Thursday, July 19, 2007

International Tax Rates

While many like to think of the US as a low tax nation, when it comes to corporate taxes, we have the second highest rates in the world. Around the world, even in the most strident welfare states of Europe, tax rates are falling. Germany has just cut it's rates to 30%, in comparison to our 39%. Eastern Europe is going even farther, instituting Flat Taxes at very low rates.

As the cost of doing business abroad falls and globalization continues to accelerate, any business of significant size will begin to look at the cost of their location. For example, what if Microsoft moved to Singapore? Or Albania? The difference in revenue between 39% and 20% would be very significant. Small businesses may not be able to move, but they will be more successful in low-tax environments. Since small business accounts for 50% of GDP in the US, putting them at a competitive disadvantage to international rivals can have a significant impact on our economy as a whole.

Why are US corporate tax rates so high? I would guess that there is more political incentive to cut personal taxes than business taxes, since individuals vote. The "progressive" element will also shout down anyone proposing a tax cut for corporations as pandering to big business, preventing any effort to provide relief.

Any economist will tell you that corporate taxes are just passed along to the shareholders and consumers. It makes no sense to tax corporations at all. I would advocate abolishing corporate taxes entirely, and simply taxing the profits when they are paid out, but since that will never happen we need to at least begin cutting them to competitive levels. Some free market types, like Treasury Secretary Hank Paulson are sounding the call, but as long as people fear corporations and seek to punish success, there will be little improvement.


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