Imagine a baseball team with a self-imposed rule requiring its players to brandish a 50-ounce bat, while the other teams use the standard 32-ounce slugger — a huge difference when facing 95 MPH pitches.
Inarguably, there would be two results:
A. The team with the dumb rule would be in last place, for swinging significantly heavier bats would produce fewer hits, and thus fewer runs.
B. The players and coaches on that team would flee to greener pastures — namely teams without such a self-defeating rule. And players’ values would immediately rise because their productivity would increase. Less restrictive rules would free up players to focus on what they do best, and the extra coin in their pockets would provide even more incentive to work harder.
Common sense clearly dictates that the last place team re-evaluate its policies, make the necessary adjustments, and halt the exodus of its players. How? By allowing its players to use lighter bats, thereby creating a winning environment and achieving a financial windfall in the process.
Naturally, it would be insanity to go in the other direction — digging in even further, and threatening sanctions against anyone leaving the team.
Even a team so obtuse as to establish such a counter-productive rule would undoubtedly see the error of its ways and rectify a bad situation. Right?
Wrong. Welcome to the United States Congress, where both parties adamantly refuse to change one of the single largest factors keeping America in a stagnant, no-growth status: the world’s highest corporate tax.
The latest story regarding the onerous U.S. tax rate is making headlines — and waves — around the world, as American pharmaceutical giant Pfizer is attempting to buy Britain-based AstraZeneca (so far, four offers have been rejected). While Pfizer’s target has an extremely promising pipeline of cutting edge anti-cancer medicines, there is another compelling reason to acquire the foreign-based firm: massive tax savings.
If the deal goes through, Pfizer would “re-domicile” in the U.K., substantially lowering its corporate tax rate. Britain finally got with the program a decade ago, when it awakened and realized that its rate — over 30 percent — was driving away business. Since then, the rate has been lowered steadily, attracting wealth and working capital to its shores. The Brits now levy a 21 percent business tax, which will soon drop to 20 percent and possibly lower.
Compare that to the United States’ tax rate of 35 percent, and it’s a no-brainer why any CEO favors moving overseas. Making matters worse, the effective rates are actually higher, once state and local taxes are factored into the equation. So in Pennsylvania, a company pays the highest federal corporate tax on the planet, on top of the nation’s second-highest state corporate net income tax (9.9 percent), on top of local taxes (and Philadelphia is, cumulatively, the highest-taxed city in America).
But that’s not all. There are even more job-killing corporate taxes in the Keystone State, including the capital stock and franchise tax, several gross receipts taxes, public utility realty tax, gross premiums tax, and financial institutions taxes, including the Bank and Trust Company Shares Tax, Title Insurance Shares Tax, and the Mutual Thrift Institutions Tax. Getting the picture?
Rather than fix the problem — steadily sky-high rates that stifle innovation, cause job cuts, place a cap on new hires, and take capital from the free market (where it could be invested in projects and people) — Congress and many states continue to stand by their draconian policies. Instead of asking why companies flee, and what can be done to halt the exodus, government instead advocates penalizing those with the foresight to seek a more secure location, with some congressmen even advocating to make it a crime for businesses to leave.
In Pfizer’s case, it could potentially save $1 billion per year in taxes. And the money saved could hire more people, increase research and development, expand operations, bolster ancillary business, and otherwise fuel a productive economic engine. Unfortunately, that investment would occur overseas, creating little benefit in America. All this because our elected officials are too lazy and or too stupid to do what must be done: lower the tax rates.
Several points to consider:
1. There will undoubtedly be partisan comments that it’s the Democrats’ fault. True, that party deludes itself into believing higher taxes and making the rich (both people and corporations) “pay their fair share” will solve all of America’s problems. But this, like every major challenge America faces, has its roots in bipartisan failure. When it controlled the White House and Congress, the GOP did absolutely nothing to improve the situation (ditto for Pennsylvania, where Gov. Corbett and record Republican majorities accomplished squat in improving the state’s business climate and tax code).
To reverse this, it will take a leader with a clear, articulated vision and strong will. Sadly, calls for such a person keep echoing back, unanswered.
2. It’s bad enough that our taxes are so high, but to make the sin mortal, the money raised is squandered. High taxes can never be justified, but the pill might not be so bitter if at least the money was wisely spent. We all know otherwise.
3. Are there some lobbyist-generated loopholes in the tax code that allow for some corporate deductions? Sure. But they amount to a Band-Aid on a gaping wound, nowhere near enough to stop the hemorrhaging. If they were the panacea, companies wouldn’t have left and countless others would not be considering the same (such as Pfizer and Walgreens). The solution is not smoke-and-mirror deductions that benefit a select few, but a total overhaul of the tax code so that it is universally fair and competitive.
4. Politicians immediately posture against proposed mergers that could take jobs and cash overseas. But it should be obvious that, if American tax rates were competitive, such an exodus could be avoided in the first place. Same goes for the states: if tax rates are too high, expect companies to migrate to more favorable locations around the country.
“We contend that for a nation to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.” So said the great Winston Churchill, and his countrymen have taken note. Yet Uncle Sam remains stuck in the bucket, continually striking out while knee deep in a mess of its own making.