Deciphering the Administration's Tricky Tax Rhetoric: Translation "We Pay More"

In a compelling Washington Post article (subscription required) Fortune magazine editor at large Geoff Colvin reminds us that "what's politically irresistible is economically nonsensical". Colvin is referring the Administration's plan (if you can call unmitigated disasters a plan) to stop American companies from moving operations to foreign countries where the corporate taxes are less. Colvin helps decode some of the rhetoric used by the administration that has not only helped sell this idea to the American public, but also helped get Obama elected in the first place. According to Colvin

In a smooth bit of political rhetoric, the White House linked international corporations to individuals who illegally evade taxes by secretly stashing income overseas. "Today our tax code actually provides a competitive advantage to companies that invest and create jobs overseas compared to those that invest and create those same jobs in the U.S.," or so began the White House's May 4 statement. In the very next sentence, the administration segued to "our tax system is rife with opportunities to evade and avoid taxes through offshore tax havens."

The average citizen had to conclude that most big U.S. companies are tax cheats. Only a dedicated student of accounting would figure out that the term "tax haven" as defined by the Treasury Department means any country with a lower corporate tax rate than America's, which is all countries except Japan.

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.

So how exactly does this plan work? Tax the companies more so they'll keep operations in the U.S., where they'll face nearly the highest corporate tax rate anywhere in the world (The U.S. has the second highest corporate tax rate behind Japan). It's a no win situation for American business! Instead, why not incentivize American companies by REDUCING the corporate tax? Nevermind, we all know the answer: because the tax revenue is necessary for the administration's big spending plans. Sure the Rhetoric sounds nice, because everyone would like to have more American jobs, but that's not what this is about is it. It's about the Liberal tax and spend policies!

In the end though it's you and I that will feel the pain of this misguided tax policy. Colvin summarizes the problem of "sticking it to business"

ultimately, business doesn't get stuck. 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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