Imagine that one day you unintentionally discover a very simple cure for the common cold. With few side effects and relatively cheap ingredients, this cure is a miracle drug. You make the first several doses yourself in a makeshift kitchen laboratory, but soon realize that you’re going to need more money, more capital, and some highly skilled employees to really take your miracle cure mainstream. You need to form a company.
Looking for sound advice, you talk to your business-savvy uncle in Ireland, who tells you that you’d be foolish to start your company in the United States. He advises you to return to your roots and come to Ireland, where the corporate tax rates are only 12.5 percent. Because Irish corporate tax rates are lower than the current American rate of 35 percent, if your company is based in Ireland, you can pay your employees better and hire more of them, while still making more money than if you had founded your company in America.
While this story is imaginary and oversimplified, it adds something to the current tax debate in American political circles. Politicians and their constituents are up in arms about allowing the Bush tax cuts to expire, which would raise personal income taxes on households earning over $250,000 from 35 percent to 39 percent. Conservatives claim that the four percent hike in rates would give high earners less incentive to work, while also taking out of their pockets the money that they use to create jobs. While high-earners do create jobs, most of them do it through the corporations where they work. The top earners don’t pay salaries out of their personal income—the corporation pays it out of its coffers.
At 35 percent for corporations earning over $18,333,333, the U.S. corporate tax rate is the second highest in the world, after Japan’s, which rests at 41 percent. (Even socialist countries like Denmark and Sweden have lower corporate tax rates than our free market empire). While the $18 million threshold doesn’t affect small businesses, it does mean that big businesses are paying a lot more of their revenue to taxes in the United States than they would almost anywhere else in the world.
The impact this high corporate tax rate has on employment is very problematic. What’s most important in the short term is job creation. High-paid individuals may do the hiring and decision making at their company, but if the company is doling out a large chunk of its profits in taxes, there’s not going to be enough cash left to hire new workers. So your flu-vaccine company may create 500 new, high-paying, private-sector jobs, but because of the high corporate tax rate, those jobs might be located in Dublin instead of Boston.
You also may wonder if personal income tax rates are raised in the United States, won’t that make people leave for other countries where the rate is lower? Yes, a few extremely wealthy financiers have been known to move to the Bahamas or Cayman Islands to save millions of dollars a year in income taxes. However, these cases are few and far between—most people are not going to move over a few percentage points in the income tax rate. That would mean selling their houses, formally renouncing their nationality, and moving far from their family and friends. Most people are not that money-oriented. However, unlike individuals, the whole purpose of a corporation is making money.
Big, multinational corporations don’t have citizenships, houses, or emotional ties to their home nations. A recent Bloomberg article illuminated the fact that Google, whose European headquarters are in Dublin, is able to save about $3.1 billion in taxes by basing its European operations in Ireland instead of in the United States. Other companies like Facebook are following suit, with similar plans to move operations overseas.
Congress should let the Bush tax cuts for individuals expire, but lower corporate tax rates. In the short term this might lead to decreased government revenue, but in the long run it will create jobs and spur business growth. The implications of inaction are serious—a high corporate tax rate will push innovative companies abroad, where they can take advantage of lower tax rates. Unless American corporate tax rates are cut, it’s quite possible that your dream job at Google or Facebook might require you to head overseas.
