Competitiveness Among Nations: Taxes (Part One)

tax-burdenIn recent months there has been a worrisome trend among a certain segment of the US’ political spectrum. Said political segment is against the redomiciliation (tax diversion) of US corporations to countries with a substantially lower tax burden.

If successful, this repudiation would be an escalation of a shameful movement in that direction initiated around ten years ago, when Section 7874 of the tax code was enacted, imposing significant limitations to the free movement referred. Before that, there were no regulations and limitations to tax diversion movements by US corporations.

In principle, such a relocation by US corporations is a zero-sum game and hence, it is against the economic interest of the US Treasury, since it tends to lower its tax base.

The major considerations made by the US Congress in support of that initiative are mainly two:

  • The harm made to the US’ tax base.
  • Corporations engaged in such redomiciliations are behaving in an unpatriotic manner, so that trend has to be stopped in its tracks or, at the very least become more limited and regulated.

To avoid making a confusing reading of the subject a clarification is in order. Nobody will question the legal power any Congress in the world has to enact laws and regulations: that’s the essence of their existence.

My focus is not from the legal perspective. It goes well beyond legal aspects. It goes to the core of things in socioeconomic issues: the common good. Hence, my objective is a pragmatic and moral analysis about what should be done and why.

Assuming the initiative were enacted into law, if no further analysis were made, that could be the end of it.

However, a further analysis of the issue very rapidly unfolds a radically different conclusion to the group’s redomiciliation repudiation.

Aiming to put this issue under the proper perspective and arrive to a solid, self-sustainable solution, it is indispensable to analyze and answer the following seven questions:

  1. Is competition among nations valid?
  2. Is competition among corporations valid?
  3. Is global competition (as a concept) essentially OK?
  4. Are nations legitimately entitled to differentiate themselves, among other things, with different tax structures?
  5. Is it logically sound and morally valid that governments try to shield themselves from the effects of society’s free will, from free markets, from the common good?
  6. What is the (philosophical) limit of the state in tax matters, particularly in the light of the global economy? What should be the limit if current practices are not self-sustainable?
  7. What is right, what isn’t, and why?
  8. Where to draw the line between right and wrong?
  9. How to deal with this situation looking for optimal results?

The answer to the first four questions is a resounding yes, since those questions deal with the very essence of  free markets and that of the global economy; the US has essentially been championing (very successfully, in fact) this political philosophy during most of its existence.

Questions 5 to 9 are a bit more complex, yet relatively easy to answer properly. To that end, let’s keep in mind three fundamental guiding concepts, already mentioned, that should be observed at all times as a sine qua non condition for answering questions 5 to 7:

  • The common good
  • The search for an answer logically sound and,
  • Morally right

Reiterating, the core issue is what to do about corporations moving to countries with a substantially lower overall tax burden? How to deal with them and why?

If the three previous conditions are met, the solution is inescapable. A correct differentiation between cause and effect provides the solution. Balanced and effective solutions to any situation should always strive to deal with the causes, not only with the symptoms.

As it can be seen, the group of politicians behind repudiating the redomiciliation are trying to deal with the symptoms, and not with the causes. Hence, they are wrong from inception. Moreover, their strategy does not place the common good at the top. Hence, this group of politicians isn’t providing a solution that is logically sound (for obvious reasons, already expounded), nor morally right.

Contrary to the strategy being pursued by the policy makers repudiating the tax diversion process, the root of the solution in this issue is not to try avoid competition (among nations, in this case) but to meet it head on.

Granted, facing challenges head on requires a great stature, greatly lacking in most congresses throughout the world. That’s why congresses are (most of the time), so adept to “easy” ways out, and “quick fixes”. I emphasize the words “easy” and “fixes” because the type of solutions congresses usually develop when confronted with tough situations are anything but “easy” and, regrettably, most of the time they do not “fix” anything.

Is shooting-the-messenger a morally valid and effective strategy? Absolutely not. We all know that.

What must be wholeheartedly repudiated are those ridiculous attempts of avoiding tough decision making by congresses, in this case the US’.

That pernicious way of thinking —and acting—, avoiding tough decision making,  is extremely costly to society.

When compared to nations like Ireland, Singapore, Switzerland, Canada, and others, the US’ tax structure is not competitive. Hence,the real solution lies in reengineering the federal government, which would inevitably conduct to belt-tightening, and drastic reduction of government expenditures, a truly tough ordeal. That is why the political group trying to repudiate the redomiciliation is attempting to go after a smoke screen, instead of doing what is right, however difficult and challenging it might be.

From many angles, it is inconceivable to see that 238 years after the publication of The Wealth of Nations, Adam Smith’s superb book about free markets, mankind is still struggling to grasp the basics of Smith’s findings (read more here). Naturally, Smith did not invent the way the economy works, he simply conceptualized it in a superb manner. His findings were so powerful (valid and true) that they have stood the test of time unscathed.

As the issue under focus clearly exemplifies it, there is still a lot of collective learning to be done, given some unsettling trends and attitudes, like the one we’re dealing with. The lack of understanding of capitalism, the common good, and of how things really work and why is quite evident.

Part Two continued here.

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About Martin Marmolejo

Global Investment Manager | Founder & Managing Director at MMA Global Investment Management | Proud husband and father | Follow me @globalmarmolejo.

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