Lower Tax Rates Is A Win-Win-Win Solution

by

Ed Dedelow

Businesses in Ireland pay a low corporate tax rate of 12% versus probable US taxes of 40% to 50% including federal, state and local taxes. This does not mean that companies making products in Ireland earn more money. In our competitive market place, there are millions of products that compete directly and indirectly and price is unquestionably king. Even a 1% edge can result in millions extra in sales and profits.

The edge can vary because every business type has a profit margin that is unique to its risks and investments characteristics. For example, a retailer such as Wal-Mart has a quick turnover of goods and a relatively small investment per sale and, therefore, a low after-tax profit margin. A pharmaceutical company typically invests large sums of money, endures long periods of research and approvals, has enormous costs and a high risk of failure. They, therefore, require a much higher after-tax margin to attract capital.

A company with characteristics that mandate a 10% after-tax profit to attract capital and that pays a 50% tax on net profits must earn a huge 20% pre-tax profit. In a country where taxes are only 12%, the same company needs only an 11.5% profit margin. The price of goods made in such a country could be as much as 8.5% cheaper. Bidding in business often comes down to fractions of a percent when billions are involved. In this circumstance, it is obvious which country would get the sale. Of course, instead of a lower prices, a business could or increase its labor rates, or earn higher profits attracting more investments. Or, all of the above could occur in a win - win situation; lower prices for the consumer, higher profits resulting in further investment, higher labor value and even better worker benefits like health care.

If businesses also incur exorbitant legal costs, high local taxation and excessive regulation, manufacturing could just be too costly. This is demonstrated by US import figures. In 2008, US imports totaled 2.54 trillion dollars. If we include the value added in the US putting these goods into other products, shipping and handling, storage, stocking, retailing costs and profits, we could easily infer that the retail shelf value of these products is twice the import cost or 5.1 trillion dollars. Consumer purchases for 2008 were 10.6 trillion dollars, which translates into a possible 48% dependency on foreign goods. Keep in mind, that when import prices increase, the US investor requires additional capital to cover the additional costs and, as with any additional cost, will need to earn extra profits.

There is good news, however. The US has the potential to reduce our imports by cutting business taxes, taking a pragmatic approach toward environmental issues and other regulation, and pruning litigiousness. Reducing costs reduces investment, thus cutting back on risk, profits and profit margins. The result is to cast a wealth stream into the market place where consumers realize lower prices for goods and workers realize improved wages. This is how to distribute the wealth. Politicians, bureaucrats and our misdirected philosophy professors (many of whom are economists) are much too interested in punishing businesses and "Dividing the Wealth." They have no grasp of the role that improved productivity has in enhancing wealth among the masses.

There is bad news too. While the world has been highly dependent on the consumer market in the United States, markets in the rest of the world, like China, are growing. Businesses in countries that have depended on US sales and have been impacted by our recession are likely to look for other markets. If they are wise, they will reduce the peril created by US dependency and the hazard of a declining dollar.

Numbers count. If you examine the numbers from the proper perspective, any problem can be solved. Most people are desperate to purchase goods that fit their budget. However, wages are under attack because of increasing government costs, and individual earnings are subjected to a rising assortment of taxes and levies both obvious and purposely hidden. Long term, unless the US cuts costs, increases manufacturing and eliminates its trade deficit, the US market place will become less desirable and the dollar will shrink in value. The $2.5 trillion price for imported goods could increase significantly as labor values in less developed countries come into parity. The $5 trillion retail price tag could be driven beyond affordability and result in a greatly lowered US standard of living.