More Confusion over Corporate Taxes

Posted by: Nanette Byrnes on August 27, 2008

As McCain and Obama argue over corporate taxes (McCain says cut them, Obama says oil companies should pay more) data continues to pile up. What it all means, though, is awfully hard to say.

On paper the US certainly has one of the highest corporate tax rates. Other countries are widening that gap by chipping away at the rates they expect companies to pay. In this recent piece arguing that corporate taxes should be done away with altogether, James Pethokoukis notes that “nine of the 30 OECD member nations, including Canada, Germany, New Zealand, Spain, the United Kingdom, Italy, Switzerland, the Czech Republic, and Iceland, have lower corporate tax rates in 2008 than they did in 2007”. China just cut its levy from 33% to 25%. By contrast, the average combined federal and state corporate tax rate in the U.S. is 39.3 percent, according to the Tax Foundation.

But even with this stratospheric tax rate, companies from less-encumbered countries continue to amp up their US businesses. According to a Grant Thornton analysis of IRS data:

the earnings of foreign-controlled domestic corporations (FCDCs) in 2005 reached $3.5 trillion, which is $450 billion more than in 2004, twice the 1996 level and almost 90 times the level reported in 1971. These FCDC receipts in 2005 represented 13.7 percent of all U.S. corporate receipts, also an all-time high…The asset growth of FCDCs has been even more staggering. FCDCs reported assets of over $9.2 trillion in 2005, up 15.7 percent from 2004 and more than three times the 1996 level. FCDC assets represented 13.9 percent of all U.S. corporate assets in 2005, another all-time high.

The authors marvel at this rise in the face of an increasingly uncompetitive US tax rate, and argue that cutting the rate would drive even more foreign investment. It’s a technique they say has worked for others already.

But is it necessry?

At the moment we are in a bad economic slump with many legitimate questions being asked about regulators’ failure to stop the easy credit madness of the past few years. But in general, the US is a better-watched market than many, with well-off (if pressured) consumers and a high share of dynamic businesses. Maybe foreign companies are willing to pay a premium to get access to all that.

No manufacturer would cut its price just to match the competition when its product is in high demand. That would be management madness.

Reader Comments

Kartik

August 27, 2008 3:18 PM

I strongly disagree. The US could attract even more businesses with a lower tax rate.

Your argument is like saying "If I already earn $100K, why should I strive to earn $200K? I am already above average."

John Hondo

August 27, 2008 4:02 PM

"No manufacturer would cut its price just to match the competition when its product is in high demand. That would be management madness."

Did Apple cut the price of the uber-in-demand iPhone? What if they expected much greater sales and a much greater return? They did it twice so far... Seems pretty smart to me.

nanette byrnes

August 27, 2008 10:24 PM

Good point about Apple. Though Apple wasn't responding to competitive pricing, but rather making the move on their own terms, right? Presumably at a point where higher volume was lowering costs, minimizing the bottom line impact. Not a scenario the US Treasury could hope to emulate.

Mike Reardon

August 30, 2008 10:27 PM

Corporate management along with lower corporate tax relief, have also had as major objectives relief from the burdens of pensions and health care costs to employees. Management has firmly for the last decade begged relief from any responsibility other than gaining profits.

With no tax money from failing employee wages the money has to be gotten from someone who can pay it, and the next pile of money in place is in the hands of rich investors.

For corporate managers, investors just like employees are expendable in the corporations search for profit. Don’t tax the business that builds the business and creates profit, but take it from the rich.

If I was a Republican investor I would ask who is going to shares the real burden. McCain has that Bush plan, finding the money to run the government under a cabbage leaf. A strong Democratic Congress is going to do something, so with any real tax program that gets into place, private investor money that is not institutional will be a real next target.

Bob Lewis

September 2, 2008 1:33 PM

Asking the wrong question generally guarantees a wrong answer. The question isn't whether the U.S. tax rate is too high. The question is whether the U.S. government returns enough additional value to U.S. corporations to justify the difference.

It's a harder question to answer than it might seem. Other countries cover health care costs, provide a more educated workforce, and maintain a better overall infrastructure.

On the other hand, in the U.S. markets are kept more open and level, businesses have easier access to decision-makers, and employment law is less protective of employees, giving employers much more flexibility.

I don't know the right answer. I'm pretty sure this is the better question.

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