Tax Competition

Tax competition is a term you are going to be hearing a lot in the next few years.

Low taxes create growth and prosperity; high taxes strangle it. Governments that take a larger share of their nations wealth cause businesses to fail, citizens to become unemployed, and economics to shrink.  Governments that take a smaller share of their citizens wealth allow business to grow, individuals to become prosperous, and economies to flourish.  Unfortunately, some government leaders care more about enlarging their control of the economy than about the success of their nations as a whole.

People and businesses are not powerless against these predatory government officials.  If one city, state, or country decides to take too much, the people and businesses will respond by moving to a lower tax jurisdiction.  New Yorkers move their tax residences to Florida.  Brits move to the Cayman Islands, the French move to Switzerland.  Entire businesses move their headquarters to friendlier countries.

The United States has one of the highest corporate tax rates in the world.  The combined federal and (average) state tax burden on corporations is approximately 39% — almost double that of most other developed nations.  It’s no wonder American companies can’t build products which are competitive with other nations.  It’s no wonder that American consumers are importing almost everything they purchase — American companies are competing with one hand tied behind their backs.

Today, many multinational companies are based in the U.S.  Profits they earn overseas, however, are not taxed until they bring them into the U.S.  This lets the U.S. government tax these corporations only on their U.S. activities.  Obama has promised to change this system and force all of these companies to pay U.S. taxes on their global operations.

At first glance, this might appear to be a good way to increase tax revenue — but in reality it will have exactly the opposite effect.  The companies are not stupid.  All they need to do is to move their legal tax residences to another country, one with a less grasping corporate tax rate.  They will then pay that government about half of what they used to pay the U.S. government and they will take the savings as profit.

Tax competition is not just an issue for corporations.  Many individuals have discovered that moving themselves, or just moving their tax residences, can save them enormous amounts on their taxes.  At one time, this was mainly done by extremely wealthy individuals with dedicated tax planners.  It is now becoming popular among two new groups: American retirees and Internet workers.

Retirees can reduce their tax burdens and lower their cost of living by moving to countries with less fiscally oppressive governments.  People who make their living on the Internet can work and live almost anywhere on the planet.  They can earn high salaries, pay little or no income tax, and live like royalty — all by relocating to a more favorable tax climate.

Governments are now in competition for these individuals and businesses.  The economic immigrants are highly desirable for the wealth they bring with them and the jobs they create.

The U.S. has effectively decided to lose this tax competition.  President Obama plans to raise the tax rates for both corporations and individuals.  This will cause the best and the brightest to abandon the United States and will hasten the decline of our once-great nation into poverty.

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