Killing that goose

From Cato:

"Businesses — and hence, jobs — over time tend to migrate, other things being equal, from high-tax to lower-tax jurisdictions — and this is true both among states and countries. Many politicians — particularly those from California, Illinois and New York — seem unable to grasp this simple economic concept."

This was certainly true last year when NYS legislators only as a last resort dropped a proposal which would have forced hedge fund managers who work in New York but live out of state to pay higher taxes on their share of profits.

In fact, Connecticut's governor, Jodi Rell, had added ammunition to the concerns of NYC Mayor Michael Bloomberg and others by using the proposal as a recruitment tool, launching what was generally described as "the hedge fund border wars." But the NYS legislators did, in the end, figure out that the tax they were proposing would kill not only NYS business and jobs but ultimately NYS tax receipts.

Same concept, larger scale, thanks to a corporate tax rate that's the highest in the world:

Tax holiday may 'repatriate $1 trillion from offshore havens

By Bloomberg News, Thursday, December 30, 2010

At the White House on Dec. 15, business executives asked President Obama for a tax holiday that would help them tap more than $1 trillion of offshore earnings, much of it sitting in island tax havens.

The money -- including hundreds of billions in profits that U.S. companies attribute to overseas subsidiaries to avoid taxes -- is supposed to be taxed at up to 35 percent when it's brought home, or "repatriated." Executives including John T. Chambers of Cisco Systems Inc. contend a tax break would return a flood of cash and boost the economy.

This has been tried before successfully:

In 2004, a tax holiday allowed multinationals to return profits to the United States at a tax rate of 5.25 percent. They brought home $362 billion, with $312 billion qualifying for the relief, according to the Internal Revenue Service.

So applying a 5% tax rate, say, to the $1 trillion that's currently sitting offshore would in theory yield a $50 billion "take" (as opposed to no take at all as it stands now). But in practice it might not prove to be quite that lucrative:

"Sophisticated U.S. companies are routinely repatriating hundreds of billions of dollars in foreign earnings and paying trivially small U.S. taxes on those repatriations," said Edward D. Kleinbard, a law professor at the University of Southern California in Los Angeles....

They're aided by a cadre of attorneys, accountants and investment bankers in the tax-planning industry.

"Some of the best minds in the country are spent all day, every day, wheedling nickels and dimes out of the tax system," said H. David Rosenbloom, an attorney at Caplin & Drysdale in Washington, and director of the international tax program at New York University's school of law.

So yet another cost of the high corporate tax rate and the complexity of the tax code in general is the misallocation of intellectual resources that results.  But I digress.

Another negative impact of the high corporate tax rate: John P. Kennedy, a partner at Deloitte Tax LLP, speaking at a conference in Philadelphia

...warned that booking large portions of income overseas can mean "you are going to strand so much cash offshore that your business chokes." That's because the foreign profits cannot be used for such purposes as building domestic factories without triggering federal tax.

Obviously, in the end, a tax holiday

..."is a short-term fix to a long-term problem, which is the uncompetitive U.S. tax structure," said Cisco spokeswoman Jennifer Greeson Dunn.

Nevertheless, a tax holiday would generate a sizable infusion of cash to the economy, both in terms of "repatriating" funds for investment purposes and in terms of tax receipts.  

As for the long-term picture, folks from Aesop to Ayn Rand have recognized that killing the goose that lays the golden eggs is suicidal, both personally and societally.  High tax rates kill business, which in turn eliminates jobs, ultimately leading to lower, rather than higher, tax receipts.  Why can't the powers-that-be see this? I think I know the answer, but that's another post.

on a tip from Tom.

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