A few months ago, I was sitting with a group of musician friends when incredibly the subject of corporate taxes came up. I am not sure how or why, but it did.
Most of those gathered at the Appalachian String Band Festival in West Virginia, were of the far left persuasion, and one, a very nice guy and talented fiddle player, got it into his head that big bad corporations in this country should pay more taxes.
I mentioned, rather demurely, that the United States already has one of the highest corporate tax rates in the world, to which another fiddle player, whom I consider a friend, answered with “BS.” (Except he didn’t use the abbreviated version.)
I let it go. Why argue over something extraneous as tax rates, when we were there to play music.
Life is too short. I’m not going to let politics, much less facts, become a demarcation line or a prerequisite for friendship. I am quite comfortable “hanging” with people who do not share my views, no matter how deluded they might be.
Carrier News Dominated
Last week, much of the news was dominated by President-elect Donald Trump brokering a deal with Carrier to keep a portion of its workforce in Indianapolis rather than a total plant shutdown with work shipped to Monterrey, Mexico.
Curiously, many pundits decried the move as something precedent setting and bad, when it was neither.
The truth is this thing happens not all too infrequently, albeit it is usually governors and high-ranking state economic developers who are making the telephone calls, dangling tax abatements as an incentive to keep companies from moving operations out of their state.
Indeed, much of the basis for industrial recruiting by economic developers in states vying for industrial investment is rooted in tax incentives.
In short, taxes matter and in tandem with a regulatory environment, infrastructure and sometimes labor costs form the basis for what many companies see as the business climate of a place.
(Sometimes companies, particularly tech companies, will ignore a not-so-good overall business climate in favor of a plentiful talent pool, witness biotech and Silicon Valley in California. Another blog for another time.)
While Carrier said tax incentives were important in keeping operations in Indianapolis, I don’t buy it. The $700,000 a year in tax abatements for 10 years from Indiana is a smidgen in comparison to the $65 million a year Carrier would have saved in labor and other costs by shifting production to Mexico.
No, something else was at work here. Two things come to mind. One, Carrier ‘s parent company, United Technologies, is a major defense contractor that wants to stay in the good graces of an incoming administration, which will likely increase defense spending.
Two, and granted this is mushier, Trump has vowed to work with the business community to reduce corporate taxes and regulations.
The Real Story
More interesting to me than the news on Carrier — which puts faces to a story (The New York Post quoted the Facebook post of an employee named Paul Roell: “Thank you, Donald Trump, for saving my job.”) — is that Trump’s proposed nominee for U.S. Treasury secretary, Steve Mnunchin, said last week that the administration was targeting a reduction in the corporate tax rate from 35 percent to 15 percent.
That is a real big story, overlooked by many. If that were to happen, it would be “yuge,” and redefine the business climate in this country.
This may come as a shock, but back in 2012, President Obama actually proposed lowering the nation’s corporate tax rate to 28 percent. At the same time, he wanted to boost overall revenue from corporate taxation by banning numerous deductions and loopholes that save companies tens of billions of dollars a year on their tax bills.
2012 was an election year and a Republican congress wasn’t about to play ball. (Mitt Romney, by the way, had proposed lowering the rate to 25 percent.)
Not BS at All
Despite what my fiddle-playing friends might believe, the United States, with a combined top marginal tax rate of 38.9 percent (consisting of the federal tax rate of 35 percent plus the average tax rate among the states), has the third highest corporate income tax rate in the world. It is exceeded only by the United Arab Emirates and Puerto Rico, according to the nonpartisan Tax Foundation.
The U.S. has the highest corporate income tax rate among the 35 industrialized nations of the Organization for Economic Co-operation and Development (OECD).
“The U.S. tax rate is 16.4 percentage points higher than the worldwide average of 22.5 percent and a little more than 9 percentage points higher than the worldwide GDP-weighted average of 29.5 percent. Over the past ten years, the average worldwide tax rate has been declining, pushing the United States farther from the norm,” according to a Tax Foundation report in August.
You don’t have to be a Washington insider or an accountant to know that the federal tax code is very complicated. Because of the abundance of loopholes and deductions, most corporations don’t pay 35 percent, but an effective tax rate closer to 29 percent. The weighted average tax rate for the S&P 500 overall was 26.7 percent in the second quarter of this year, according to Howard Silverblatt of S&P Dow Jones Indices.
Still, our effective rates are significantly higher than the worldwide average corporate tax rate, which has declined since 2003 from 30 percent to 22.5 percent.
Also, keep in mind that companies do not need to pay U.S. taxes on the profits earned by overseas operations until the earnings are brought back to the U.S., which means many keep trillions in profits parked offshore.
I have to believe that a lower corporate tax rate would bring much of that money home and sharply reduce companies’ incentives to take a foreign address, a practice called inversions.
A Challenging Environment
Now if you were to ask me if I believed that some companies pay their executives really obscene amounts of money and that wealth disparity in this country is a real and growing problem, I would say absolutely true.
Do I believe that special interests have been successful in carving out loopholes and deductions making a tax system far too complicated tax code and unfair. Yes, I do. But those are separate issues.
The issue of this blog, which directly impacts job creation, is that we have a very challenging environment for business investment in the U.S. in large part due to our disproportionately high corporate tax rate in comparison to the rest of the world.
There remains a lot of unknowns to what may or may not happen. So if the effective rate goes to 15 or 20 percent, will this be done in conjunction with the closing of loopholes? No one yet knows. We still don’t have a lot of meat on the bone, but the impact to corporate profits and investment in this country could be significant.
So this is the big story that I am watching. I’m not so much concerned with whether Trump is making phone calls to CEOs in an attempt stop individual plants from closing and moving offshore. It’s not necessarily a bad thing, I just think it is small potatoes when compared to what happens with corporate taxes and the overall business climate of this country.
Staunch the Bleeding?
The latest jobs numbers from Bureau of Labor Statistics show that jobs in the manufacturing sector fell for the third straight month, declining by 9,000—losing 62,000 workers year-to-date.
We’ve been bleeding manufacturing jobs, going from 20 million jobs back in 2000 to 12.3 million today. Will Trump, the economic nationalist, find a way to effectively staunch the bleeding through tax and regulatory reform?
I don’t know. How about that, a business consultant who says he doesn’t know. I am watching and waiting just like you.
I’ll see you down the road.
Dean Barber is the president/CEO of Barber Business Advisors, LLC, a location advisory and economic development consulting firm based in Dallas. He can be reached at email@example.com or at 972-890-3733. Mr. Barber is available as a keynote speaker.