May 1, 2009

Life's Certainties: Death and Taxes

Ben Franklin’s adage finds relevance in an April 22nd WSJ article bringing up Obama’s proposal to increase corporate taxes on overseas profits. Written by Jesse Drucker, the article stresses the administrations proposal to generate a “potential 20 billion dollar tax revenue” to combat the fiscal recklessness seen by critics in its first 100 days. Drucker states that currently, “U.S. companies can defer taxes indefinitely on the profits they say they have earned overseas until they repatriate that money back to the U.S.” Corporations that will most likely be hurt include, global corporations like Phizer, Hewlett Packard, and Coca Cola. But these companies have benefited immensely as well, for example Phizer due to the current law, cut its effective tax rate by 20.2 percent. While the complete repeal of the law that allows for such benefits is unlikely a restructuring is a valid proposition. In defense of corporations, America’s corporate tax is amongst the highest in the world--around 35%, on the other hand critics point out the number of loop holes in the tax code and the fact that a lot of these larger corporation hold profits in shell offshore companies to stem off taxes. Accordingly, the administration “is committed to reforming deferral to improve the overall efficiency and equity of the tax code by reducing incentives to divert investment from the U.S. in order to avoid taxation.”

While the argument possesses a populist sentiment, it undermines several economic ideas. First, the idea of diverting investment from the US, suggests that the idea of trade being a zero sum game, contradicting classic economic thought. Acquiring comparative advantage through trade and competition, progresses all participants. While the spokesperson for the administration might equate money as investment, and thus divestment, wouldn’t it make more sense that a lower corporate tax to begin with would attract more foreign investment into the US? Higher corporate taxes hinders US companies to compete and taxing profits hinders them substantially, in a global economy it is essential that we are able to grow our corporations to benefit not only ourselves but the world. How are US companies able to compete overseas where domestic companies are being taxed at a considerably lower rate and have an advanatge in their business model. By removing incentives like these laws, it only inhibits competition globally. As the article states these “titans” of industry aren’t going down without a fight, with significant lobbying power, Round 1 of this fight will be bloody.

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