Americans and business being driven away by taxes and regulations

Commentary by James Shott

It is frequently said and generally true, especially well into the 1900s, that America is a land of immigrants, due to the huge numbers of people that have flocked to the United States since the early 1600s when the Pilgrims began the process, crossing the ocean in a long and perilous journey seeking religious freedom. A major wave of immigrants arrived here during the colonial era, during which the United States of America was born, and another wave occurred from 1880 to 1920, as thousands arrived seeking greater economic opportunity.

While these periods saw immigrants voluntarily traveling to America, thousands of African slaves reached our shores, brought here against their will from the 17^th century well into the 19^th century.

Four hundred years after the Pilgrims sought freedom of religion, America is still a favored destination for people from many other nations, and many or most of them come from highly troubled circumstances in their home countries and seek a better life, and as we have seen more recently, many sneak across the borders, and some come here to cause trouble and pain.

Curiously today, we also find thousands of Americans voluntarily giving up their U.S. citizenship for that of other countries. This is a trend that has seen surprising growth over the last several years.

Looking back to 1998, 398 Americans gave up their citizenship, and through 2009 the number of American expats ranged from a low of 231 in 2008 to a high of 762 in 2005, which was the end of a slow but steady seven-year increase in expatriate activity, according to data from the U.S. Treasury Department. After that, the numbers bounced around below the 2005 high, but then in 2010 that number nearly doubled, with 1,534 Americans giving up citizenship. This was the start of a period of increasing numbers of expatriates for every year except one, until it peaked last year at 5,411.

Interestingly, more than one-third of those expats in 2016 took this step in the last quarter of the year when the presidential campaign ended and the election was held. This raises the question of whether so many did so in the last three months of the year because they feared Hillary Clinton would win the election, or whether they decided to split after Donald Trump defeated her to become president?

During the run-up to the election a long list of recognizable names threatened to leave the country if Trump won, including one Associate Justice of the Supreme Court, Ruth Bader Ginsberg. It is worth noting that Ginsberg and many, or perhaps all, of the others threatening to leave are still here.

As these personalities were advertising what turned out to be their idle threats, countries like Canada and New Zealand advertised themselves as desirable destinations for Americans ready to abandon ship. As it turns out, New Zealand is the third most popular destination for American expatriates after Malta and Costa Rica, and followed by Mexico.

Why are people who are citizens of perhaps the most sought-after destination for people leaving other countries willing to give up U.S. citizenship to live somewhere else?

There are several reasons, such as that some of them fell in love with the culture and history of another country while on a trip abroad, and decided to move there. Or perhaps some may be immigrants who came here, became citizens, and want to return to their native land.

But another reason explains expatriation: The escalation of offshore penalties over the last 20 years is likely contributing to the increased incidence of expatriation, in the judgment of the tax attorneys who track expatriate data on their International Tax Blog. And US News adds that “The U.S. is one of a very small number of countries that tax based on nationality, not residency, leaving Americans living abroad to face double taxation.”

The U.S. tax code once again rears its ugly head. Its irrational design not only encourages businesses to move to other countries, but encourages individuals with earnings in other countries to abandon their citizenship, as well. However, President Donald Trump has pledged to overhaul the tax code, reducing tax rates on businesses and individuals, among other changes, and that may make a difference for these people.

Inside the tunnel where the Left lives, peering out on the world with their narrow view of things, everyone that makes a lot of money and every large company is an evil thing that threatens survival, so tax breaks that help the wealthy and the rich corporations are a bad thing.

But moving past the liberals’ tunnel vision, removing tax provisions and regulations that punish businesses and creating an environment that invites businesses, will encourage those that left to return and will help domestic businesses to expand and produce the jobs the country so badly needs.

Lowering personal tax rates and raising the standard deduction will leave more hard-earned income in the hands of regular people, who will then spend and/or invest it, both of which help the economy grow. And doing away with taxing foreign income will remove a factor encouraging people and their money to seek greener pastures elsewhere.

Cross-posted from Observations

Does stopping corporate inversions require a stick, or a carrot?

Commentary by James Shott

 

The Obama administration and Democrats in Congress have recently focused on corporate “inversion” as something needing quick attention. In an inversion, a US company starts or buys into another company in a country with a lower corporate tax rate and then calls the new country home, enabling it to avoid some taxes in the US. Although US companies still pay the same rates on US income, the lower rates apply to income earned abroad.

The Congressional Research Service reports that there have been 47 inversions in the last decade, and Business Week online identified 14 since 2011. The administration brought the issue to the fore with a letter from Treasury Secretary Jack Lew saying that inversions ‘’hollow out the U.S. corporate income tax base.”

The issue has both practical and political importance, highlighting the lower amount of corporate taxes collected, and also providing politicians who may be or become candidates for office a populist issue to exploit, like Sen. Elizabeth Warren, D-Mass., considered a potential presidential candidate.

Leaders of both political parties on the Senate Finance Committee – chairman Ron Wyden, D-Ore., and Sen. Orrin Hatch, R-Utah – agree that the tax code needs major reform, however, the two parties have different approaches on exactly how to accomplish that goal.

Peter Merrill, a director at PricewaterhouseCoopers, testified before the Finance Committee and discussed how US corporate taxation rules compare to those of other countries. He named two areas of the US tax system that “fall far outside international norms: the high corporate rate, and the worldwide system of taxation,” both of which he said make it more difficult for US companies to compete in global markets. Citing increasing competition from other nations, he said in the last 15 years the number of US companies on the Forbes Global Top 500 list has dropped by a third, from 200 to 135, and noted that the US corporate tax system contributes to this decrease.

The US corporate tax rate is the highest among major economies, Dr. Merrill said, more than 14 points above the average for the other Organization for Economic Co-operation and Development countries, and nearly 10 points higher than the average for the other G7 countries. And he noted that while other countries have substantially lowered their tax rates since 1986, the US raised its rate to 35 percent in 1993.

President Barack Obama wants Congress to enact corrective legislation that is retroactive to May, arguing that the proposal will stop companies from rushing into deals to avoid lower taxes. And he accuses these corporations of being economically unpatriotic.

Reuters reported that Mr. Obama said in remarks at Los Angeles Technical College: "Even as corporate profits are higher than ever, there’s a small but growing group of big corporations that are fleeing the country to get out of paying taxes.” And he added, "They’re technically renouncing their U.S. citizenship, they’re declaring their base someplace else even though most of their operations are here. You know some people are calling these companies 'corporate deserters.'”

Other prominent Democrats echoed that sentiment. Rep. Chris Van Hollen, D-Md., quoted in The Wall Street Journal, characterized these companies as "deserting the U.S. in order to dodge their obligations to the country and American taxpayers."

Senate Finance chairman Wyden wants to make it harder for U.S. companies to move their headquarters abroad, and commented, "… corporations must understand that they won't profit from abandoning the US." Secretary Lew joined that view, calling for a "new sense of economic patriotism."

Attacking companies as “unpatriotic” because the US tax system is punitive and encourages them to move overseas to lower costs is both hypocritical and dumb. They are legally operating within the complex and confounding framework government provides for them, and are trying to maintain profitability in an increasingly competitive global market.

Democrats want action taken now to limit inversions, but there are sound arguments that this will make things worse. Putting duct tape on the tax code instead of rewriting it and making it comprehensible and sensible is why things are such a mess. Comprehensive tax reform is the best solution.

It’s not for nothing that the Democrat Party has been tagged “the tax and spend party.” They go happily along championing high taxes to fund politically popular programs without any apparent clue that their policies frequently do more harm than good.

“Comprehensive tax reform would reduce deductions and lower tax rates for everyone," said Michael Steel, spokesman for House Speaker John Boehner, R-Ohio.

The way to encourage businesses to stay in the US and expand, or relocate to the US is to make it desirable for them to do so, and have a tax code that says “we want you here.” That means slashing tax rates to competitive world levels, stop taxing foreign income and eliminating some deductions.

Businesses provide goods and services that people want and need. They also provide jobs that enable people to afford things they want and need, and they pay taxes that support governments at all levels.

Business is the goose that lays the golden egg. Democrats need to understand that instead of beating the goose, they need to nourish it.

Cross-posted from Observations 

What’s more important, a minimum wage hike, or fixing the economy?

Commentary by James Shott

An analysis by the Congressional Budget Office (CBO), a nonpartisan arm of Congress, shows that both sides in the debate over whether to raise the federal minimum wage from $7.25 an hour to $9.00, $10.10, or even $15 an hour have relevant points to make.

Advocates believe that the wage hike would lift nearly a million people out of poverty, increase productivity, reduce turnover and give those receiving the raise more money to spend, and that would translate to businesses recording higher sales, and an overall improvement in economic activity.

A $10.10 minimum wage, the CBO says, means 900,000 fewer people in poverty, and job losses will comprise only 0.3 percent of jobs affected by the wage hike.

The hike would boost wages for most low-wage workers, as about 16.5 million workers who make less than $10.10 an hour would see higher earnings once the higher minimum is fully implemented, which Democrats in the House and Senate have been calling for. And then, those making slightly more than the new minimum wage may feel they need a raise too, and employers would be virtually compelled to give them one in what the CBO calls a "ripple effect."

Let’s review: Advocates believe we should raise the minimum wage because the more low-wage workers make, the more they'll have to spend, and the better that will be for businesses selling products and services. People move out of poverty and spend more and consequently businesses prosper from greater sales. Our economic problems magically dissolve. Does it get any better than this?

Unfortunately for the advocates, good decision-making requires looking at all the factors, not just the ones that support a particular position.

Opponents point out that higher wages lead to higher prices, and lost jobs, and wages need to be related to the work involved and its value to the company, not artificially determined by Washington bureaucrats.

An essential factor that needs to be considered is what happens inside businesses when their labor costs increase? They must make adjustments in other expense areas, increase productivity or increase prices to maintain profitability and stay in business.

The other side of the CBO job loss estimate is that while only 0.3 percent of minimum wage workers will lose their jobs with the proposed wage hike to $10.10 an hour, and that sounds like a small effect, the number of actual people comprising that 0.3 percent is 500,000. So 900,000 will be lifted out of poverty, but more than half that number will lose their jobs. Thus, the picture painted by the CBO is somewhat less rosy than the advocates believe.

A study for the National Center for Policy Analysis by Richard B. McKenzie, explains that there are other forms of compensation to consider, nonmonetary benefits that may be as much as 30 percent over and above wages of all workers, a substantial percentage of the total compensation employees receive. Faced with higher labor costs, employers may make adjustments to these nonmonetary benefits to balance things. These benefits include relaxed work demands, workplace atmosphere, schedule flexibility, job security, and hours of work. Employers may also have to cut jobs, curb summer hiring, opt not to replace workers who leave; lower their profitability and/or raise prices to customers.

Despite what you may hear, read or think, most employers want the best employees they can get; the most productive, best trained, and most devoted workers they can find. They are willing to pay them to keep competitors from luring them away, however, there are financial limits to what businesses can pay without making other changes.

They may reduce jobs or cut worker hours, increase demands on existing employees and impose a stricter work atmosphere to increase productivity, replace workers with machines, or look for cheaper materials from overseas where labor costs are lower, affecting American suppliers.

The US economy is suffering, as evidenced by, among other indicators, the labor force participation rate, which shows that only 63.2 percent of Americans age 16 or older are participating in the labor force, the rate having fallen over the last several years to 1977 levels.

We need an atmosphere that encourages businesses to create jobs, not artificially raise the wages of the least skilled, least experienced people in the labor force, particularly when doing so will cost 500,000 jobs, and further depress the participation rate.

Among the many stunning failures of the Obama administration is its proclivity to pander to small constituencies to gain political support, all the while ignoring the broader problems facing the nation.

When an administration chooses to implement narrowly focused policies conceived for political gain, you get what the Obama administration has produced: an almost non-existent recovery from the recent recession, millions of Americans who can’t find a job, millions more who are too discouraged to keep looking and have dropped out of the labor force, and still millions more Americans on food stamps and other forms of welfare.

The Obama administration and Congressional Democrats have shown conclusively that the serious problems of the nation are far less important to them than winning the next election.

Cross-posted from Observations

Reidin’, Rightin’, and ‘Rithmetic

Commentary by James Shott

Senate Majority Leader Harry Reid (D-NV) gave a speech on the Senate floor last week where he said this about the disastrous implementation of the Affordable Care Act: "Despite all that good news, there’s plenty of horror stories being told. All of them are untrue."

This abjectly stupid remark ignores the problems millions of the people Harry Reid serves as Majority Leader have encountered at the hands of this Democrat-created nightmare, some of them with life-threatening consequences.

Some say he really was alluding to claims made in ads paid for by the Koch brothers, about which he specifically commented shortly after that major gaffe, claiming the Kochs are trying to “buy America” through Americans for Prosperity, a 501(c)(4) started by David Koch and Richard Fink.

He believes that the Koch brothers are the single greatest threat to liberty, “spending hundreds of millions of dollars telling Americans that Obamacare is bad for them.”

However, Koch Industries donated less than $3 million in the 2012 election cycle, earning 77th place on the Top Donor List of OpenSecrets.org. Americans for Prosperity is reported to have spent $40 million, but does not appear on the Top Donor List.

Top Donor organizations ahead of Koch Industries include: the National Education Association, #5 at $14.7 million; the United Auto Workers, #8 at $13.3 million; the American Federation of State/County/Municipal Employees, #10 at $11.4 million; the AFL-CIO, #14 at $9 million; and the Service Employees International Union, #18 at $6.6 million. Ten more labor unions beat Koch Industries in spending. Organized labor is “buying America” to a much larger extent than Koch Industries and Americans for Prosperity combined.

Harry Reid misleads us on political spending, and lied to us during the 2012 campaign about Mitt Romney having paid no taxes for 10 years. He epitomizes the sordid aspects of partisan politics, and simply cannot be believed.

*****

On May 5, 2010 Latino students at Live Oak High School in Morgan Hill, California turned out to celebrate their Mexican heritage on Cinco de Mayo.

When some American students showed up at school wearing American-flag shirts, school officials ordered the American students to turn their shirts inside-out or go home, to avoid a repeat of the unrest that had occurred during past observances of this date.

The 9th U.S. Circuit Court of Appeals last week upheld the action of school officials.

So, when students from Mexico attending American schools want to flaunt their Mexican-ness in the face of the American students by waving Mexican flags on a Mexican holiday, and some American students decide to show their patriotism by wearing American flag shirts, the school authorities believe that the American students are wrong, and the Mexican students are right, and a federal court agrees with them.

Disgusting!

Whacky, radical rulings like this one have earned the Court the nickname, “The 9th Circus.” The Mexican students should not be allowed to stir up sentiments by waving a foreign flag around to celebrate Cinco de Mayo. If they prefer Mexico to the U.S., perhaps they should just go back.


*****

Congressman Dave Camp (R-Mich.), Chair of the House Ways and Means Committee, has produced a tax reform plan based upon three years of hearings and discussions with bi-partisan groups.

Hardly anyone who pays taxes will argue against reforming this overly complex system. The last round was in 1986, and at that time the tax code was more than 26,000 pages. Thirty years later, the tax system is a incoherent mess that negatively affects prosperity, job creation and investment, and is regulated by a tax code that has nearly tripled in size to roughly 75,000 pages.

Each year the tax code gets further complicated with more special interest loopholes, credits, and carve-outs.

Rep. Camp would make several changes to the code, like eliminating loopholes, reducing tax rates, whittling down the current seven tax brackets to three, and lowering the corporate tax rate from 35 percent, the highest in the industrialized world, to 25 percent.

In those 75,000 pages are goodies for numerous interests, and they will scream bloody murder if their special goody is on the chopping block. The Heritage Foundation’s Stephen Moore notes that we can “expect the White House to lambast this plan as a ‘tax cut for the rich,’ but the evidence from history shows that lower tax rates are usually associated with higher overall tax receipts and more taxes paid by the rich. In the 1980s after two rounds of Reagan tax rate reductions, income tax receipts doubled, and the share of taxes paid by the top 1 percent, 5 percent, and 10 percent rose as the economy expanded.”

This plan simplifies the tax code by allowing millions of tax filers a larger standard deduction, meaning they don’t need to itemize and can use the EZ form. For those who do itemize, the mortgage and charity deductions remain.

While the Camp plan isn’t perfect, and produced quite a few knee-jerk criticisms, it has many advantages, and is certainly a good start toward finally transforming the current tax code into something that is sensible and easy to understand. Let’s hope Congress has the courage to follow through.

Cross-posted from Observations