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Higher Taxes for Business Mean We All Pay

By Geoff Colvin
Tuesday, June 30, 2009

Sometimes what's politically irresistible is economically nonsensical, as we may soon be reminded. The Obama administration, desperate for revenue and spotting an easy target, is proposing three hefty tax increases on business. If the administration gets its way, the result will be bad news for all Americans.

The first instance of dangerously mixing politics with economics was the administration's announcement in May that it wanted to "reform our international tax laws" so that they don't "stack the deck against job creation here on our shores."

In a smooth bit of political rhetoric, the White House linked international corporations to individuals who illegally evade taxes by secretly stashing income overseas. "Today our tax code actually provides a competitive advantage to companies that invest and create jobs overseas compared to those that invest and create those same jobs in the U.S.," or so began the White House's May 4 statement. In the very next sentence, the administration segued to "our tax system is rife with opportunities to evade and avoid taxes through offshore tax havens."

The average citizen had to conclude that most big U.S. companies are tax cheats. Only a dedicated student of accounting would figure out that the term "tax haven" as defined by the Treasury Department means any country with a lower corporate tax rate than America's, which is all countries except Japan.

The reality is that the administration is lashing out against perfectly legal behavior. A U.S. company that makes money in Country X pays Country X's taxes on that money. If the company ever brings the money back to the United States, it must also pay the tax that would be due under America's higher rate. The administration argues that because the United States has almost the world's highest corporate tax rate (and even Japan's is only a fraction of a point higher), current rules create incentives for U.S. companies to operate anywhere but here, at the cost of U.S. jobs. The White House therefore proposes charging all American companies full freight -- the whole difference between their overseas taxes and the U.S. corporate rate -- on all their profits as soon as they're earned, no matter where. This measure, in their minds, would bring jobs home.

If the logic eludes you, you're not alone. The bottom-line effect of the change would be a steep tax hike -- more money vacuumed out of corporate coffers. Would that make U.S. companies competing in a global economy more inclined to hire additional workers in the highly expensive United States? The answer is clear. It's why Microsoft chief executive Steve Ballmer said recently that if the change is enacted, "we're better off taking lots of people and moving them out of the U.S. as opposed to keeping them inside the U.S."

That's Obama's first proposed business tax increase. Another would require companies to account for their inventories on a first-in-first-out (FIFO) basis rather than a last-in-first-out (LIFO) one -- an eye-glazing change that's highly significant. In an era of rising costs, to assume that you're selling your oldest inventory rather than your newest increases reported profits and thus taxes, even though nothing real has changed. If inflation turns worse, as many analysts predict, FIFO would force companies to pay real taxes on phantom profits as the value of goods gets inflated while they sit in inventory.

The third business tax hike would be the new levy on carbon emissions. Regardless of the form it takes -- a cap-and-trade system or a carbon tax -- and despite the good reasons for it, it's still a tax, money out the door for which a company gets nothing.

The problem with sticking it to business in these three major ways is that, ultimately, business doesn't get stuck. Tax-wise, a company is just a bunch of incorporation papers; all taxes are paid by people -- customers, shareholders and employees. And guess who would bear most of the burden of these tax increases? It's the U.S. employees of the companies being taxed.

Research has shown that when business taxes are raised by a dollar, 70 to 92 cents comes out of employees' pay. When workers wake up to that fact, they may decide this is one time they don't want the White House beating up on business.

Geoff Colvin is a senior editor at large for Fortune magazine.

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