By Ross Kaminsky on 2.23.12 @ 6:10AM
The cynical madness continues.
Q: When can you be sure President Barack Obama is proposing a tax increase?
A: When you hear him propose a tax cut.
On Wednesday, the president announced his plans to modify the U.S. tax code by cutting the corporate income tax rate from 35 percent to 28 percent. Our current rate is the second-highest in the OECD, and about to be the highest with Japan cutting its rate in April. Currently, our corporations’ average total income tax rate, including the typical state tax rate of just over 4 percent, gives us the highest corporate taxes in the industrialized world, above 39 percent.
If cutting the corporate income tax rate were all the president was trying to do, one might call it a good start, but only a start since the average total corporate tax rate of over 32 percent for American corporations will still be far above the OECD average of 25 percent.
High corporate tax rates lead to reductions in capital formation and foreign direct investment, particularly in more profitable companies and industries. High taxes are associated with “re-allocation of resources towards possibly less productive sectors.” And high taxes favor companies that use debt over companies that raise money through equity (stock) offerings — the latter group including most startups and technology companies where a majority of America’s employment growth is to be found.
Unfortunately, but not surprisingly for a man who is unable to propose serious spending cuts other than at the Department of Defense, reducing a tax rate is not all Obama is proposing.
The administration’s plan also includes eliminating a wide (but as yet unspecified) range of loopholes and deductions. Eliminating loopholes and deductions to make reducing rates a revenue-neutral but less economy-distorting endeavor is a good, indeed indispensable, part of sane tax policy.
When we see the details, however, expect the closed loopholes to target oil and other non-“green” energy companies with particular aggressiveness, meaning higher gasoline and home heating oil prices for all Americans. After all, Obama needs to pay for his increasing the subsidy for the Chevy Volt from $7,500 to $10,000 per vehicle — for a car whose average buyer has an annual income of $170,000. Now that’s income redistribution!
Obama’s new tax plan is not aiming to be revenue-neutral; instead it is intended to help reduce the deficit, which is to say it is intended to be a net tax increase of the most economically-damaging sort. And that brings us to the heart of the Obama proposal: a shiny new tax on American companies’ foreign-earned (and not repatriated) profits.
This “minimum tax on foreign earnings” is the core of Obama’s tax hike disguised as a tax cut. This is economic cretinism, or more accurately economic masochism, writ large. The administration suggests that taxing foreign earnings will stop “giving companies an incentive to locate production overseas or engage in accounting games to shift profits abroad.” But, typical of those who live in a Keynesian statically-modeled world, Obama and Treasury Secretary Geithner forget that corporations, like people, respond to incentives, and perhaps even more so.
For example, Tyco International reincorporated in Bermuda in 1997, as did Ingersoll-Rand and Foster Wheeler four years later. Cooper Industries and Nabors Industries joined them in shorts and long socks in 2002.
In 2004, a proposal was brought to Tyco shareholders arguing that they should reincorporate in the U.S. because lesser shareholder protection in Bermuda was a negative for the stock price. Shareholders rejected the measure emphatically, with 93 percent voting against moving back to the tax-hungry United States. In 2009, Tyco moved its headquarters from Bermuda to Switzerland where it will pay a 16 percent total corporate tax rate – scheduled to decline to just under 14.5 percent next year. Foster Wheeler also reincorporated in Switzerland in 2009.
A 2005 report of the Joint Economic Committee of Congress suggests that “the shifting of profits out of the United States has been estimated to total about $75 billion a year and to cost the U.S. Treasury $10 billion or more per year.”
Politicians of all stripes have demonized “corporate inversions,” whereby a company’s official address is offshore but most of its management team and company operations remain in the U.S. Such companies are called “tax dodgers,” “ex-patriots,” and worse. Expect similar divide-and-conquer rhetoric from Obama and Geithner as they market their destructive, ill-conceived plan.
A company’s fiduciary responsibility is not to the U.S. Treasury; it is to shareholders who, it should be noted, pay taxes on capital gains and dividends earned through investment in the company’s shares. Since, all else being equal, lower corporate taxes should lead to higher stock prices and higher dividend payouts, much of the corporate tax revenue lost to the Treasury is recovered through individual income tax payments. This impact is magnified by lower corporate taxes also being associated with higher wages, about which more in a moment.
About the Author
Ross Kaminsky is a self-employed trader and investor and is a senior fellow of the Heartland Institute. He blogs at Rossputin.com and is the host of The Ross Kaminsky Show on Denver’s NewsRadio 850 KOA on Sundays from 11 AM to 2 PM.