Yesterday, President Obama announced a long-awaited proposal to cut corporate taxes in America, which U.S. businesses complain are much too high by international standards. The proposed reform is intended to prevent companies from shifting operations and earnings to tax havens (paging Mitt Romney!) and instead encourage companies to bring them back into the U.S., where they could create jobs and growth.
What’s being missed in all this is that the corporate tax debate and the jobs debate are two separate things. Here’s why.
America has the second highest corporate tax rate in the rich world. But most American businesses don’t pay it. The President is suggesting that the corporate tax rate drop from 35% to 28%. But as my colleague Fareed Zakaria wrote a few months back in Time, few of the biggest U.S. businesses are paying that rate right now; indeed, most are paying much less – 115 of the companies in the S & P 500 paid less than 20% in tax over the last five years. And 39 firms paid less than 10%.
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That gets at the key issue: Fundamentally, lower taxes aren’t the reason that businesses choose to invest, or not, in a certain country. As Warren Buffett told me when I interviewed him late last year, “The idea that American business is at a big disadvantage against the rest of the world because of corporate taxes is baloney in my view. In the 50s and 60s, corporate taxes were 52%, and we were making all kinds of [job] gains.”
True enough. In fact, you can see more and more evidence for the fact that business doesn’t locate in a particular country just because it’s cheaper to do so. Consider the recently released Harvard Business School study looking at insourcing and outsourcing decisions among 10,000 alumnae who are running American businesses. The key reason for outsourcing wasn’t labor cost, but a combination of cost, proximity to market, and (most importantly) better worker skill sets abroad. In order for America to create jobs at home, we need to do the heavy lifting to reform education and develop workers who can do the sort of jobs businesses need them to do. (On that score, I applaud the way the President is trying to link educational reform with the bolstering of American manufacturing.)
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This goes to the final point, which is why companies are holding such a huge wad of foreign profits abroad to begin with – $1.5 trillion by some estimates. You can make a case that they simply don’t want to be taxed at 35%. But there’s no reason to think that under our current complicated tax structure, they couldn’t find ways around that, as they do with U.S. earnings.
Even more to the point: As Buffett says, nobody ever stopped investing because of high taxes. Companies stop investing because they don’t fundamentally believe in the growth opportunities in a market. I agree with Buffett that you can’t allow U.S. firms to repatriate foreign profits tax-free; it creates moral hazard. But it would be interesting to see how much of that money would flow back into the U.S. if the rate was 20%, or 12.5%, as it is in Ireland. It would tell us a lot, not only about corporate America’s belief (or lack thereof) in shared sacrifice, but also about their belief (or lack thereof) in the U.S. economy.
