Mobility and Taxes

Posted by: John Tozzi on February 12, 2009

I found this nugget in the Small Business Economy Report (on page 201 of the PDF). It’s kind of jargony, but it’s basically saying that as some companies become more sophisticated about picking and choosing to pay taxes in favorable jurisdictions, more of the tax burden will fall on local businesses that don’t have the luxury of, say, incorporating in Delaware (or the Cayman Islands):

The Expanding Technology of Tax Planning

The increasing mobility of tax bases, both domestically across state lines and internationally into other countries, will contribute to the ongoing proliferation of methods for reducing individual and business taxes. Confronted by this increasing mobility, federal, state, and local governments will have to face the tradeoff between competing for mobile bases by lowering tax rates on one hand, and raising enough revenue to fund public service obligations on the other. Local, less mobile tax bases will be asked to bear a larger share of the total tax burden unless major changes are made in how multi-jurisdictional activities are taxed. This has especially important ramifications for local small businesses that are not as easily able to relocate to a lower-tax jurisdiction or engage in costly yet sophisticated tax planning.

This is another one of those places at the intersection of government and business where policy may favor large companies at the expense of small ones. It’s kind of under the radar right now. But maybe we’ll hear more about it, especially now that states and local governments are so pinched for revenue. I’d be interested if there’s any research out there on how much more local businesses (and individuals, for that matter) have pay in taxes because of companies that shelter their earnings off-shore or in lower-tax states.

Reader Comments

Graham Lawlor

February 12, 2009 10:56 PM

Very interesting piece. I suspect that there is not a strong positive correlation between the size of a company and its mobility. Many small companies (especially online ones) are highly mobile and can move to take advantage of favorable tax regimes. Meanwhile, many large businesses are local and immobile (think any business with real estate or a physical storefront).

There was a great article in the August 2008 issue of Website Magazine on "Tax Havens for Online Businesses". If my suspicion is correct, the burden of high taxes will then fall disproportionately on the least mobile "old economy" businesses. And as more businesses become more mobile, governments will be increasingly forced to compete by lowering taxes to attract and retain businesses, jobs, and skills.

John Tozzi (BusinessWeek reporter)

February 13, 2009 10:51 AM

Thanks, Graham. I think you're observation is right especially when it comes to local real estate taxes. But do you know of start-ups or small online companies that take advantage of favorable income tax rates by incorporating in places other than where their main operations are? I tend to think that this is something most businesses only consider when they reach a certain scale, but I'd love to see if any researchers have looked into this.

Niels Jorgensen

February 17, 2009 1:02 PM

We have two businesses. The first one is traditional brick and mortar that produces oversize equipment for the lumber industry (www.kiln-direct.com) and we recently launched a business providing web-based business management solutions with integrated e-commerce (www.saleskite.com).

The first business can be relocated to another state within the US with lower taxes, regulation, and/or labor; but it is not worth it at this time (we are located in NC). However, the latter business can be relocated to any state or ANY country very easily. The latter has far more growth potential (both domestically and internationally). I am a recent citizen to the USA and wish to remain loyal. But in the end, the high US corporate tax rate and increased regulation may push this business overseas. Many will say you should always stay, but if a competitor provides the same services with lower overhead by operating from a "Tax Heaven", then they can spend more on advertising or customer service; thereby essentially out competing our new business. This cannot be good for the country.

You can raise my personal taxes, and I will probably stay as I prefer and believe in this country. But if you keep Corporate taxes and regulations much higher than other countries, then we are likely to lose businesses; especially those with high growth potential. That would be especially true for those with a great international potential = export revenue. If those leave we lose double: Tax revenue and export revenue; The US needs both right now.

Big vs small biz

February 17, 2009 1:31 PM

I believe the Tozzi's original points are valid. Too much government favoritism towards larger enterprises. Take our current "too big to fail" mentality for instance. If a small regional bank goes under, it dies anonymously on the weekend. If a big bank in NY shows even a little sweat on its brow, we taxpayers jump at the opportunity to bail them out. We need to bring failure back into the system and not play favorites. Either we let them fail or we don't let them get "too big to fail." As for the comment about small companies being "highly mobile", that is unfortunately not the case for most small businesses. The barber, the lawyer, the construction worker, the restaurant owner, all stay where their communities (aka clientele and workers) are. In my own case as an entrepreneur working in a 10 person online business, it is simply not possible to just pick up and move when we seek to maintain the right culture and keep the right people. Any other alternative is simply an exercise in cat-herding which I don't get paid to do.

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What's it like to run your own company today? Entrepreneurs face multiple hurdles new and old, from raising capital and managing employees to keeping up with technology and competing in a global marketplace. In this blog, the Small Business channel's John Tozzi and Nick Leiber discuss the news, trends, and ideas that matter to small business owners. Follow them on Twitter @newentrepreneur.

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