Is Corporate Flight The Next Step?
Newspapers in the UK are littered with reports of companies moving from the UK to Ireland to take advantage of the lower corporate tax rate. In the UK, the corporate tax rate is 30%, while it’s only 12.5% in Ireland. Many companies that are able to move to take advantage of the lower rate have moved, including Shire (SHPGY) and advertising giant WPP (WPPGY).
In the United States, we currently have the second highest statutory corporate income tax in the world (after Japan). Everyone knows that the effective rate is currently much lower due to corporate loopholes, the largest of which is that companies are not taxed on income from their foreign operations that is not repatriated.
The Democrats have long threatened to tax this income, citing increased government revenues as well as punishing companies for shipping jobs overseas. Conveniently ignoring data indicating that America is actually helped by these foreign divisions, the democrats have promised to kill this loophole. Obama mentioned closing this loophole in his speech last night, which was greeted by a standing ovation.
Almost every competent economist has stated that closing the loophole without a decrease in the corporate tax would be a disaster. Most of us have assumed that if Obama does in fact come through with his promise, it would include a sizeable reduction in the corporate tax. These changes, on the net, would not necessarily be terrible. They would disadvantage the multi-nationals but would be favorable for purely domestic companies.
I will fade Obama and the Democrats competence in this department any day though. I would not be one bit surprised if they decide to close this loophole and only reduce the corporate tax by a smidgen (perhaps 1-2%) if at all. They don’t need one Republican vote in the House to get this passed (as proven by the stimulus bill), and it is not too difficult to sway a couple of the weaker Senate to prevent a filibuster. Obama certainly will not bring the corporate tax down to 20-25%, which when you factor in state corporate taxes, is what America would need to do to keep our corporate tax competitive.
While we are busy toying with socialism in America, Canada is going in the other direction. Their government has already enacted measures that would bring down the federal corporate tax to 15% and the provinces to have a max corporate tax of 10%, making the total tax burden 25% (compared to our 39%) by 2012. The government also has sizeable tax breaks for Canadian small corporations, with those making $500k or less a year generally paying less than 15% tax total.
Given the vast corporate tax disparity, a gradual corporate flight from the US to Canada could happen. Many industries, such as IT, are easily relocated. Those that move to Canada instead of staying in the US will be at a sizeable advantage. While politicans in the United States are attempting to bleed the last dollar from its companies and its people to pay for entitlements and stimulus programs, the companies that move to Canada are able to steal market share since their government leaves them alone.
I run a small internet business that has about a dozen or so part-time employees and contractors. Almost all of the profits we make are reinvested back into the business (since it’s an LLC and those profits are above $250k a year, that means more money goes to the government instead of to expanding the business soon). I’m one of those entrepeneurs politicans say they love to help. I cannot think of an administation more hostile to both big business and entrepeneurs than Obama’s. Killing the corporate tax loophole and decreasing the corporate rate by 1-2% would technically favor companies like mine (if it were fully incorporated) over multi-nationals. Nonetheless,the clearest way for a company like mine to grow and prosper would be to just leave this country as well.
Disclaimer: Author does not own any shares in companies mentioned in this article