More on tax inversions and the repatriation tax' affect on business

[mjvcaj]

Attended a conference and some experts had this to say:

1) The average effective U.S. corporate tax rate when you consider total income taxes (state + federal) is approximately 39% (not sure what data set this was pulled from). This compares to 20% for the UK (trending lower b/c of a new 10% income tax cap on profits generated from IP) and 12.5% in Ireland (lower in certain industries - e.g. pharma, HC).

Even if the actual cash taxes are far lower than the effective rate in question, when you combine this rate with income taxes required at the local level (i.e. where the business is actually being conducted), it is quite easy to see why tax inversions have become the norm. Quite the disadvantage for U.S. companies when it comes to investment decisions and shareholder value maximization.

However, it was made emphatically clear by these experts, tax inversions do not drive M&A activity. They can be contributing factors to making decisions, but are never the primary driver.

2) Recently, a phenomenon occurred whereby cash on corporate balance sheets outside the U.S. surpassed the cash on balance sheets inside the U.S., $2.1T to $1.9T.

Inability to repatriate cash from cash flow earned abroad is muting economic growth and development and reducing investments by businesses, according to these experts.

 

[Rockport Zebra]

It is a ongoing problem.


How do we fix it? The left won't move due to their political base and the right dosn't have the votes. The President seems to beleive that these companies should bring the money home and pay the tax. I have no doubt that the voters don't understand the issue. I wonder who is being manipulated for political gain?

This post was edited on 11/19 11:10 PM by Rockport Zebra

This post was edited on 11/20 12:23 AM by Rockport Zebra

 

[CO. Hoosier]

In a way, this problem is as damaging as Smoot Hawley

We have effectively imposed a tariff on money. Money that can be used for capital formation and investment.

 

[mjvcaj]

And when the job market is still considered poor

particularly for the underemployed, it makes little sense to continue down this path.

 

[Marvin the Martian]

I suspect it is a drag on the economy

Of course I wouldn't doubt someone who stands to profit by lowering corporate tax rates coming up with the thought of selling it by claiming it mutes investments and growth. But in this case, I suspect there is something to it.

So here's what I would do, lower the corporate rate. If this article is accurate, our graduated rate is part of the problem (you can see the charts there). We are in the middle of the G8 at $100,000 profit, but second at $1 million and $100 million. So, what if we took the lower rate for five years to see what happens? Just wipe out the progressive taxes and take the lower rate. I favor progressive taxes on people, I'm not sure I understand the reasoning on corps.

Of course I would then want various loopholes closed so the lower rate is more the actual rate.

Set that in place for five years. As I believe all legislation should have, set benchmarks of what you expect out of the legislation in five years. Then in five years compare what economic investment and growth we expected to what we received and either renew or eliminate this plan. It gives international business five years to prove this is true and not just a sales pitch.

 

[mjvcaj]

Seems like a logical thought to me...

The problem has long been, strategic and financial decisions are always made based on the stated rate, not an estimated effective rate (since that can change and is not guaranteed).

 

[hoot1]

Given the highly employable people around the globe...

...willing to work for less than American workers, how substantially will lowering the corporate taxes help employment?

In the past American workers benefited from having an almost exclusive monopoly on American capital, but those days are gone forever. At this point in time I can see American businesses using employment as a wedge to obtain lower tax rates. However, when everything is taken into consideration will lower rates be the silver bullet in regard to high employment rates for American workers?

By the way, I see lower corporate tax rates as being part of the grand bargain as we finally come to grips with reforming entitlements.

 

[mjvcaj]

Well...

1) Workers are employable, but nowhere near as productive as U.S. workers.

http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)_per_hour_worked

2) What does it matter if the capital is American or Chinese or Brazilian? Foreign Direct Investment into the U.S. continues to strengthen as our economy represents one of the few bright spots globally.


"The United States is an increasingly attractive location for business investment from global companies. In
AT Kearney's 2013 FDI Confidence Index, the United States surged past countries like China, Brazil and
India to become the country with the top FDI prospects globally, as ranked by 302 companies
representing 28 countries and multiple industry sectors.1 This marks the first time that the US occupied
the #1 spot in the survey since 2001.2 In a survey of U.S. manufacturers with production abroad late last
year, BCG found that the majority (54 percent) are looking at re-shoring to the United States, up from 37
percent in 2012."

http://www.whitehouse.gov/sites/default/files/docs/winning_business_investment_in_the_united_states.pdf

This jives with what the panelists experienced anecdotally.

3) I'm not necessarily even advocating for lower corporate tax rates. First and foremost, I'm advocating that multinationals should not be subject to double taxation for profits made under another sovereignty.

 

[hoot1]

About productivity

Historically the American worker has been highly productive. The age old question about this productivity is whether credit should go to the worker or the capital investment in technology and equipment.

As I said previously, given that the American worker can no longer be guaranteed to have the lion's share of American capital investment by American employers in equipment and technology to improve his productivity, the continued high productivity of the American worker as compared to his foreign counterpart could be in jeopardy. Having said that, in recent years foreign capital has come to the U.S. in industries such as auto manufacturing so some of workers are benefiting from foreign capital.

 

[mjvcaj]

It is a combination

Innovative processes, equipment and technology combined with a harder working populace.

First off, you are thinking about things from a manufacturing enterprise point of view. Investment in new technology or machinery leads to jobs. What about services, consulting, technicians required to service equipment or technology, etc.?

It is silly to expect 100% of every $1 in tax savings to wind up in the hands of an unemployed or underemployed worker. But, it would undeniably be better than the status quo (cash sitting idle in foreign banks).