Why corporate taxes are bad for the USA, (or any country) and solutions on small business savings
According to the US Public Interest Research Group Education Fund, at least 362 major corporations in the United States maintained tax sheltered subsidiaries in foreign countries. These tax havens are estimated to hold approximately $2 Trillion (US) of untaxed profits which were earned in the United States. Major corporations who take advantage of this opportunity include: Apple, American Express, Nike, Bank of America and Pfizer, among many others.
In June 2014, President Obama denounced these tax loopholes, called tax inversions as unpatriotic. In his weekly radio address, President Obama said that Americans dont get to pick which rules they follow, and neither should companies. In deference to this viewpoint, 3,000 Americans working and living abroad have renounced their citizenship, which is approximately three times the amount from the previous year. Apparently the President did not see that report from the IRS.
Small Business Seek Solutions
Many small business owners, whom I have personally interviewed, explaine
d that they wish to reinvest in their businesses and in growth, but usually see a 39% tax-bite against profits. So they look to their tax advisors to wave the magic wand, making taxable profits disappear and become non-taxable, like their corporate big brothers in the first paragraph.
After utilizing every legitimate deduction, such as buying and expensing equipment (called the Section 179 write-off) and setting up 401K pension plans, they often look to advisors for the opportunity to off-shore profits. Those types of deductions are usually out-of-reach to the local small business owner, either because the facts and circumstances do not support the deduction or the cost of the tax structuring is not worth the benefits.
According to a recent report by the Organization for Economic Cooperation and Development (OECD), the nominal corporate tax rate , which combines national, state and city-level taxes, is nearly 40% in the United States, which is the highest across all 34 OECD countries. For reasons like this, even Burger King and Tim Hortons Inc. are merging and planning to source profits to Canada, a country with a nominal corporate tax rate of about 27%.
You may think, we should boycott these companies and stop buying their products. But then reality steps in and you or your children want Nike sneakers or a Whopper, you find yourself back in the situation where some other country is benefitting from your purchase.
My point is that money and investment dollars, earned collectively by profitable companies (big and small alike) are like the ocean or a river. Water does not flow upstream. It seeks the lowest level of challenge and looks for opportunity to flow freely. And the ocean, over time, will slowly wear giant boulders down into a sandy beach, by exerting constant pressure on the rock. The same is true of profitable companies, and no amount of political brow-beating by a president is going to force companies and their owners to work for the chance to pay high corporate taxes. Instead, companies will look for legal (and some will look for illegal) ways to thwart a system burdened by large tax costs.
Solutions for Small Business Savings
There are a number of solutions to this problem.
- One solution is not to further grow big government and burden people and businesses with that cost. Reducing the cost of government by adapting methods and systems that could be employed by small businesses to gain efficiency could help small business. Ideas such as out-sourcing, right-sizing and re-inventing your businesses were critical requirements for companies who survived the market crash in 2009. That is how small businesses became more profitable.
- The second solution is to reduce corporate taxes across the board to be competitive with other developed countries, and to induce the flow of investment capital into the United States. After all, what small business owner would not agree to re-invest profits if the opportunity was there? And even if the owner simply took the excess profits and socked them into a 401K plan for him/herself and employees, those investments would then find their way into the banking system and create corporate investment opportunities for other companies.
So, the next time you hear a political leader chastise companies for not coughing up extra taxes, think about the water analogy and ask yourself, Is that what I would want for my small business?.
About the author
Raymond M Nowicki CPA is managing partner of Nowicki and Company, LLP, a firm with its headquarters in Buffalo, NY with a satellite in Manhattan. Nowicki is a nationally recognized speaker and trainer of CPAs on pension plan auditing, and quality improvement for CPA practices. His firm also audits 401K plans. Ray has helped Nowicki and Company, LLP grow to be one of the top 30 firms in Western New York. In recognition for service to small businesses, New York Governor George Pataki awarded him the Small Business Advocate of the Year Award in 2005. He serves most of the firm clients, especially in a number of specialized areas including estate planning and trusteeship, structuring new business ventures, strategic planning and workouts, and litigation support.Website