LLPOH’s Short Story: Why Would a Company Offshore Its Business?

I am always stunned by the comments that appear relative to corporations deciding to take their businesses offshore. There are screams about it being a short-sighted decision, that the corporations are cutting their own throats, and that the businesses are evil and are doing it to spite the working class.

So, let’s take a look at some of the reasons why a corporation would move offshore:

Corporate Tax Rate:

The US corporate tax rate is the highest in the world, at 39%. That is astonishingly high. For every dollar they earn, they give 39% to the federal government. Some very large corporations have gotten extremely good at minimizing this rate, but it costs them a lot to do so (albeit less than actually paying the rate.

Adding insult to injury, there are also state corporate tax rates – the highest (Iowa) maxing out at 12%. So if you run a corporation in Iowa, your highest total corporate tax rate is 51%. If you happen to be in California, the state corporate tax rate is 8.84%. In Pennsylvania, 9.9%. So, the effective corporate tax rate total is in the neighbourhood of 50%.

There is simply no way to put this other than to say that that is absolutely appalling. If you own a corporation paying that rate, and decide to take a dividend, you pay a further 15% on what you take out. So if your corporation makes $100 profit, you lose $50 to corporate tax, and then you lose a further $7.50 to dividend tax. Your effective tax rate is then almost 58%.
And here is the further kicker – the idiot Democrats want to take the dividend tax rate up to the marginal rate – let us say 35%. In that case, out of your $100 profit, you would lose $50 to corporate tax rates, plus a further $17.50 to dividend tax, leaving the owner of the business to take home an amazing $33.50 for every $100 dollars the corporation manages to make.

If you were a corporation owner, and faced the prospect of this occurring, would you not run for the hills? Would not a low-tax nation look enticing? Be honest – would you really take the chance of funding a business, when the reward you can reap is 33.5% of profits? Really?

High Cost of Labor

Wages in the US are the world’s highest, at around $54,000 per person. That is a disadvantage if you are competing in a world market. Trust me on that. In addition to that wage, you also have the joy of payroll tax, which is currently 7.65%. Any bets that it will go up as SS runs out of money, or as Medicare falls further into the black hole? Would you bet your house on that? Business owners do.

The cost of providing medical insurance adds a further $12,000 – $15,000 per employee. Anyone want to make the same bet – that it will not keep climbing? Bet your house on it, maybe?

Unemployment taxes add about another $1000 per year to the costs. And we all know unemployment rates will surely fall, now don’t we?

So, the US has the highest wages in the world, and the additional costs per employee probably push $20,000 per year. The additional costs exceed the base wages per employee in all but about 20 countries on earth. If you were running a business, and were faced with base costs of about $75,000 per employee, do you think just maybe there would be incentive to look to offshore some of that extraordinary cost?

Compliance Cost/Miscellaneous Cost

There are huge compliance costs with doing business in the US. EPA and OSHA lead the way. Choose your own numbers for these, but even small businesses spend tens of thousands of dollars a year dealing with EPA and OSHA issues.
There are sundry miscellaneous costs as well – such as property tax, etc. If you ae unfortunate enough to have a unionized workforce, you can add further tens of thousands of dollars per year dealing with those issues.

Countries without such compliance costs certainly look attractive if you are a business owner.

Ways to Compete

There are three main ways a company can compete for business. They are via price, via service, or via quality. Some companies – Apple, for instance – have managed to carve out a niche where they compete on innovation (or perceived innovation), and there are some other niche ways to compete, but we will focus on these three.

With regard to price, I have already laid out the basis as to why the US cannot compete on price – labor costs, associated labor costs, and compliance costs are just too outrageously expensive. The only positive price/cost factor that exists is that there is a distance benefit that exists – it is expensive to ship product long distances. Small, light products are obviously cheaper to ship than big, heavy items. But, in general, the shipping costs do not overcome the labor costs.

With regard to service, the distance issue really is a benefit. A good local company can exceed the service that a foreign corporation can provide. Modern technology, local representatives, etc., are eroding that ability. And significant pricing advantages generally outweigh the service issues.

With regard to quality, there are several issues that are making the US uncompetitive. First, the ethic of quality simply does not exist in the US. Workers do not buy in to the need to produce quality product. Second, they skills of US workers are falling behind their world-wide competition. The education system is lagging, and the wrong skills are being studied, and so workers with the skills to produce high-quality products are hard to come by. And also, US consumers do not generally place a high value on quality – they want cheap. High quality comes at a cost. Make no mistake about it.

So, given all of that, how does the corporation compete? It can compete on service, but on quality and price it is in trouble. And the ability to compete on service is being daily eroded.

My company competes on quality and service, and not on price. However, I am being continuously squeezed on price and service. How long I can manage to keep the foreign completion away remains to be seen.

In Sum

So business faces: the highest tax rates in the world, the prospect of significant tax increases, the highest labor costs in the world, the highest compliance costs in the world, and has a workforce whose skill base has eroded over the last few decades. Given that, is it really short-sighted that corporations are abandoning ship and are moving offshore? Really?

If you owned a business, and faced these challenges, and looked at a possible return of under 35% of profits earned, would you stay in business considering the risks? Would you try to move your business to a more favourable locale? I face that decision every day, and every day I get closer to calling it a day and closing up shop.

If the Democrats manage to get the dividend tax rate raised to the levels being discussed, mark my words – you will see an exodus of business the likes of which have never before been seen. It will be the straw that breaks the camel’s back.