Fisher Investments Editorial Staff
Taxes

If You Love Me, Let Me Go

By, 08/30/2012

Promises to constituents are rife during an election year—whether in the form of more or bigger or better perks, subsidies, tax breaks, lower taxes, etc., politicians can be reliably counted on to make promises. So when asked for their political “wish list,” it wouldn’t be terribly surprising for US businesses to start rattling off various forms of benefits—subsidies to make competition easier, tariffs on their foreign competitors, incentives for increasing hiring and so on.

Which makes some manufacturers’ most recent wish list slightly surprising. When asked, many wished rather simply for a more straightforward US corporate tax code, along with improved infrastructure and better education. Not for increased loopholes or additional write-offs. Not for increased taxes on foreign competitors. In other words, manufacturers wish politicians would make it easier for them to do business on their own—not help them succeed or provide government funding.

That in turn makes the news some businesses have been leaving the US for countries with more favorable corporate tax structures rather unsurprising. And as politicians have caught on and sought to slow or altogether halt this practice through legislation, companies have become increasingly creative, taking such measures as merging with foreign companies (rather than directly relocating) to achieve essentially the same goal.

Their idea is not abandoning the US altogether—rather, many of these companies maintain their US presence, they simply acquire a foreign headquarters address. This helps maintain their global competitiveness—which, in the face of competition from countries like Ireland, whose corporate tax rate is 12.5%, is easier said than done, given a US rate of 35%.

Now, think what you will about their stated motives—it’s certainly easy to portray these companies as greedy capitalists seeking only (or at least primarily) to preserve their bottom lines and with it, their salaries. But the reality is that’s an entirely noble and worthwhile goal—one all politicians should be in favor of. Because without those salaries, bottom lines, profits, revenues, etc., those companies likely slowly cease existing altogether. And that would be a loss for everyone—primarily US consumers, who would lose access to their goods or services. Not to mention their employees. Try as we might, there’s simply no way to insist US companies pay higher taxes than their global counterparts, yet take the same risks and earn even higher returns from those risks. Seems rather a mathematically impossible (or at least highly improbable) prospect.

Economist Henry Hazlitt had this to say about taxes in his erudite Economics in One Lesson:

“If they lose the whole dollar when they lose, but can keep only a fraction of it when they win, they decide that it is foolish to take risks with their capital. In addition, the capital available for risk-taking itself shrinks enormously. It is being taxed away before it can be accumulated. In brief, capital to provide new private jobs is first prevented from coming into existence, and the part that does come into existence is then discouraged from starting new enterprises.”

Hazlitt was referring primarily to individuals, but the same can easily be said—and is equally true of—businesses.

A lesson it seems the tiny island-nation of Mauritius has learned well as investors based in that country are exempt from capital gains taxes. According to The Wall Street Journal, the benefits have been rather clear: “The influx has boosted employment and living standards. About 15,000 Mauritian accountants, lawyers and other professionals work with offshore companies, representing 5% of Mauritius’s gross domestic product.”

And it seems now India would like to do something about it, given it’s hurting India’s tax revenues. But rather than improve its own tax competitiveness, India’s answer is seemingly decreasing Mauritius’s—reminiscent of recent pressure from several eurozone members on Ireland to increase its corporate tax rate so they could more easily compete.

Taxes create incentives—though not often the ones politicians hope they create. And politicians would no doubt prefer finding ways to build private sector dependence on their representatives for whatever “perks” they deem necessary to improve their odds of success—after all, it makes reelection somewhat less challenging. But the reality is the private sector really only needs one thing from politicians: For them to largely step aside. And as US manufacturers are increasingly indicating, stepping aside means reforming the corporate tax code, decreasing the number of loopholes and simply providing US businesses the opportunity to compete in a globally competitive environment based on their own merits. The rest is up to them. Here’s hoping politicians someday hear—and heed—that request.

 

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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