Taxes as a Competitive Advantage in the Global Economy

“In America's ideal of freedom, citizens find the dignity and security of economic independence, instead of laboring on the edge of subsistence. This is the broader definition of liberty that motivated the Homestead Act, the Social Security Act, and the G.I. Bill of Rights. And now we will extend this vision by reforming great institutions to serve the needs of our time. To give every American a stake in the promise and future of our country, we will bring the highest standards to our schools, and build an ownership society. We will widen the ownership of homes and businesses, retirement savings and health insurance - preparing our people for the challenges of life in a free society. By making every citizen an agent of his or her own destiny, we will give our fellow Americans greater freedom from want and fear, and make our society more prosperous and just and equal.”

I love the sound of the words, “ownership society,” but having recently written about how overhead burdens in this country are driving businesses overseas, I didn’t understand how this could happen until I read the Journal article and now my hope is soaring.

Simpson begins the Journal article with, “European countries have been steadily slashing corporate-tax rates as they vie for foreign investment, potentially adding to pressure on the U.S. for similar cuts as it weighs a tax overhaul.” Examples of what is happening in Europe can be seen in the following table:Tax Rate Changes in the last few years.Before After ReductionIreland 24.0% 12.5% 11.5%Netherlands 34.5% 31.5% 3.0%Portugal 37.0% 27.0% 10.0%Austria 34.0% 25.0% 9.0%Germany 56.0% 38.3% 17.7%Poland 27.0% 19.0% 8.0%U.S. 40.0%

The article points out that while many large U.S. businesses use loopholes and shelters to pay far less than the national rate suggested, even the effective rate is still as much as 10% above Europe’s average. The result is that Europe is addressing the overhead issue via tax reductions to woo U.S. companies to expand in Europe rather than at home. This potentially moves jobs and revenue offshore.

We truly are in a global economy and must compete in that global economy not only for customers and revenue, but now governments are competing for business and jobs in their countries. It’s a beautiful thing.

The last major rate reduction in the U.S. corporate rate came in 1986. Since then deductions and shelters have proliferated and businesses have become more adept at creating profits offshore rather than at home to avoid the high tax rates. For example, in 1999 U.S. Companies reported $13.3 billion in profits in Ireland. With the tax reduction in Ireland, profits in that country have jumped to $26.8 billion in 2002.

Europe is becoming much more business friendly and if the U.S. wants to increase jobs and tax revenues, they are going to have to become much more competitive from a tax standpoint.

The words “ownership society,” the journal article and my article, “The Overhead is Killing US” all merged together in my mind to paint a very different picture of a potential future for the U.S. and the World. If governments are awakening to the idea that businesses create profits and jobs (without which there are no tax revenues), then maybe there is hope that the world is changing and the resulting competition by governments will make the possibility of an “Ownership Society” a very real possibility.

Copyright Bob Cannon/The Cannon Advantage, 2005. All rights reserved.

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