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Friday, September 05, 2008

Yes, Taxes Matter

Various politicians and policymakers seem to still think that taxes don’t matter. That is, taxes can be increased or be noncompetitive, and there simply will be no downside in terms of entrepreneurship, investment, business and jobs.

Just look at the current race for the White House. Democratic Party candidate Barack Obama plans to hike personal income tax rates on upper-income earners – including many entrepreneurs – along with higher tax rates on capital gains and dividends. Obama also mocks Republican candidate John McCain’s proposal to reduce the corporate income tax rate from 35 percent to 25 percent.

Somehow, Obama thinks his tax agenda will be beneficial to the economy. From an economist’s perspective, how that might be the case remains a mystery. In reality, the Obama tax plan will raise the costs of working, investing, entrepreneurship, and generally doing business. That’s bad news for the economy.

Just in case one still needs an example of what noncompetitive taxes can do, look at an article in the Business Section of today’s (September 5) New York Times. The piece, written by reporter Julia Werdigier, is titled “British Companies Emigrating Over Taxes.”

The report notes various British firms that are picking up and leaving Great Britain due to high taxes, and tax uncertainty looking ahead.

Consider the following from the piece:

• In an open letter published last week, George Osborne, the opposition Conservative Party’s candidate for chancellor of the Exchequer, asked the government to cut the tax and simplify the tax system to prevent companies from relocating. “With companies leaving Britain, weakening an already ailing British economy,” he said, the government should revisit the tax “to restore our competitiveness and help prevent more companies from deciding to leave the U.K.”

His remarks drew a separate warning from John Cridland, deputy director general of the Confederation of British Industry, which represents about 200,000 British businesses. The “U.K.’s uncompetitive corporate tax system is driving firms overseas,” he said recently, and predicted more might follow.

• Michael Foster, the chief executive of Charter, was already attracted to Ireland because of its 12.5 percent corporate tax rate. But the icing on the cake was that the tax system appeared more stable than in Britain, where the government’s yearlong review of the controversial tax law has heightened uncertainty about how much tax companies will have to pay in the future.

“We are really concerned about the complexity and insecurity of the tax laws,” Mr. Foster said. “We need security to be able to manage our costs as effectively as we can.”

• Shire, the British pharmaceutical group, is already mostly out the door. It is preparing to hold its first annual shareholder meeting outside Britain since the company was set up in 1986 by a team of British entrepreneurs. Members plan to meet in Dublin later this month after Shire moved its tax residence to Ireland in April, saying the tax system there was more attractive for an international company.

By the way, it should be noted that the current U.S. corporate income tax rate is higher than Great Britain’s, and there is considerable tax uncertainty lying ahead.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

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