Tax Havens

Yesterday President Obama called out the multinationals that are "shirking" taxes by using overseas tax havens. The NY Times article does a good job of covering the background of the argument but one thing it fails to mention is the reason businesses use tax havens or other methods of U.S. tax avoidance. Our corporate tax rates are too high!!

Companies want to be able to compete and it's hard to be competitive when someone in another country can do business cheaper than you can. In the past corporate tax rates didn't have much impact on business decisions because businesses couldn't just get up and move, but that is not the case today. Advances in technology have lowered costs of doing business. The world is flat and information moves quickly.


From the article...

"The top corporate tax rate is 35 percent, but the Treasury Department estimated that in 2004, the most recent year for which data is available, American multinationals paid $16 billion in taxes on $700 billion in foreign income — an effective rate of 2.3 percent. "

I agree this is pathetic but if the corporate tax rate was lower this number would be considerably higher. The only reason people use tax havens is because it is economically viable to do so. The costs of moving the money is still less than paying the ridiculous 35% top tax rate. Let's say the Obama administration lowered the top corporate tax rate to 20%. This would result in more truthful profit reporting and it might even create more jobs in the process. Another potential benefit from a lower corporate tax rate is higher revenues. Actually decreasing the tax rate might put us at a point on the Laffer curve that generates more revenues.

P.S. In the last paragraph of the article Professor Jim Hines from the University of Michigan is quoted on the topic. I had him for Government Revenues (Econ 483?) and I would recommend taking the class if he is teaching it. He is really brilliant and knows everything about the tax code and its revenue implications.