Globalization, Taxes

Our Robin Hood Government

By, 05/23/2008

Story Highlights:

  • Higher corporate taxes reduce profits and therefore a firm's competitiveness—a severe disadvantage in today's globalized world.
  • Globalization has mobilized international business, and many firms are choosing to relocate to countries with less severe corporate taxes.
  • When companies choose to leave or simply not do business, workers and domestic economies can suffer.

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Competition is vital for a growing economy. Here at MarketMinder, we love competition. (Trash can basketball, anyone?) And that's why it hurts us deeply when we hear politicians clamoring for corporate tax hikes to bolster government revenues. But many wonder, what's the harm? After all, why not tax faceless corporations with millions if not billions in revenues just a tad more and let the government redistribute funds? Just to make things a touch more fair. Who really gets hurt?

The answer is you, me, most all businesses, and pretty much everyone else. As fond as we may be of Robin Hood and his men in tights, stealing from the rich and giving to the poor doesn't work very well outside of fairy tales. Companies' profits pay for millions of Americans' salaries. Is it any wonder wages tend to increase when companies excel? Beyond salaries, profits drive investments in research and development, innovation, and new technologies—all most likely leading to lower prices and higher quality goods for the consumer.

High corporate taxes reduce profits and therefore a firm's competitiveness—a severe disadvantage in today's globalized world. Corporate tax rates vary greatly globally, meaning a toy company shackled by high corporate tax rates in one country cannot compete as effectively with a toy company located in a country with lower tax rates. If you're a CEO, where do you want to locate your firm? Someplace with high taxes? Or someplace with lower hurdles to competitiveness?

Tax Forum Adviser Fears More UK Exits
By Peter Hutchison and Graham Ruddick, Telegraph
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/05/20/cntax120.xml

Britain's new proposals to increase corporate taxes on foreign profits were met with, unsurprisingly, angry and frustrated business owners. Fortunately for them, and unfortunately for Britain, globalization diminishes barriers to domiciling firms inside tax-friendly borders—and many firms have moved or are contemplating moving from British locales. Ironically for the British government, the proposed tax hike probably won't lead to increased tax revenues.

This is one concrete, global example of the Laffer Curve. The Laffer Curve shows at both very high and low tax rates, the government collects less taxes (at high tax rates, taxpayers are either averse to working or paying taxes; at low tax rates, well, the government's not collecting much). At some point between is an optimal tax rate, where both lowering and raising tax rates reduce revenues. The fact countries who have decreased corporate tax rates are seeing an increase in tax revenues (and usually, an increase in economic vibrancy) shows we're globally far from that optimal tax rate. Certainly, the US and the UK can afford to drop rates without worrying about sinking below the "optimal" spot.

Investing in Japan
By Editorial Staff, The Wall Street Journal
http://online.wsj.com/article/SB121131954755408329.html

Case in point: Japan has one of the highest corporate tax rates in the world. Combined with other factors adverse to foreign direct investment, it's no surprise it ranked #22 on the recently released IMD World Competitiveness Yearbook.* Meanwhile Singapore and Hong Kong are #2 and #3 respectively—with some of the lowest corporate tax rates among developed markets. While the business environment is made up of many factors including stability, perceived risk, levels of available capital, etc., corporate tax rates are a critical component.

When companies choose to leave or simply not do business, workers and domestic economies can suffer. The US has managed to remain competitive while having one of the highest corporate tax rates in the developed world, but it's dangerous territory. US politicians proposing additional corporate taxes are indeed robbing the "rich," but it is unlikely the "poor" will benefit. After all, in the end Robin Hood was really just a thief.


Note:

*The IMD World Competitiveness Yearbook scoreboard, http://www.imd.ch/research/publications/wcy/upload/scoreboard.pdf


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

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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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