January 29 2011
Breaking News: Low Taxes are Key to Profits
NPR reports this morning that "For Many Companies, Low Taxes Are Key To Profits."
And in other news, ovens cook things.
I'll skip any further snarky comments about the obviousness of this NPR headline and praise them for actually running the story (another shocking aspect to the story is that it seems somewhat sympathetic to Walmart!).
Explaining that many American companies head oversees to escape America's sky-high corporate tax rates, the article goes on to illustrates that for companies dependent on domestic customers and services (as opposed to pharmaceutical and computer equipment companies), the opportunities for reducing taxes are more limited.
Just how broken is the corporate tax system? Consider the tax rate paid by two of America's biggest companies - Wal-Mart and General Electric. Wal-Mart paid 34 cents in taxes for every dollar of profit it made in the past three years. General Electric paid just 3.6 cents on the dollar.
Welcome to the mysterious world of the corporate income tax, says tax expert Len Burman at Syracuse University. "There are big companies that consider their tax departments to be profit centers," he says.
Of course tax departments have become profit centers. If corporations can figure out ways to reduce that 35 percent tax rate, this makes an enormous impact on their profits. And one way to reduce it is to move overseas-which ultimately leaves billions of dollars in profits overseas as well.
For example, Burman says, think about a company that moves its pharmaceutical plant from New Jersey to Ireland for tax purposes. In addition to the loss of American jobs, there are other costs to consider.
"The company might say, 'Well, it's worth incurring the transportation costs, hauling all the medicines back overseas from Ireland to the U.S., because of all the money they save on taxes, but that's just a pure waste."
Pharmaceutical and biotech companies pay some of the lowest tax rates around - in the low single digits, according to research from New York University.
Most retailers - like Wal-Mart - pay the full 35 percent corporate tax rate.
"Right now, we have the tax code that provides incentives for you to do this type of behavior or that type of behavior," says Rachelle Bernstein, the tax counsel for the National Retail Federation. "The better way to do it [is to] lower the rates, broaden the base and let businesses make the right decisions without the tax code in the way."
The U.S. has the second highest corporate tax rate (of course, we will soon be #1 as Japan just announced it will lower its rate). These tax rates are driving businesses and jobs to other countries. This will continue to happen unless Congress finally takes action.