John  Browne

A widely-held maxim tells us that money tends to flow from where it is treated badly to where it is treated well. This trend has taken center stage in the ongoing battle between U.S. states to attract and retain top employers. In that conflict, high tax states like California have been losing ground to relatively low tax states such as Texas and Florida. Politicians like to pretend otherwise but the same forces are at work in the global business arena. U.S. tax laws treat business profits badly and corporations have been looking for friendlier fields. But rather than treating profits with more respect, some U.S. politicians just want to heap on another layer of abuse.

At 35 percent, the U.S. has the highest corporate tax rate in the developed world. But this doesn't even factor in the additional taxes heaped on by many of the states. Furthermore, unlike most developed nations, which tax their corporations only on domestic profits, the U.S. taxes its corporations, like its citizens, on worldwide income. These burdens reduce a U.S. corporation's international competitiveness.

To get around these handicaps many globally integrated U.S. corporations have attempted to use complex structural and legal schemes to shift larger portions of their profits to countries with lower tax rates, such as Ireland, Switzerland and even Great Britain. Earnings that don't wind up on the balance sheet of the U.S. corporation don't get taxed, as long as the money stays overseas. Sometimes this means establishing foreign-based subsidiaries to retain earnings that were generated abroad. More brazenly, foreign shell companies can be created as pass through entities that have no other purpose than to lower tax exposure. However, U.S. tax authorities are looking with increasing scrutiny at these moves.

But when U.S. companies send money overseas, they have fewer funds available domestically for investment and job creation. This has aroused considerable Congressional anger. Although most politicians agree generally that the U.S. tax code is a burden on business, they are unable to take the difficult political steps to change the law. This keeps the country locked in a bad system. So rather than tackle the problem at the root, Congressional Democrats are looking to close off the few escape hatches that remain open to U.S. companies.

John Browne

John Browne is the Senior Market Strategist for Euro Pacific Capital, Inc.