Littered throughout the President’s proposed budget and health care plan are over $2 trillion in new taxes. In the budget we see tax hikes on businesses including the death tax; new detrimental restrictions on a tax provision called “deferral” that is vital for U.S. companies operating abroad; and potential new taxes to raise revenue for health care reform. We also see in the proposed health care plan a new Medicare tax on investment income. Heritage experts have pointed out that tax increases have a negative effect on the economy and hinder job growth. So why is the President insisting on more tax hikes for businesses when they already struggle to compete internationally with an extremely high tax rate?
Just ask Ireland how well raising taxes is working for their economy when just a few years ago its economy was increasing at one of the fastest paces in Europe. Despite its low tax rate, over the last year we have seen Ireland’s unemployment rise and incomes plunge like many countries around the world.
One of the significant, bellwether events leading to Ireland’s recession was Dell’s decision to move its operations from Limerick Ireland to Lodz, Poland costing almost 2,000 workers their jobs. A U.S.-based, global computer company, Dell’s exports from Ireland were about 5% of their total economy. How did this happen to a country that has one of the lowest corporate tax rates and used to be one of the main countries companies would use as their manufacturing base?
One of the reasons for the flight of companies from Ireland and other European nations is the potential for a common tax base across the European Union which forced Ireland to raise its taxes on businesses significantly to be more consistent with high-tax European norms. The high tax burdens incurred across the Union raise the operating costs of companies and lower their ability to compete. This additional tax is intended to create “fair competition” to level the playing field between countries. However, for previously low-cost countries it actually drives away business to countries that have lower operating costs. Is it smart to make a country raise its taxes because the other EU countries like Germany and France want them to be higher?
This raises the question; why Poland? Poland is also in the EU and will be subjected to the new taxes as well. However, in addition to its low corporate tax rate, the cost of labor in Poland is much cheaper. Companies are naturally going to move to where they can be more competitive at a lower cost – either tax cost, labor cost, or any other costs..
As we consider the President’s proposal to raise taxes on corporate income, the trend of lower corporate tax rates in other countries should serve as a warning to the United States, which already has the second highest in the world. Heritage experts J.D. Foster and Curtis Dubay point out in their paper that not only will companies struggle to compete abroad, the domestic production in the U.S. will fall as well. In fact, the evidence is clear that when U.S. companies have operations in foreign companies, U.S. jobs increase. The bottom line is that additional taxes hurt, costing jobs and opportunity – a high price to pay for government’s wasteful spending.
Margot Crouch currently is a member of the Young Leaders Program at the Heritage Foundation. For more information on interning at Heritage, please visit: http://www.heritage.org/about/departments/ylp.cfm