Corporate Flight from the U.S. - The Next Step?

Newspapers in the UK are littered with reports of companies moving from the UK to Ireland to take advantage of the lower corporate tax rate. In the UK, the corporate tax rate is 30%, while it’s only 12.5% in Ireland. Many companies that are able to move to take advantage of the lower rate have moved, including Shire (SHPGY) and advertising giant WPP (WPPGY).

In the United States, we currently have the second highest statutory corporate income tax in the world (after Japan). Everyone knows that the effective rate is currently much lower due to corporate loopholes, the largest of which is that companies are not taxed on income from their foreign operations that is not repatriated.

The Democrats have long threatened to tax this income, citing increased government revenues as well as punishing companies for shipping jobs overseas. Conveniently ignoring data indicating that America is actually helped by these foreign divisions, the democrats have promised to kill this loophole. Obama mentioned closing this loophole in his speech last night, which was greeted by a standing ovation.

Almost every competent economist has stated that closing the loophole without a decrease in the corporate tax would be a disaster. Most of us have assumed that if Obama does in fact come through with his promise, it would include a sizeable reduction in the corporate tax. These changes, on the net, would not necessarily be terrible. They would disadvantage the multi-nationals but would be favorable for purely domestic companies.

I will fade Obama and the Democrats competence in this department any day though. I would not be one bit surprised if they decide to close this loophole and only reduce the corporate tax by a smidgen (perhaps 1-2%) if at all. They don’t need one Republican vote in the House to get this passed (as proven by the stimulus bill), and it is not too difficult to sway a couple of the weaker Senate Republicans to prevent a filibuster. Obama certainly will not bring the corporate tax down to 20-25%, which when you factor in state corporate taxes, is what America would need to do to keep our corporate tax competitive.

While we are busy toying with socialism in America, Canada is going in the other direction. Their government has already enacted measures that would bring down the federal corporate tax to 15% and the provinces to have a max corporate tax of 10%, making the total tax burden 25% (compared to our 39%) by 2012. The government also has sizeable tax breaks for Canadian small corporations, with those making $500k or less a year generally paying less than 15% tax total.

Given the vast corporate tax disparity, a gradual corporate flight from the US to Canada could happen. Many industries, such as IT, are easily relocated. Those that move to Canada instead of staying in the US will be at a sizeable advantage. While politicans in the United States are attempting to bleed the last dollar from its companies and its people to pay for entitlements and stimulus programs, the companies that move to Canada are able to steal market share since their government leaves them alone.

I run a small internet business that has about a dozen or so part-time employees and contractors. Almost all of the profits we make are reinvested back into the business (since it’s an LLC and those profits are above $250k a year, that means more money goes to the government instead of to expanding the business soon). I’m one of those entrepeneurs politicans say they love to help. I cannot think of an administation more hostile to both big business and entrepeneurs than Obama’s. Killing the corporate tax loophole and decreasing the corporate rate by 1-2% would technically favor companies like mine (if it were fully incorporated) over multi-nationals. Nonetheless,the clearest way for a company like mine to grow and prosper would be to just leave this country as well.

Disclaimer: Author does not own any shares in companies mentioned in this article

Comments

[Fabien Hug:]

Something else will happen they will slam these countries that practice "unfair" taxes like IR, Switzerland and else. These countries wouldn't exist without the huge stimulus from bigger countries. For instance US lets Dell happily evades its taxes in IR and let them import their goods in the US without tariffs. But, if US doesn't save AIG, C or BoA with huge deficits Ireland is dead. It's a sucker's game and it will not last.

Feb 27 09:31 AM

[sunnsea:]

Go ahead, move to Canada. And you won't have to worry about paying for health care either with their single-payer system.

Feb 27 09:50 AM

[kelm:]

Go ahead and move. I grew up in Canada. I can tell from the article you won't like it.

Feb 27 11:12 AM

[carey_jim:]

Michael: You aren't looking at the elephant in the room and I'm not talking about the Republican Party. It is the difference between huge corporations and small businesses such as your own. America thrives and continues to thrive because of the creative genius of small entrepreneurs like you and their dedication to providing new services and products. Like it or not, huge corporations are already quasi-socialist organizations with huge political bureaucracies and even massive security forces. These entities operate like small, independent states. They are the elephant in the room and the government needs elephant guns and other large caliber weapons to bring them under control. If the government (and yes huge corporations) damage small businesses like yours, and I include businesses that make many millions of dollars a year in profits, then they will destroy the free enterprise system itself. I think (I hope) the new administration is smarter than that. But keep making noise because the high caliber bullets will start flying soon and we need to minimize as much collateral damage as possible.

Feb 27 12:47 PM

[Michael_Cohen:]

I don't have much experience with large corporations obviously, but the little I have (in dealing with them directly or talking to my friends that are employed by them), I can tell they're highly inefficient operations. There's a lot of fat and inefficiency, and it's difficult for them to trim down due to their size...it's much easier for a small business to adjust.

Obama's tough on both companies large and small. If a small business is at all successful, the owner is likely to get hit with a tax increase under Obama. That, plus the tightening credit conditions, is really putting the squeeze on.

Small businesses have to decide if they are going to purchase capital equipment, just like large ones. Since we have to expense it over 7-15 years (just like large ones), and since our after-tax returns are now reduced, it's more difficult than ever for a small business to take that 'next step.'

I don't lose sleep at night thinking about the perils of Exxon and Microsoft, but Obama's attitude of 'get the rich/get big business' pretty much attacks any profitable/efficient company, large or small.

Also, there's a certain 'sweet spot' in terms of size for businesses to move. A small one with $1-$2 million in profits...it's just not worth the cost of moving. But the ones in the $3-$10 million likely can move much easier, and the tax savings will trump the costs. Large businesses may have so much capital equipment and other interests entrenched in the US that moving is impossible.

In the end, Obama is trying to model our economy after Western Europe and/or Japan. Their GDP per capita is 20% below ours. Given we'll have a huge debt/GDP ratio, not to mention the expenses of our extravagant military, drug war, etc., the fall to match Western Europe/Japan or even below it in terms of GDP per capita is going to be painful.

Feb 27 04:45 PM

[carey_jim:]

Microsoft, Exxon and the rest combined, have more power than most governments, and together with their lobbyists, even control much of the United States government.

I and many people like me are more than sympathetic to 'small' businessmen like you and, in fact, I believe that you represent what's best in 'the American Way of Life.'

I myself worked for a start up company and, along with a few more than fifty employees, helped to transform a $100 million dollar company into an 18 billion dollar one. Our CEO was only forty and I was the 'old man' on a team that was mostly under thirty.

This is America. There isn't really any other place like it in the world. But you will agree that the Obama administration has a lot of problems to face and it's going to make a lot of mistakes.

But I think (hope) they will listen to reason. Whenever possible we just have to try to move their sites to the big corporations and away from the 'little' guys like you.

Feb 28 01:02 AM

[Amitabha Mu...:]

What is happening in America today , it is obvious five years down the line everybody will say - once upon a time there was a big country that was again the richest country in the world. As the saying goes in India - wrongly directed thoughts in times of great danger. So it is now happening in America in a big scale. Instead of taking the help of big companies to save the nation from economic collapse , the top executives are being ridiculed, their achievements are down sized. The real enemy of the income difference in the American society is the lack of proper marketable education in the masses making them unable to scale heights in this highly technology oriented and globalized societies. Instead of hitting that or I would rather say simply sleeping over it now the government has awaken and going for short cuts.

Feb 28 11:19 PM