Thursday, June 10, 2004

Reading assignment of the day

How US tax policies hurt US corporations' ability to compete internationally. A primer from Neal Boortz (second item); here's an excerpt:

Our draconian corporate tax regulations actually force companies out of this country for their own fiscal health.

We'll illustrate this by considering a fictional consulting company called BoortzCorp. . . . We'll consider two scenarios; one where BoortzCorp is incorporated in the United States, the other where BoortzCorp is based in Bermuda.

BoortzCorp, U.S. Since BoortzCorp is a U.S. corporation federal tax regulations will require BoortzCorp to pay federal corporate income taxes on every single penny it earns. It doesn't matter whether that money is earned in the U.S. or not. If BoortzCorp earns $15 Million in [for example] Belgium it will not only have to pay whatever taxes are due on those earnings in Belgium, but in the United States as well. Now the U.S. tax laws will allow a credit to BoortzCorp in the amount of the taxes paid to Belgium, but since U.S. corporate income taxes are generally higher than most other nations, there will be additional taxes due to Washington. In some enlightened foreign countries there are no corporate income taxes at all. In that case, the U.S. collects the full amount.

BoortzCorp Bermuda. . . . BoortzCorp reincorporates in Bermuda. The home office stays in the U.S., as do all but about five employees. But now the tax laws are different. The BoortzCorp subsidiary operating in the United States will pay corporate income taxes to the U.S. government on earnings made in the U.S. The BoortzCorp operation in Belgium, however, will pay income taxes on earnings realized in Belgium, but will owe nothing to the U.S. government for those earnings. That will leave BoortzCorp with additional cash that can be used to hire additional people, expand the business, or pay dividends to shareholders, many of whom, by the way, live in the United States.

Let's think about foreign corporations doing business in the U.S. Let's say there is a German company, KrautCorp, that does exactly the same type of work that BoortzCorp does. KrautCorp operates in the United States. BoortzCorp U.S. operates in Germany. KrautCorp will pay taxes to the U.S. government on earnings realized in the U.S., but not on earnings realized in Germany. BoortzCorp will pay taxes to the German government on earnings realized there, but will also pay taxes on its German earnings to the U.S. government. Since the tax burden to Boortz Corp U.S. is higher, KrautCorp has a competitive advantage. It can undercut BoortzCorp prices and still earn exactly the same profit. In other words, the U.S. corporate tax laws give a competitive advantage to foreign corporations. Now that makes perfect sense, doesn't it?

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