An objection that people frequently have regarding multinational corporations is their “avoidance” of taxes associated with money they make over seas. Consider corporations like GE that have significant portions of their company in foreign countries. GE makes about two thirds of their revenues from those foreign operations, and as such never pay US corporate tax on those profits, despite that they are a US-based company. Quite frankly, the idea that they should pay should be abandoned by anyone who takes a rational view of the situation. In fact, attempting to gather those taxes is one of the very concepts that is helping to stagnate the US economy, and is playing a key part in keeping lower standards of living in the US. We shoot ourselves in the foot because of some skewed vision of “fairness.”
In fact, these corporations are acting exactly as we’ve incentivised them to (with the greatest of intentions, of course). Let’s examine this through the lens of the common arguments people takes, as well as evaluating the rational response to the situation.
The Ethical Component:
Many people would label corporations who don’t build their new plants in the US as “evil.” These people would argue that not having these plants in the US deprives people of jobs and causes lower standards of living. This is only partially correct. Going this route deprives people they can see of a higher standard of living. Jobs are being produced on the other side of the planet for people you don’t know. Even if these jobs are at a much lower wage, the impact they have on these people is much more significant than if the jobs were in the US. A real job with a multinational corporation can be the difference between absolute poverty and basic sustenance for these people. Just because you don’t know them doesn’t mean they don’t have the right to a basic living.
The Nationalistic Component:
Of course, there are many who would argue that, even though people elsewhere might benefit from the jobs, the obligation of a company is to take care of those at home first. Patriotism, nationalism, etc. The problems with this are twofold. First, a multinational corporation may be based in the US, but it is not strictly a US company. Ownership is public and often significantly foreign. People all over the world own shares in these companies, people all over the world have jobs with these companies, and yet we believe a mailing address should determine where they make their next investment. Secondly, if a company does not make the appropriate financial decisions someone else will. If they chose to invest further in the US against their own financial incentives, it could result in the collapse of the company when they can’t be competitive. In this case, all the US-based jobs that were created are lost along with the ones that already existed for that company.
The Rational Component:
If we have removed the ethical concern and the nationalistic concern, the decision must come down to what is most profitable for the company. If we in the US want the companies to invest further in the US, we must make it logical for them to do so. In efforts to “get ours” we certainly are not setting up the appropriate situation right now.
A few things to think about right off: wages are not as disparate as they once were (i.e. people in China no longer earn dirt cheap wages), and transportation costs have increased with oil (i.e. high oil prices means it costs a lot of money to make larger items overseas and then ship them to the US to sell). There really is a lot less of an advantage in making products for the US overseas now. In fact, many companies are considering moving operations back to the US. So what’s keeping production overseas?
A huge part of the equation continues to be taxes. These corporations have made billions over the years producing in other countries and selling to other countries. Those profits are realized overseas, and so they are taxed by the overseas governments at their rates. The money remains over there. Our government can’t touch that money… unless they move it back to the US. If the companies wanted to, say, build a plant in the US the first thing that would happen is that the government would take approximately 35% of the money that they take over. Building a $1 billion plant would cost $1.35 billion. Building it overseas would still just cost the $1bil, so the company would be choosing to throw away $350 million. Companies don’t do that.
If the US didn’t tax companies for repatriation, and a plant was built, the government would be able to tax all future earnings from that plant as well as all employee earnings for that plant. The government’s cut as it stands if the plant is built elsewhere is zero. Seems to be an obvious choice. From a citizen’s perspective, the choice is between having many jobs added to the economy versus zero added. Again, it seems like a no-brainer. Significant revenues vs. none, new jobs vs. none.
Where does the issue come in? People in the government and as citizens feel entitled to a cut of any money that a multinational corporation based in the US earns, no matter where they earn it. It just seems “fair” to them. It’s a case of cutting our noses off to spite our faces. It’s time that people got over what they feel entitled to in the case of fairness and looked at what is rational to inspire prosperity. If we can, we all stand to gain.