The American Premium And The Corporate Tax Price War
A favorite talking point to come out of negative economic news is the argument that the United States must have the lowest possible taxes in order to attract business and those who stimulate it. I call this the “price war theory of competitive taxation,” and it is nonsense.
Businesses and individuals have relocated expressly for tax and regulatory reasons since taxation and regulation was invented. American businesses tend to incorporate in states like Delaware and Nevada with favorable tax climates, to the extent that they have fomented the development of cottage business service industries.
Many corporations have taken it a step further and actually incorporated abroad, often in such economic powerhouses as Bermuda and the Cayman Islands. The parlors of Monte Carlo are famously havens for wealthy Europeans who find the income taxes of their home countries an unfair price to pay for living there.
I enjoy the dice far too much to speak overly critically of Monaco, but its restrictive (and expensive) residency policy helps to articulate the point that most "havens" are so for a reason. They tend to be wealthy enough to afford social services without an overly burdensome tax structure or purposely limited in said services, sparsely populated, geographically isolated, in favor of low "teaser" tax rates to attract businesses and/or consumers, hoping to pay for those rates on the back end, or some combination of the above.
Monaco works because only rich people live there, which is why the service employees of Monaco live in neighboring France.
The United States is a country with birthright citizenship, a more cavalier approach to birth control than many of its G8 brethren and despite what some on talk radio would have you believe, a capitalist economy. For lack of a better term, it has relaxed standards of admission. Inevitability, not all of its citizens can pay for their own burden or share of social services.
The only fiscally prudent way to participate in a tax price war would be to cut social services to the bone, but as controversial as the introduction of certain elements like Social Security and Medicare may have been, public opinion has historically favored such programs to the point where they are basically untouchable.
Even the most fundamentalist free-market doctrinaires will concede that a (low) base level of taxation is necessary to provide for a certain necessary amount of social services. Most of these doctrinaires don’t want to drive their luxury cars on dirt roads.
In simpler terms, Americans may not all want French-style socialism, but they certainly do not want Somali libertarianism, where the swashbuckling businessmen are actual swashbuckling businessmen.
Somalia is a failed state with an extremely limited central government and almost no services. There are no tax collectors; thus, the effective tax rate is zero.
I happen to believe that the United States is the greatest country in the world, but I acknowledge that is debatable. The fact that the United States is more desirable than Somalia as a venue for commerce is not.
This is not a shot at Somalia; we’ve seen authentic “no-rules” capitalism in parts of Russia (particularly immediately post-USSR), Mexico and Afghanistan that exist(ed) outside the control of official authorities. Even though taxes are nonexistent and there are no non-warlord regulators to obey, I can’t see Joe the Plumber rushing to set up shop in Mogadishu.
The American economy does not have to have the lowest tax rates of all to attract business; rather, it needs to provide value in its combination of low taxes and useful services.
That value not only comes from tangible benefits like well-enforced laws against unfair competition, fire and police protection, good roads and ports and easy access to financial services, but in things like an educated work force, wealthy consumer base and quality educational and research institutes coming up with both big ideas and leaders who can develop them.
Germany has higher taxes than Estonia, and not all German businesses are now headquartered in Tallinn. This is because Germany offers its businesses a much more comprehensive package of services and a wealthier consumer base. I like Estonia, and it’s a great example of a country that has used certain tax incentives and technology to energize its economy, but there’s a reason it is priced similarly to Bulgaria and not Germany.
We have all bought some off-brand consumer goods that we ended up replacing with the quality product we should have purchased in the first place. Stating that the only way we can compete is to draw businesses with lower taxes is a race to the bottom, and I reject the implication that our suite of economic services and the products we offer cannot be expected to command a premium going forward.
I find this to be not only lamentable but false, as do most airlines, television stations, militaries and internet users. This country has given the world the ability to Facebook from an iPad on a Boeing 30,000 feet in the air. As much as first Germany, then Japan and now China were supposed to be the economies of the future, the cutting-edge technologies of today (and tomorrow) are overrepresented by American companies. Bermuda is a nice place to domicile an insurance company but it offers little beyond a tax break and ugly shorts. The U.S. is a complete economy.
Certain countries need to use the "dollar store" price wars approach to draw business; the United States does not. No business is located here solely because of low taxes. The United States remains a premium place to conduct business and can price itself accordingly.
Reach Matt Pressberg here.