RE: Democratic Party Debate - January 17th
Let's say you run a successful small business that has grown significantly. Whether you pay taxes as a C Corp or pass taxable income through to your shareholders as an S Corp, you are looking at a marginal tax rate in the 40% range (actually, substantially higher if you are a C Corp that pays dividends, but let's assume that you can pass enough to yourself through salaries and bonuses that we can ignore that case for now). Let's assume that you have two competitors, both in the US and worldwide--a large US corporation with the same 40% marginal tax rate and an Irish company with a 12.5% tax rate, plus consumption taxes that get rebated on exports. Most non-tax costs are close enough that no clear advantage is created, and your proximity to the US market is essentially matched by the Irish company's proximity to the similar-sized EU market. I'm using Ireland because the tax rate differential is greatest, but the same analysis works for Germany at 30% or Sweden at 22%, or any of a number of other countries with similar differentials.
The US can impose a tariff on the Irish product that makes your product competitive within the US. But the US can do nothing to make your product competitive with the Irish product in the EU or anywhere else in the world. So your Irish competitor has the advantage of a much larger potential market than you do. Your corporate America competitor can move its manufacturing operations to Ireland, pay the US tariff on imports and compete with you here, and also compete with your Irish competitor in the rest of the world. Or that corporation can continue to manufacture here for the US market, but move manufacturing for the rest of the world to Ireland. Either way, you are having to compete with two other producers who have access to much larger markets than you do. And all you get in return is a push in your home market. Ultimately, you are going to lose that battle.
Obviously there are cases where costs are not similar, or market proximity is an issue because of shipping costs, or raw materials availability drives your decision, or lots of other issues that take you away from a tax comparison as the decider. But why would we want to win only in those cases where one of those other factors is paramount? Shouldn't we want to compete in as many cases as possible, and use taxes to increase rather than decrease competitiveness? Moreover, as Hambone pointed out elsewhere, taxes and regulation are about the only two things where government really does have the power to create huge differences. Shouldn't we be using that power to our advantage.
Clearly, if iron ore is a major component raw material, Michigan is going to be a more attractive location than Fiji. And there is nothing that the government off Michigan (or Fiji) can do to change that. But should we want to limit ourselves to those situations where we have a major resource or cost or market or transportation or other advantage, or should we want to use the things that government can influence significantly in ways that make us more competitive across the board? There are arguments both ways, but that's where the discussion should be had
(This post was last modified: 01-18-2016 01:07 PM by Owl 69/70/75.)
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Democratic Party Debate - January 17th
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Taxes are my families business biggest problem while taking on a corporate structured collision shop giants in Gerber and Service King.