The most recent edition of 60 Minutes included a segment they called “The new tax havens”. So as the segment begins, we are introduced to the representative of the town of Zug,Switzerland. This is the new haven that is taxing corporations at a rate of only 15-16%. All a corporation has to do is move its world headquarters to Zug and they can begin to enjoy lower taxes. It is interesting to keep your eyes on how this situation is being characterized. The segment really does speak for itself. To its credit, it does give you all the information you need to come to the right conclusions. Sadly, the folks at 60 Minutes seem to miss it. Read the full analysis after the video.
You can find the entire segment below.
The segment really does sprinkle on that a dash of “Ambush Journalism” as our intrepid host attempts to meet the heads of the companies in their offices in Zug. She knows they are not there, we know they are not there – but hey, this makes great television, right?
Of course, all this is designed to set a stage and leave you with an impression. All the detective work is great theater, orchestrated to give you the impression that underhanded shenanigans are afoot. Of course, once you get about 4 minutes into the segment, they make the off-hand comment that none of this is illegal, but the clear intention of leaving you thinking that corporate evil is in the air has already been established.
So what does a travesty of justice like this need? A hero of course. So who will our hero be? How about Congressman Lloyd Doggett, Democrat from the great state of Texas? So what does this defender of the Constitution suggest? Perhaps he wants to reduce the corporate tax rate to entice those companies back home? Perhaps he wants to make it easier for corporations to do business in the United States? Oh please. Now how would THAT fit in with the narrative that 60 minutes has created? We have gone to all this trouble to establish that whatever is going on here is shady, right? So of all the options out there, our “Hero” wants to create a law that will impose taxes based on where the corporations decision makers are, and where the corporate decisions are made instead of where they file their articles of incorporation. As he says, “He thinks it’s fair”. Perhaps “Thinks” is too generous a term in this case.
Wow, that sure will put a stop to all this. Right? Well, maybe not. Even with only the suggestion that Rep. Doggett makes with his legislation, corporations have started to actually move their decision makers to other countries.
So lets see if we have this right. Our “Hero” has now made it make more business sense to take the entire management staff out of the United States. So now when those folks buy some milk, it won’t be at the corner store in “Where the hell did all the people go” Texas, but in good old Geneva, Switzerland. Oh, and what about those income taxes? Nope, those will go overseas as well, assuming that those folks become residents of Switzerland – and if your tax rate would get cut by doing so, wouldn’t you? No more cars bought at the local Texas dealership, no more contractors hired to remodel the kitchen in Texas. It all goes overseas. So in one fair swoop, our “Hero” has managed to reduce our income tax revenue, lose jobs and eliminate a likely heavy consumer from the American marketplace. Now we are cooking!
So how does Mr. Daggett respond to the fact that by just suggesting his new law, top management at major corporations are leaving the country? In the 60 minutes interview, you will hear him say, “We can’t write a law that their lawyers can’t get around.” According to him, “That is the whole problem here.” Hmm… could the real problem be sky high corporate taxes for those companies in the United States? Can we blame them for making smart financial choices? If they see options and they choose the one that saves them the most money, we are supposed to condemn them for that? The sweet moment comes when the interviewer then asks, “Why do we allow congress to write laws that allow this to happen?” Of course, the government just needs to do more to fix this… that seems to be the assumption offered here.
Maybe we need to really internalize this bit of wisdom that indicates that folks will act in thoughtful self interest when given several options. Perhaps instead of legislating at odds with those natural instincts, we should use them to our advantage. But more on that later.
As the story progresses, we move on to some legislation that was introduced in 2004 that was designed to try and hold back these companies from going overseas. It was setup to make them pay the 35% corporate tax even when they moved. Of course, this is an interesting form of corporate slavery where even when the company wants to leave the US, we try to shackle them. After all, the United States has THE highest corporate tax rate in the western world. Why would ANY corporation decide to base itself here in those circumstances. We have an environment where companies are deciding to never even start their companies in the United States. Our policies make these companies start in other nations and build up their research and development, management and manufacturing all in other nations. So we lose not only all those top tier management jobs but also get the extra one-two punch of brain drain as all our most talented R&D people are moved out of the country. But wait…there’s more! Companies are also moving all their intellectual property overseas as well! Finally, and this will make you nuts, US policy actual DISCOURAGES corporations from moving their money from overseas back to the United States through levying heavy taxes. Wait, we WANT that money back over here… right? The segment tells us there is about 1.2 TRILLION dollars overseas that is held by US companies. Could our economy use 1.2 trillion dollars right now?
Next, our interviewer asks how things would go if the corporate tax rate was dropped to 20%. She makes the point that it would be a 2 trillion dollar decrease in revenue. Of course, this assumes that corporate income remains the same. It assume no increase in the number of corporations in the United States and that none of the companies currently doing business overseas for tax reasons will stop doing so. Those are pretty big assumptions that defy the exact same logic that motivated corporations to move overseas in the first place. The most honest conclusion would be that corporations that moved out, will be likely to move back for the exact same reason – lower taxes.
The conclusion drawn by the folks at 60 minutes is like asking what 2 + 2 is and answering “Argentina”. They completely missed the point – and the lesson to be learned.
So where do we go from here? Lets look at what is happening around the world. Because of their very attractive corporate tax rates, Switzerland and Ireland are enjoying lower unemployment and amazing revenue from taxes. Their smart tax policy has drawn corporations to their shores like a bear to honey. Clearly, we know what the carrot is when it comes to appealing to the instincts of a corporation. Make it cheaper to do business and they will come running.
Whatever we might lose in tax revenue for lowering our corporate tax will be more than made up in terms of existing corporations returning to do business in the United States and new corporations that would have established themselves somewhere else if our taxes were higher. Switzerland and Ireland have proven this, it is not as if we don’t know if it works or not. This will have the added benefit of adding a level of stability to the income we receive. The more corporations you have, the less volatile the tax income. Lets create a system where it makes financial sense for a company to WANT to bring their assets into the United States.
In one fair swoop it would suddenly make sense again for corporations to establish themselves in the United States. The best CEOs, Manager, Engineers, Scientists, Manufacturers and Builders would be coming INTO the country instead of leaving it. With all that would come jobs…. lots of them.
Perhaps folks like Mr. Daggett need to embrace more of a “Get the hell out of the way” mentality, instead of fighting the natural and completely reasonable instinct of any corporation (or human) to shop for the best deal, save the most money and then act on those realizations.
With just this change we would start to see higher employment and increased tax revenue.