In his speech at the U.S. Chamber of Commerce yesterday, President Obama tried to make nice with U.S. business. While the speech contained some positive elements about promoting trade and a lower corporate tax rate, the president also pounded the tired theme that we are locked in a battle with other countries over a fixed number of jobs.

Notice how the president framed the otherwise good news of expanding domestic production:

Right now, businesses across this country are proving that America can compete. Caterpillar is opening a new plant to build excavators in Texas that used to be shipped from Japan. … A company called Geomagic, a software maker, decided to close down its overseas centers in China and Europe and move their R&D here to the United States. These companies are bringing jobs back to our shores. And that’s good for everybody.

The strong implication is that U.S. companies add jobs at home by closing production facilities abroad and thus “bringing jobs back to our shores.” This kind of win-lose, zero-sum accounting is out of step with the reality of our global economy. More often, when U.S. multinationals ramp up production and hiring abroad, they do the same at their factories and offices in the United States, and vice versa.

Take Caterpillar, the global equipment company based in Peoria, Ill. According to its recent quarterly earnings report, the company added 19,000 jobs to its global workforce in 2010, 7,500 of those in the United States. This is common practice among U.S. multinationals.

As I noted in my 2009 Cato book Mad about Trade, studies show that the jobs added by U.S. multinationals at home and abroad are strongly and positively correlated. More production and sales abroad typically require the hiring of more managers, accountants, engineers and production workers at the parent company’s facilities in the United States.

Despite the president’s rhetoric, the creation of jobs in today’s global economy is a win-win, positive sum proposition.

President Delivers Same Zero-Sum Message on Jobs to U.S. Chamber is a post from Cato @ Liberty - Cato Institute Blog

Japan has announced that it will cut its corporate tax rate by five percentage points. Japan and the United States had been the global laggards on corporate tax reform, so this leaves America with the highest corporate rate among the 34 wealthy nations of the Organization for Economic Cooperation and Development.

That is not a good position for us to be in. Most of the competition faced by U.S. businesses comes from businesses headquartered in other OECD countries. America also competes with other OECD nations as a location for investment. Our high corporate tax rate scares away investment in new factories, makes it difficult for U.S. companies to compete in foreign markets, and provides strong incentives for corporations to avoid and evade taxes.

The chart shows KPMG data on statutory corporate tax rates in the OECD for 2010, but I’ve also put in the new lower rate for Japan. With the Japanese reform, the average rate in the OECD will be 25.6 percent. That means that the 40 percent U.S. rate is 56 percent higher than the wealthy-nation average.

Most fiscal experts agree that cutting the U.S. corporate tax rate is a high priority, and President Obama’s fiscal commission endorsed the idea. If the president wants to get the economy firing on all cylinders–and generate a new pragmatic and centrist image for himself–he should lead the charge to drop the corporate rate to at least 20 percent.

With state-level taxes on top, a federal corporate rate of 20 percent would put America at about the OECD average, and give all those corporations sitting on piles of cash a great reason to start investing again.

Dan Mitchell’s comments are here.

Buy Global Tax Revolution here.

U.S. Corporate Tax Rate the Highest is a post from Cato @ Liberty - Cato Institute Blog

Ireland is in deep fiscal trouble and the Germans and the French apparently want the politicians in Dublin to increase the nation’s 12.5 percent corporate tax rate as the price for being bailed out. This is almost certainly the cause of considerable smugness and joy in Europe’s high-tax nations, many of which have been very resentful of Ireland for enjoying so much prosperity in recent decades in part because of a low corporate tax burden.

But is there any reason to think Ireland’s competitive corporate tax regime is responsible for the nation’s economic crisis? The answer, not surprisingly, is no. Here’s a chart from one of Ireland’s top economists, looking at taxes and spending for past 27 years. You can see that revenues grew rapidly, especially beginning in the 1990s as the lower tax rates were implemented. The problem is that politicians spent every penny of this revenue windfall.

When the financial crisis hit a couple of years ago, tax revenues suddenly plummeted. Unfortunately, politicians continued to spend like drunken sailors. It’s only in the last year that they finally stepped on the brakes and began to rein in the burden of government spending. But that may be a case of too little, too late.

The second chart provides additional detail. Interestingly, the burden of government spending actually fell as a share of GDP between 1983 and 2000. This is not because government spending was falling, but rather because the private sector was growing even faster than the public sector.

This bit of good news (at least relatively speaking) stopped about 10 years ago. Politicians began to increase government spending at roughly the same rate as the private sector was expanding. While this was misguided, tax revenues were booming (in part because of genuine growth and in part because of the bubble) and it seemed like bigger government was a free lunch.

But big government is never a free lunch. Government spending diverts resources from the productive sector of the economy. This is now painfully apparent since there no longer is a revenue windfall to mask the damage.

There are lots of lessons to learn from Ireland’s fiscal/economic/financial crisis. There was too much government spending. Ireland also had a major housing bubble. And some people say that adopting the euro (the common currency of many European nations) helped create the current mess.

The one thing we can definitely say, though, is that lower tax rates did not cause Ireland’s problems. It’s also safe to say that higher tax rates will delay Ireland’s recovery. French and German politicians may think that’s a good idea, but hopefully Irish lawmakers have a better perspective.

Don’t Blame Ireland’s Mess on Low Corporate Tax Rates is a post from Cato @ Liberty - Cato Institute Blog

From the subscription magazine Tax Notes today:

Taiwan’s Legislative Yuan (parliament), in an attempt to attract foreign investors, on May 28 passed legislation cutting the island’s corporate tax rate from 20 percent to 17 percent, retroactive to January 1…

The lower corporate tax rate will make Taiwan more competitive with its East Asian rivals Singapore, whose rate is also 17 percent, and Hong Kong, whose rate remains slightly lower at 16.5 percent.

The reduced rate ‘will make us even more competitive and will help attract international businesses to set up their headquarters in Taiwan. We believe we’ll see the positive results in the next several years,’ lawmaker Alex Fei of the ruling Kuomintang.

If you were the CEO of an international company that made semiconductor chips, laptops, or other manufactured products, would you locate your next plant in the United States — where the corporate rate is about 40% — or Taiwan where it is less than half of that?

Companies build new factories, buy machines, and hire workers in order to earn after-tax profits. Our government swipes twice as much of those profits as the Taiwanese government, so our economy obviously gets fewer factories and machines and lower wages than otherwise. 

The global business environment is changing, and we need to change with it. I’m not sure why that is so hard for U.S. policymakers to understand.

See here for corporate effective tax rates around the world.

Buy this book to read about the global tax revolution.

Taiwan Cuts Corporate Taxes is a post from Cato @ Liberty - Cato Institute Blog

A thorough new study of 30 nations from the Institut Constant de Rebecque in Switzerland reveals serious shortcomings in America’s tax system.

The report, entitled “Tax burden and individual rights in the OECD: An International Comparison,” creates a Tax Oppression Index based on three key variables: the overall tax burden, public governance, and taxpayer rights. The good news is that the United States has a comparatively low aggregate tax burden, though America’s score on this measure would be much better in the absence of a punitively high corporate tax rate. The bad news is that corruption and inefficiency in Washington drag down America’s score for public governance. The ugly news is that America has a very low rating for protecting taxpayer rights — largely because politicians have tilted the playing field to favor the IRS, including the fact that taxpayers lose the presumption of innocence provided in the Constitution.

Here is a brief description of the study:

The OECD’s campaign against “harmful tax competition” and “tax havens” has overshadowed the essential issue, namely the important roles that both tax competition and “tax havens” play for capital preservation and formation, leading to higher prosperity and better protection of individual rights throughout the OECD.

The tax oppression index is based on 18 representative criteria measuring fiscal attractiveness, public governance and financial privacy in the 30 member states of the OECD. Switzerland appears as the country with the lowest tax oppression — due to a relatively low tax burden and a more [classical] liberal institutional order, including its citizens’ right to veto legislation, political decentralization, and protection of financial privacy. Germany and France, on the other hand, whose governments have supported the OECD’s efforts, are among the most questionable states in terms of safeguarding their residents’ individual rights.

…The tax oppression index evaluates the 30 OECD member states on three complementary dimensions quantified by 18 representative criteria, on the basis of OECD and World Bank data. The index enables relevant conclusions about the tax burden and individual rights among those countries.

Switzerland earns the top ranking in the report, followed by Luxembourg, Austria, Canada, and Slovakia. Italy and Turkey have the worst systems, followed by Poland, Mexico, and Germany. The United States is tied for 19th, behind the welfare states of Scandinavia. With Obama promising to raise tax rates and increase the power of the IRS, it may just be a matter of time before the United States is competing for the world’s most oppressive tax regime.

Tax Oppression Index Ranks America in Bottom Half of Industrialized Nations is a post from Cato @ Liberty - Cato Institute Blog

Desperate for fresh revenues to feed the giant spending appetite of President Obama, Democratic policymakers are talking up ‘tax reform’ as a way to reduce the deficit. Some are considering a European-style value-added tax (VAT), which would have a similar effect as a national sales tax, and be a large new burden on American families.

A VAT would raise hundreds of billions of dollars a year for the government, even at a 10-percent rate. The math is simple: total U.S. consumption in 2008 was $10 trillion. VATs usually tax about half of a nation’s consumption or less, say $5 trillion. That means that a 10% VAT would raise about $500 billion a year in the United States, or about $4,300 from every household. Obviously such a huge tax hit would fundamentally change the American economy and society, and for the worse.

Some fiscal experts think that a VAT would solve the government’s budget problems and reduce the deficit, as the Washington Post noted yesterday. That certainly has not happened in Europe where the average VAT rate is a huge 20 percent, and most nations face large budget deficits just as we do. The hard truth for policymakers to swallow is that the only real cure for our federal fiscal crisis is to cut spending.

Liberals like VATs because of the revenue-raising potential, but some conservatives are drawn to the idea of using VAT revenues to reduce the corporate tax rate. The Post story reflected this in noting “A 21 percent VAT has permitted Ireland to attract investment by lowering the corporate tax rate.” That implies that the Irish government lost money when it cut its corporate rate, but actually the reverse happened in the most dramatic way.

Ireland installed a 10% corporate rate for certain industries in the 1980s, but also steadily cut its regular corporate rate during the 1990s. It switched over to a 12.5% rate for all corporations in 2004. OECD data show that as the Irish corporate tax rate fell, corporate tax revenues went through the roof — from 1.6% of GDP in 1990, to 3.7% in 2000, to 3.8% in 2006.

In sum, a VAT would not solve our deficit problems because Congress would simply boost its spending even higher, as happened in Europe as VAT rates increased over time. Also, a VAT is not needed to cut the corporate income tax rate because a corporate rate cut would be self-financing over the long-term as tax avoidance fell and economic growth increased.

Euro VAT for America? is a post from Cato @ Liberty - Cato Institute Blog

Jeff Zeleny at the New York Times Caucus Blog reports, “President Obama will present a set of proposals on Monday aimed at changing international tax policy, calling for the elimination of benefits for companies and wealthy individuals that harbor their cash in offshore accounts.”

Cato scholars have long made arguments in defense of tax havens. In The Wall Street Journal, Senior Fellow Richard Rahn outlined the policy the federal government should be taking instead:

The correct policy for the United States to follow is to reduce its corporate tax rate to make it internationally competitive, and to move toward a tax system that does not punish savings and productive investment so severely. We know from the experiences of many countries that reducing tax rates and simplifying the tax code improve both tax compliance and economic growth. Tax protectionism should be rejected because it is at least as destructive to economic growth and job creation as are tariffs on goods and services.

Cato scholar Daniel J. Mitchell narrated a three part video series on the subject, presenting the economic and moral cases for tax havens, and a final video that punctured myths associated with the practice.  

Mitchell spoke on Capitol Hill last month about the role of tax havens and in Foreign Policy magazine, Mitchell explained why tax havens are a blessing.

Obama Taking on ‘Tax Havens’ is a post from Cato @ Liberty - Cato Institute Blog

In Tax Notes International today, two Ernst and Young experts describe how corporate tax reforms in Japan have made America an even bigger outlier in its punitive treatment of multinational corporations:

Japan’s recent adoption of a territorial tax system as part of a broader tax reform reduces the tax burden on the foreign-source income of Japanese multinational corporations.

Before the Japanese reform, the two largest economies had both high corporate income tax rates and worldwide tax systems. Now the United States not only has the second-highest corporate income tax rate of the OECD countries, it is also one of the few that still have a general worldwide tax system.

The Japanese corporate tax reform is part of a global trend toward reduced taxation of corporate income, which often takes the form of a significantly reduced corporate tax rate but also is reflected through reduced taxation of foreign-source income.

The details of the president’s budget proposal to reform deferral are expected in the coming weeks. As we await the specifics, it is clear that the direction of the proposal runs counter to this strong current of global corporate tax reform with lower overall corporate tax rates and reductions in domestic taxation of foreign-source income.

In simple terms, Japan’s reforms may give firms such as Toyota or Hitachi an advantage over firms such as Ford or General Electric in international markets.

Alas, U.S. policymakers don’t seem to understand that in a globalized world of free-flowing capital we need to change our uncompetitive tax policies. At Cato, we will keep trying to educate them, but it is sad that our economy loses jobs and investment because our elected leaders are such slow learners compared to leaders in Japan, Jordan, Canada, and elsewhere.

America Alone on Punitive Corporate Taxes is a post from Cato @ Liberty - Cato Institute Blog

Despite the recession, globalization continues to exert pressure for beneficial tax reforms. From Tax Notes International today:

Jordanian Finance Minister Bassem al-Salem on April 20 confirmed that the government is working on draft legislation that would cut corporate tax rates drastically, reducing them in some cases by more than half.

Al-Salem said the government will seek to introduce a single 12 percent tax rate for most corporate entities, although companies in the banking, insurance, and mining sectors would pay tax at a rate of 25 percent. The current corporate tax rates range from 15 percent to 35 percent for different profit levels and also differ by business sector.

The draft legislation would also rationalize individual income tax, custom duties, and other taxes to increase efficiency, al-Salem said. Jordan has about 100 different taxes.

Al-Salem said the tax cuts are needed because many countries in the region either don’t have taxes at all or have much lower tax rates than Jordan’s, making them more attractive jurisdictions for investment.

 The full story on taxation and globalization is here.

Globalization and Tax Reform is a post from Cato @ Liberty - Cato Institute Blog

House Approves 90 Percent ‘Bonus Tax’

Sparked by outrage over the bonus checks paid out to AIG executives, the House approved a measure Thursday that would impose a 90 percent tax on employee bonuses for companies that receive more than $5 billion in federal bailout funds.

Chris Edwards, Cato’s director of tax policy studies, says the outrage over AIG is misplaced:

While Congress has been busy with this particular inquisition, the Federal Reserve is moving ahead with a new plan to shower the economy with a massive $1.2 trillion cash infusion — an amount 7,200 times greater than the $165 million of AIG retention bonuses.

So members of Congress should be grabbing their pitchforks and heading down to the Fed building, not lynching AIG financial managers, most of whom were not the ones behind the company’s failures.

Cato executive vice president David Boaz says this type of selective taxation is a form of tyranny:

The rule of law requires that like people be treated alike and that people know what the law is so that they can plan their lives in accord with the law. In this case, a law is being passed to impose taxes on a particular, politically unpopular group. That is a tyrannical abuse of Congress’s powers.

On a related note,  Cato senior fellow Richard W. Rahn defended the use of tax havens in a recent Wall Street Journal op-ed, saying the practice will only become more prevalent as taxes increase in the United States:

U.S. companies are being forced to move elsewhere to remain internationally competitive because we have one of the world’s highest corporate tax rates. And many economists, including Nobel Laureate Robert Lucas, have argued that the single best thing we can do to improve economic performance and job creation is to eliminate multiple taxes on capital gains, interest and dividends. Income is already taxed once, before it is invested, whether here or abroad; taxing it a second time as a capital gain only discourages investment and growth.

Obama to Stop Raids on State Marijuana Distributors

Attorney General Eric Holder announced this week that the president would end federal raids on medical marijuana dispensaries that were common under the Bush administration.

It’s about time, says Tim Lynch, director of Cato’s Project on Criminal Justice:

The Bush administration’s scorched-earth approach to the enforcement of federal marijuana laws was a grotesque misallocation of law enforcement resources. The U.S. government has a limited number of law enforcement personnel, and when a unit is assigned to conduct surveillance on a California hospice, that unit is necessarily neglecting leads in other cases that possibly involve more violent criminal elements.

The Cato Institute hosted a forum Tuesday in which panelists debated the politics and science of medical marijuana. In a Cato daily podcast, Dr. Donald Abrams explains the promise of marijuana as medicine.

Cato Links

• A new video tells the troubling story of Susette Kelo, whose legal battle with the city of New London, Conn., brought about one of the most controversial Supreme Court rulings in many years. The court ruled that Kelo’s home and the homes of her neighbors could be taken by the government and given over to a private developer based on the mere prospect that the new use for her property could generate more tax revenue or jobs. As it happens, the space where Kelo’s house and others once stood is still an empty dustbowl generating zero economic impact for the town.

• Daniel J. Ikenson, associate director of Cato’s Center for Trade Policy Studies, explains why the recent news about increasing protectionism will be short-lived.

• Writing in the Huffington Post, Cato foreign plicy analyst Malou Innocent says Americans should ignore Dick Cheney’s recent attempt to burnish the Bush administration’s tarnished legacy.

• Reserve your spot at Cato University 2009: “Economic Crisis, War, and the Rise of the State.”

Week in Review: Bailout Bonuses, Marijuana and Eminent Domain Abuse is a post from Cato @ Liberty - Cato Institute Blog

A set of stories in International Tax Review today illustrate the backwards nature of U.S. corporate tax policy. The first story discusses the high-profile chest-thumping in Washington over corporate “tax haven abuse.” The congressional response to greater international tax competition is to load even more regulations on American businesses.

The second story is entitled “Taiwan Slashes Corporate Tax Rate”:

Taiwan’s government has approved plans to cut the country’s corporate tax rate from 25% to 20%. Ministers hope the cut will encourage investment in the country and stimulate growth in the economy…

America is in the worst recession in decades and it desperately needs to cut its 40 percent corporate tax rate to reinvigorate business investment. Why are U.S. policymakers so clueless about the most obvious way to spur investment when that policy imperative is clear to leaders just about everywhere else?

Regulations vs. Rate Cuts is a post from Cato @ Liberty - Cato Institute Blog