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Political rhetoric in the United States, particularly on the right, has a strong tendency to focus on the incomparable economic freedom of Americans and American businesses. They portray the rest of the world as more socialistic and the American system as the closest thing to a free market economy operating in the world. Yet that is far from the truth. In fact, America is swiftly being supplanted as a preferred place of business by many other countries in the rich world.
The reason for America’s declining business attractiveness is a matter of simple economics: The US corporate tax rate is ruinously high, and the tax compliance system is mind-bogglingly byzantine. While the average corporate income tax in the OECD, a club of rich countries, is 25 percent, the US federal corporate tax rate is 35 percent. Add state corporate taxes on top of that and the average corporate tax rate in the United States comes out to a whopping 39.1 percent. Even the socialist playground of France has a tax rate of 34.4 percent. America’s bizarrely high corporate tax rates are largely the product of standing still in the face of changes in the global marketplace. European countries have long been skeptical of the free market, yet they have slowly adopted many market precepts over the past few decades. In order to maintain and expand high qualities of living, these countries had no choice but to embrace the market and make doing business easier. Their relatively small economies could not survive with high barriers to doing business in the face of growing emerging market competition.
America, on the other hand, has not faced those same pressures. Thanks to its size and centrality in the global economic system, the United States was able, throughout the Cold War and the two decades after its conclusion, to maintain a particular cachet that attracted businesses to its shores in spite of the erosion, and ultimate inversion, of its tax advantages. Business leaders were (and many still are) willing to pay the tax premium for being incorporated in America where they would be protected by its size, and would be able to trade principally in the dollar, which is still the world’s reserve currency (though for how much longer remains an open question). That willingness to put up with America’s tax regime is beginning to dissipate.
The American business climate is confronted with two market forces that threaten to tear it apart. On the one hand, the marketplace has become ever more choked with regulations which has made doing business harder every year. For example, American-based businesses could balance the relatively high taxes against a more fluid labor force. That advantage has been clogged up by red tape. On the other hand, the perks of being based in the United States have diminished in comparison to the rest of the world. As other countries have slashed corporate tax rates and made their labor forces more adaptable, America has marched resolutely in the opposite direction, toward greater state control of the economy.
America is finally starting to pay the price for its broken corporate tax regime. The recent increase in so-called tax inversions, in which American corporations seek lower tax rates via mergers with companies based in foreign countries. Tax inversions result in American firms effectively becoming foreign businesses, something many politicians on the left have come to fear and despise. At least 47 American tax inversions have occurred in the last decade, but it was not until this month that they started making serious headlines. When the American pharmaceutical firm Abbvie announced it would be taking over the Ireland-based Shire corporation in a $57 billion deal, major figures in the Obama administration and in Congress began to lash out at such corporate maneuvers. Jack Lew, the Secretary of the Treasury, wrote a letter to Congress arguing for “a new sense of economic patriotism, where we all rise and fall together.” Lew’s comments hold frightful echoes of the statists Ayn Rand describes in Atlas Shrugged, officials and bureaucrats who would shackle the productive power of individuals to what they perceive to be the “public good.”
Even Warren Buffett, erstwhile champion of Obama’s higher tax agenda, has gotten in on the inversion action. He is helping Burger King take over Canada’s Tim Horton’s, which will move the headquarters north of the border.
The answer to America’s problems is not more restrictions on businesses, or denying them the ability to leave the country. The answer is to transform the business environment so that companies want to come and stay in the United States. That is the only way to end the flight of firms from America’s shores. America is in dire need of economic freedom, not economic patriotism.