Keeping Businesses Here: Carrots and Sticks

Categories : Financial, News
May 19, 2021

All walls are barriers, but not all barriers are walls. Barriers don’t have to be physical in nature. The Biden administration wants to discourage U.S. multinational corporations from shifting investments, production, and profits overseas. Their plan is to create barriers, such as regulations and taxes, in their attempt to keep businesses home. Oh, and incidentally, while they squeeze dramatically higher taxes out of all corporations.

When other countries see us lower our rate, they lower theirs to undercut us,” Treasury Secretary Janet Yellen said last Wednesday. “The result is just a global race to the bottom.” Bottom of what? Competing international corporate tax rates, that’s what. Instead of old-fashioned competition, which is a “carrot” approach, the current Administration proposes taxes and penalties, using the “stick” disincentive.

According to the Treasury Department, corporate tax revenue in the USA is at historic lows. But, the unspoken reason corporate tax revenues have been running lower is COVID-19, and that is quickly reaching an end. Corporate tax collections are rising quickly, and are projected to continue rising for a decade.

First of all, the government cannot “pay for” anything until it stops running an annual deficit. Before any new spending is proposed every year, we will have already borrowed over $1 Trillion (12 zeroes) to fund the current budget deficit. Balancing the budget would allow us to consider new expenditures and how they would be funded. Printing money and spending has already caused a huge spike in the inflation rate. It will only get worse.

In 2017, President Trump spearheaded a change, slashing the maximum corporate tax rate from 35% to 21%, thus encouraging companies to return money and production to our shores. Immediately, factories began reopening domestically, new ones were built, and jobs were returned to the U.S. (along with hundreds of billions in cash). Barriers had been lifted. The Trump “carrot” worked. No “stick” is needed.

Among other provisions, Biden’s corporate tax proposal encourages other nations to join a global agreement to enact a minimum global tax. Many countries will play along to curry favor with the U.S., which can be very generous in return. Other countries won’t join, as they would rather compete in the business market.

The Biden Administration’s proposed 15% minimum tax on book income (rather than taxable income) of large companies ignores several facts. Aside from basic competition, a minimum tax overrides the U.S. Tax Code. Some companies (notably Amazon) use legal provisions of the Code to reduce taxable income by making legal investments and acquisitions. In so doing, they benefit employees and customers alike.

Last week, President Biden announced a $2.2 trillion proposal to upgrade the nation’s roads, bridges, broadband, and clean energy infrastructure. He wants to “pay for” most of the sweeping overhaul by raising the corporate tax rate from 21% to 28% and encouraging other countries to enact a global minimum tax. Global taxes, dictated by the United States? Be afraid, America, be very afraid. Personal income tax increases cannot be far off.

"It changes the game we play," Yellen said of the blueprint. So, Janet Yellen apparently thinks that this is all a game. How many of you get seriously scared when you hear that?

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