immigrants we are allowing into the country, and we will become a third world nation within a generation.

Please do provide the Cato or Heritage reports you were referencing. I’d like to see their take on the hard data.

[1rudeboy]

I don’t think you are interested in hard data. If you are capable of find your hard data from the commielibs, (the datasets that begin after the oil shock of the early 70’s is the tipoff), then you are perfectly capable of finding it at Heritage or Cato. My guess is that you are afraid to have your assumptions challenged.

[Soul of the South]

“If you are capable of find your hard data from the commielibs, (the datasets that begin after the oil shock of the early 70’s is the tipoff), then you are perfectly capable of finding it at Heritage or Cato.”

If you know it is at Heritage or Cato you should be able to refer it. Interesting you claim to know but provide nothing. Ignorance is bliss!

[1rudeboy]

I’ve post that stuff so many times I can’t count. It always results in pretecctionist/libs running away while screaming like stuck pigs. Only to see that same person posting their same bullcrap, again.