The Voice of Young Conservatives Blog

One of the things missing from the deficit debate is a plan to improve our economic growth. The sole message of the various commissions, it seems, is that we must cut spending and increase taxes to improve our economic situation. It seems that everyone is overlooking a crucial third factor that could make any austerity package a much easier pill to swallow – growth. Higher tax rates are not the only way to increase government revenues, economic growth achieves the same end without the harmful economic impacts of taking a greater percentage of money out of people’s pockets. The goal of reducing the government’s shortfall by $1.4 trillion would be able to be halved to $700 billion if our GDP grew by an additional .5 percent each year. Private economic growth seems to give us the quickest, most tangible results in our quest for financial stability.

That is why the current US tax system, the global tax system, is holding back our economic growth. As of now, US companies not only pay other nation’s taxes on their foreign earnings, but must also pay U.S. federal, state, and local taxes if and when the money is brought back to the United States. To avoid this double taxation, US firms choose to either find loopholes to avoid paying US corporate taxes or simply don’t repatriate their money back to our shores.

Such a problem is why we are one of the few nations left using a global system of taxation. In an effort to draw more corporations, other nations have switched to a territorial system in which governments only tax income earned inside their borders.

Of course the thought of losing tax revenue makes liberals throw up their arms in disgust, but we are quickly falling behind in the worldwide marketplace. Moreover, increasing our global competitiveness could lead to huge returns in higher corporate profits, more investment being made by American businesses, and additional jobs moving to our shores.

The benefits of switching to a territorial model with a lower corporate rate are clear to see. Take Ireland for instance. From 1999 to 2002, Ireland had an effective tax rate of 8 percent. By 2002, pretax profits for US multinational firms in Ireland had doubled to $26 billion. When Denmark reduced its corporate tax from 23.9% to 7.6%, US profits rose not by the 16.3% differential between the two rates, but rose instead by 200 percent! The Belgians dropped their tax rate from 26.6% to 12.5%. The result was US profits in Belgium subsequently increased by 84 percent. Imagine what our economic climate would look like if we had a territorial tax system. In such a system companies would be free to bring their profits stateside, where our research and eductational systems give us distinct advantages, without having to worry about an additional tax of up to 35 percent.

Besides giving American businesses the opportunity to bring their international profits back to the US, a territorial tax system enhances our companies’ competitiveness on a global scale. No matter what isolationalist or protectionalist schemes politicians devise in a misguided attempt to keep jobs from leaving our shores, globalism is on the rise and here to stay. To successfully compete and prosper, international companies need to have free flowing capital. As one of the last bastions of an outmoded tax system we are punishing businesses from operating here and encouraging them to create complicated international divisions that hinder productivity.

Finally, the territorial system is a harbinger of economic growth.  Take, for instance, Great Britain. Britain’s high corporate tax rate and worldwide tax system is pushing companies out. To gain a lower tax bill, McDonalds and Google transferred their European operations from London to Switzerland. Because of higher taxes, Dell relocated their European offices, and the office’s 1,900 jobs, to Poland from Ireland. Dell had been the Irish’s largest exporter and accounted for 5 percent of Ireland’s GDP. As much as we may want corporations to care about workers on our shores, they ultimately must answer to their bottom line. The smart ones will maximize their profits, and thus global wealth, by flocking to areas where they can be the most competitive. It’s pure common sense.

The American economy does not need more bailouts, more government regulation, more commissions, more hearings or more speeches. The American economy needs incentive to grow, and the only incentive we can give businesses is a reduced government yoke.  Productivity is penalized in the global tax system. Companies that have put the time and work into growing beyond our borders are being taxed twice. That means fewer new factories, offices, and jobs here. As President Calvin Coolidge once said, “the business of America is business.” It’s time we step up and show it.

by Justin Williams