April 25, 2011

Continuous Robbery

What would happen if we lowered the U.S. corporate tax rate?

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Robbery is easily defined by Random House in a common law sense, as “taking the property of another,” with the intent to permanently deprive the person of that property, by means of force or fear. When that definition is further analyzed, it most notably resembles our United States tax law. The tax law is really, in essence, a legal form of robbery.

Our government has formed the legal right to tax all U.S. citizens, U.S. companies and pretty much anyone else that transacts business in any form within our legal borders. They permanently deprive any person and/or corporation of those tax dollars (property), through force or fear, such as the IRS’ threatening letters forcing the levy of property, wages, assets or even imprisonment until the tax bill is fully paid or collected. Given that, one could conclude that our tax system is definitely not a voluntary system as opposed to what Senate Majority Leader Harry Reid D-Nev. seems to think, per his famous online interview at FreeLiberal.com, “Paying income taxes in America is voluntary.”

Assuming that I’m right and our U.S. tax system is a form of robbery, what would the normal reaction be? Probably finding a way to seek shelter from that robbery again and again, or at least reduce the impact of the theft to every extent possible. It’s no surprise, therefore, that many American corporations are moving their jobs, production, manufacturing and even headquarters outside the U.S., if all they get by being here is continuous robbery.

I saw an interesting 60 Minutes report on March 27 by Lesley Stahl, which was about this corporate tax issue. If you haven’t seen the video, I highly recommend watching it. Her story talked about how American companies are finding new overseas tax havens to legally protect some of their profits. During the piece, Ms. Stahl interviews Congressman Lloyd Doggett D-Tex., who insinuates that corporations moving their headquarters and executives to other countries such as Switzerland or Ireland are, in some way, unethical. Personally, I don’t see it that way. 

If the U.S. corporate tax rate is 35%—which, by the end of April will become the highest corporate tax rate in the world behind Japan—I can’t see why any decision maker on the corporate front would not make a strategic business move to Ireland where they would only pay 12.5%.

Making Money for Shareholders

I think most forget to understand that corporations are in business to make the most money possible for their shareholders. Therefore, any reduction of expenses, such as taxes, indirectly increases the corporation’s profitability, which helps

the company’s stock fundamentals. These include a company’s financial stability, its marketability, its future growth, and possible increased dividend payouts, not to mention various financial analysis formulas like earnings-per-share. So why is it that our government can’t understand how the simplistic economics of lower taxes will give companies the opportunity to create jobs, which in turn, reduces the unemployment rate and increases government revenue as full employment is achieved?  

Let’s look at some real analysis here. Ms. Stahl, in her interview of Cisco CEO John Chambers, found out that Cisco has roughly $40 billion in revenue, net of taxes, outside the U.S., which cannot be used within the U.S. unless Cisco pays 35% of it in taxes to our government.

If we take that $40 billion and assume it was earned revenue in Ireland, that effectively means the before tax income was roughly $45.71 billion ($40 billion / (100%-12.5%)). Now if that $45.71 billion was taxed in the U.S., the net after-tax income would be $29.71 billion ($45.71 billion x (100%-35%)). The difference between the two is effectively $10.29 billion ($40 billion - $29.71 billion) in net profit that Cisco would lose for being taxed in the U.S. instead of Ireland. Cisco could pay that $10.29 billion out in dividends to shareholders, increase production, hire more employees, or spend it on research and development. Therefore, why would any corporation not make the same decision if it increased their net profit by $10.29 billion? 

Let’s further assume the U.S. had a 10% corporate tax rate instead of 35%. Cisco would probably move every office, production facility and manufacturing plant back to the U.S., as there would be no need for a tax haven. If that were the case, the U.S. would receive roughly $4.57 billion (10% x $45.71 billion) in corporate federal tax revenue just from Cisco alone! Government revenue of $4.57 billion versus zero seems to be a logical decision. Otherwise, the mass exodus of multi-national corporations from the U.S. is only going to increase, as the rest of the world continues to do everything possible to compete for our corporations, and to gain even a share of U.S. prosperity.  

To me, it just shows the ignorance of our legislative branch as they can’t see the forest for the trees. I understand the view of Wall Street and corporate greed, but if we stay the course, we will soon not be able to feed the hungry or less fortunate, if we continue to run off our largest sources of employment and revenue.

Why can’t we just drop the tax rates to 10% or 15% for the next 30 yearsand see if we can’t steal every multi-national company away from every other nation? Sure, it may increase the deficit, but isn’t our government continuing to do that anyway? In my opinion, that’s what we did historically to become the greatest nation in the world, so why not gamble to maintain our prosperity, instead of continuously robbing people in hopes of keeping our prosperity.   

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