A Prelude to Tragedy
Since 1909 American companies have been subject to pay the government taxes on profit. Today that tax rate is 35% which is the highest in the world. As free market capitalists, we recognize that government regulation and taxation has all kinds of negative effects on companies and the market. From inflation to the hindrance of innovation, the negative effects of government intervention are blatantly obvious, but there is one particular restriction that puts American companies at a disadvantage globally: Worldwide taxation.
What is Worldwide Taxation?
Worldwide taxation (which is a form of double taxation) is a discriminatory tax imposed on companies, not by protectionist foreign governments, but by American politicians. Unlike their foreign competitors, the U.S. is one of the few nations in the world to impose worldwide taxation. This means not only are U.S. companies taxed on income earned in the United States, they are also taxed on income earned in other countries, which is a problem since they also must pay taxes to the foreign governments on the same income.
When two governments tax the same income, that is a form of double taxation. This puts American companies at an instant disadvantage in the global market. So what does the government do to combat the handicap they enforce on our own businesses? They offer tax credits to companies that pay taxes to foreign governments. This wouldn’t be so bad if the U.S. government didn’t also impose the highest corporate tax rate in the world. Combining the two is a huge liability for American companies.
The Global Disadvantage
For example: An American company is competing with a French company in the global market. Both companies have manufacturing divisions in Sweden, servicing divisions in Japan, and financing divisions in Belgium. To keep it simple, lets say each company makes 100 million dollars profit per division, netting 300 million dollars in profit. Now lets take taxes into consideration. Let’s say the Swedish government imposes a 12.5% corporate tax on each company, Japan imposes a 16.5% tax on each company, and Belgium imposes a 0% tax on each company.
Since the U.S. has a worldwide tax system and France has a territorial tax system the American company would owe the IRS on the $300 million earned in three jurisdictions, whereas, the French company does not need to pay any additional taxes on its $300 million. Even if the American company is allowed full tax credits its total bill would be more than $100 million (about three times higher) than the tax bill for its French competition. In a competitive global market, this is a huge disadvantage.
Defending Tax Deferrals
Knowing this, politicians created a policy known as “deferral” which allows American companies (in some circumstances) to delay the extra tax. This, however, still does not create an even playing field, but it does help lighten the blow by the self-imposed tax discrimination caused by America’s worldwide tax system. One would think that policy makers would try to correct this competitive disadvantage by lowering the corporate tax rate or shifting to a territorial system, but in Washington D.C. moving in the right direction does not seem to be an option. To make things worse, leftist policy holders want to restrict tax deferral. Now, at this point one would probably ask himself “why would they want to handicap our companies in the global market?”
Well, there are a few reasons. First, politicians love tax revenue. Obama claimed that this portion of his budget would collect $210 billion where in reality it wouldn’t collect anywhere near that due to the laffer curve effect. Of course, that is no obstacle to politicians. They will just assume the money will materialize and resume increased government spending. Second, leftists and economically illiterate Berntards confuse “deferral” as companies finding a loophole to “not pay their fair share” which drives the leftist propaganda machine that paints capitalism as evil and that the government is here here to “protect you” from these big bad companies. Lastly, there are people in Washington who see deferral as a way to subsidize offshore jobs. They say that if an American company can earn money in Sweden and only pay 12.5% tax, this gives them an incentive to close down factories in the states and move them overseas. However, according to the Commerce Department, 90% of what American companies produce overseas is sold overseas, so there is not much evidence of this happening.
The Consequences of Government Intervention
Regardless, if deferral is eliminated several bad things would happen. American companies will become less competitive because of the higher tax rate resulting in a loss of market share to their foreign competitors due to the tax advantage. America will have fewer exports since the majority of exports are goods sold to American companies’ foreign subsidiaries. This would result in American workers having fewer jobs because of the reduction in exports and higher costs of business. These effects would also hurt the consumer due to inflation, higher costs of goods, and lower quality of products in relation to price.
Now we see just how bad government regulations are, not just on businesses, but the entire market all the way down to the consumer. Everyone loses in the ever growing government intervention clown show, but sadly, politicians don’t understand or don’t care. All that matters to them is that they get to spend more of our stolen money on things that would be far better off privatized in the free market.