Higher Taxes for Business Mean We All Pay

Jun 30, 2009

Today’s Washington Post op-ed by Geoff Colvin does a great job of highlighting some of the flaws with the Administration’s tax proposals. And, rightfully, wonders aloud how levying billions of new taxes on worldwide American businesses helps achieve the President’s objective of creating millions of jobs…

The reality is that the administration is lashing out against perfectly legal behavior. A U.S. company that makes money in Country X pays Country X's taxes on that money. If the company ever brings the money back to the United States, it must also pay the tax that would be due under America's higher rate. The administration argues that because the United States has almost the world's highest corporate tax rate (and even Japan's is only a fraction of a point higher), current rules create incentives for U.S. companies to operate anywhere but here, at the cost of U.S. jobs. The White House therefore proposes charging all American companies full freight -- the whole difference between their overseas taxes and the U.S. corporate rate -- on all their profits as soon as they're earned, no matter where. This measure, in their minds, would bring jobs home. If the logic eludes you, you're not alone. The bottom-line effect of the change would be a steep tax hike -- more money vacuumed out of corporate coffers. Would that make U.S. companies competing in a global economy more inclined to hire additional workers in the highly expensive United States?

Quite simply, the answer is no. A tax hike would make worldwide American companies less competitive and, thus, less likely to hire additional workers. Heck, it makes even retaining existing workers challenging. And who will ultimately bear the increased costs of doing business? Consumers. So, if we are looking to make U.S. companies less competitive, cost American workers their jobs, and drive up consumer prices during a recession, this certainly seems to be the plan to follow.

And don't celebrate domestic-only businesses; there are plenty of tax proposals for everyone, not just American companies doing business on a worldwide basis:

Another [proposal] would require companies to account for their inventories on a first-in-first-out (FIFO) basis rather than a last-in-first-out (LIFO) one -- an eye-glazing change that's highly significant. In an era of rising costs, to assume that you're selling your oldest inventory rather than your newest increases reported profits and thus taxes, even though nothing real has changed. If inflation turns worse, as many analysts predict, FIFO would force companies to pay real taxes on phantom profits as the value of goods gets inflated while they sit in inventory.

Again, for an Administration whose stated goal is to create jobs the suggestion of repealing LIFO is a baffling one. The repeal of LIFO and subsequent increased tax liability could have a devastating impact on businesses that rely on this accounting method. This repeal could significantly limit business’ cash flows, forcing those companies to curtail investment in machinery and equipment and to cut jobs. And it isn't just employers who pay, as the op/ed concludes:

Tax-wise, a company is just a bunch of incorporation papers; all taxes are paid by people -- customers, shareholders and employees. And guess who would bear most of the burden of these tax increases? It's the U.S. employees of the companies being taxed. Research has shown that when business taxes are raised by a dollar, 70 to 92 cents comes out of employees' pay. When workers wake up to that fact, they may decide this is one time they don't want the White House beating up on business.

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