In a small effort to help assist during Admin’s sporadic posting week, I thought I would revisit the issue of US corporate taxes, and the resultant $2 trillion in profits that are sitting overseas, and which are unlikely to be brought into the US anytime soon due to the corporate tax rates in effect. Please forgive any typos as I am typing this directly into WordPress.
I just read today that Admin’s second most favorite company (sitting squarely behind IKEA in the number one spot), GE, has $108 billion in profits sitting overseas, which is being used to invest in overseas projects. Overall, there is believed to be around $2 trillion total in profits that foreign arms of US companies have made that are not being transferred to parent companies in the US owing to the corporate tax rate of 35%, which is, of course, the world’s highest. Those transfers will not be made, as it would be irrational for a company to do so.
Everyone knows that corporations pay little or no tax on their US profits, for a great many reasons – tax breaks, R+D credits, etc etc etc. Total corporate tax take is around $300 billion a year. However, any overseas profits brought back on shore would be hit with the full corporate tax rate, as the various rorts have already been used to minimize the tax on onshore profits. If the full $2 trillion were to be repatriated, it would mean an approximate tax bill of some $700 billion dollars. That is not going to happen, as the companies would rather be investing the $700 billion rather than just giving it away to the IRS. Further, if the money were repatriated, and the $1.3 trillion left after the tax take was invested in the US, the income on the money would be subject to the draconian 35% tax rate – as I have said, which is the highest in the world (at least the developed world). So the long and the short of it is, corporations are way ahead of the game if they do not bring the money home. Even very modest returns on their $2 trillion investment means the corporations are generating billions in income more than if they were to bring the money into the US.
A further issue is that transfer pricing is being rorted mightily. Companies are doing all possible to make sure their overseas arms post a profit, and for their US entities to not post a profit. The best way to do this is to ensure that the overseas entities sell goods to their US entities at inflated prices, thus maximizing overseas profits and minimizing US profits. And vice versa. There is huge incentive to do this, and it is being done on a very large scale, despite attempts to keep it from happening.
An interesting fact is that around $1.5 trillion of the overseas profits are actually held in US banks. The overseas entities send their profits to US banks to hold, and it is not deemed to be returned to the US. It is simply a foreign entity having accounts in the US. The main reason it is done is to protect the parent corporation from swings in the exchange rate of the US dollar. So rather than holding the profits in ringits or baht or whatever, the foreign arms open a US bank account and deposit the foreign earnings into JP Morgan, US treasuries, or whatever.
So, to summarize, the curent tax system 1) gives corporations incentive to leave foreign profits overseas, and not bring the profits back to the US, and 2) gives incentives to artificially minimize US profits by transferring the profits to the overseas arms of the US corporations so as to minimize US tax. It takes a particular kind of stupid to come up with a system that achieves exactly the opposite of what it should.
I understand that this can be a very complex issue, but the current system is promoting the flow of capital out of the US into countries that the US is competing against in a world-wide marketplace. It seems to me that the tax rate shuld reflect the global market, and a corporate tax rate of around 15 to 20% would eliminate the incentive which exists to 1) minimize US earnings in favor of foreign earnings, and 2) hold profits overseas. It would result in a significant increase in US capital expenditure, which would make the US more internationally competitive, and would create high-end, good paying jobs, and would make direct competitor nations less competetive at the same time, starving them of capital and profits.
It is beyond my ability to calculate the tax gain or loss this would create. There is currently around $300 billion in corporate taxes paid per year. A lower rate would certainly take from that pool but it would be at least somewhat offset by job creation and the resulting personal income tax take, some tax on repatriated profits, and some tax on profits not shifted overseas via transfer pricing.
It is the definition of insanity for a nation to have the highest tax rates in the world, which the US does. It will invariable starve the nation of capital, will give incentive to transfer profits and jobs overseas, and will lead to a continued economic crisis. The answer is not to keep increasing corporate and personal taxes, but rather there needs to be a system that provides incentive for corporations to remain onshore, and for individuals to put their capital at risk. Such a system does not exist today, and those determined to redistribute wealth are failing to understand that they are killing off the flow of capital. A socialist agenda will not return the US to prosperity. People and corporations need incentive to risk their wealth and their labor, and such incentives have largely disappeared.