January 19, 2018 06:05 pm CST
Cut These Taxes Now
By Geoffrey Pike, Wealth Daily

U.S. companies — particularly technology companies — are keeping big profits offshore. In total, it is estimated that $2.1 trillion is sitting outside the country.

Eight technology companies alone — including Apple, Microsoft, and Google — account for more than a fifth of this amount. These companies are keeping their profits sitting overseas in lower-tax countries to avoid paying U.S. taxes.

Of course, U.S. politicians want to get their hands on this money. They think a good piece of it belongs to them so they can spend more and buy more votes. So until the laws change, for better or for worse, it makes more sense for these companies to declare a portion of their profits overseas.

This money needs to be encouraged to come back to America and invested in new equipment, new jobs, and higher wages. This cash could provide a serious boost to the U.S. economy, potentially raising GDP growth from 2% to 3%.

Cisco CEO John Chambers recently told Bloomberg:

I’d prefer to have the vast majority of my employees here... our tax policy is causing me to make decisions that I don’t think is in the interest of our country, or even in our shareholders, long term.

But corporations have zero inventive to bring that cash home when it will be taxed at an outrageous 35%.

U.S. Corporate Taxes: A Fiscal Nightmare

Most Americans don’t realize that U.S. corporate taxes are among the highest in the world.

At the federal level, the rate goes as high as 35% — and this doesn’t even include additional corporate taxes by state and local governments.

In comparison to all other developed economies, the U.S. actually has the highest nominal corporate tax rate. Ladies and gentlemen, the land of the free.

Unfortunately, Obama has little interest in changing the corporate tax rates for the better or to grant some relief to companies wishing to repatriate some of their profits from overseas. To be sure, it isn’t just the fault of Obama and the Democrats, as the Republicans failed to provide any significant tax relief for corporations in the George W. Bush era.

While Federal Reserve policy affects the economy in dramatic ways — particularly in its manipulation of interest rates and the money supply — we have to consider the great effect of fiscal policy, too.

In terms of fiscal policy, everything matters and has an effect. Government spending, government debt, government regulations, and all government taxes shape the economy and generally distort pricing and misallocate resources.

Corporate taxes are just one piece of this big puzzle, but they should actually be one of the easier pieces to deal with. The U.S. government could easily lower corporate tax rates, and the politicians may not even see a decline in tax collections, since companies would likely make more money and repatriate much of their holdings from abroad.

You know there is a problem when most of Western Europe actually has lower tax rates than the United States in this one area.

Hidden Taxes

Unfortunately, many Americans tend not to complain about things that don’t directly affect them — or more accurately, they don’t complain about things they don’t think directly affect them.

This happens with government debt and inflation. If Americans don’t see the money coming directly out of their pockets, they tend not to think about it, and they definitely tend not to fight it.

Debt and inflation affects everyone who uses U.S. dollars. The money in your pocket slowly loses its purchasing power over time. It is very subtle, like an indirect tax, but politicians and central bankers like it because they get away with it easier.

There are also many hidden taxes, including excise taxes and fees that people don’t realize they are paying.

Consumers grasp the fact that they are paying sales taxes. They can pick out a $10 item in the store and end up paying about $10.70 when they go to the cashier to pay.

Gas taxes are subtler, as they are built into the price. Most people understand they are paying something in taxes when they fill up their tank, but they don’t really know how much.

Of course, there are thousands of taxes and hidden fees that Americans pay every day. Some of them are small, but they add up quickly.

Out of all taxes, clearly personal income taxes are the worst. They are the most confiscatory of the hidden taxes. 

Think of an average middle-class guy. He pays sales taxes when he buys things. He pays property taxes on his house. He pays income taxes and payroll taxes that get taken out of his paycheck. He knows in these situations that he is coughing up money to the government.

If you ask the average middle-class guy if we should raise taxes, he is likely to oppose it if it involves property taxes, sales taxes, payroll taxes, or income taxes, especially if he thinks he will pay more than any perceived extra benefits from the government.

But if you ask people about raising corporate taxes, especially on big companies, there is going to be less resistance. That’s not to say everyone will favor the idea, but there will be less hard-core opposition. Some will favor raising corporate taxes simply because they think it doesn’t affect them, figuring a big company with big corporate profits can afford it.

But the thing is, every American pays for corporate taxes in some way. All corporations are owned by individuals, employ individuals, and sell products to individuals. It just tends to be a large number of individuals in the case of large companies.

When the U.S. government collects tax money from corporations, that money is coming out of someone’s pocket. It could be reducing shareholder value or reducing dividends paid to shareholders. It could mean more expensive products or lower wages for employees.

In many cases, some products may never come to the market in the first place. These are all of the unseen consequences of high corporate tax rates.

Americans, as employees and as consumers, do pay for corporate taxes, even if they aren’t the ones writing the checks directly to the tax collector.

Investing in Low-Tax Jurisdictions

I am still bullish on the United States in the long run. Despite the dominance of Keynesian economics, there is still a great spirit of individualism and entrepreneurism that just doesn’t exist in most other parts of the world.

But in terms of economics, the U.S. is no longer the best place to do business. This is why investors should look at investment opportunities outside of the United States to supplement their portfolios.

The United Arab Emirates is becoming one of the great financial hubs of the world with its atmosphere of low regulations and low taxes. Many mistakenly believe the country is rich mostly because of oil, but it is actually tourism and international finance that accounts for most of the wealth there.

Hong Kong and Singapore repeatedly come out on top in the rankings of countries regarding economic freedom. They are great places to do business, and without the threat of a lot of red tape.

These are just a few of the places to explore when looking at companies to invest in overseas.

While emerging markets are attractive for the potentially big rewards, it is wise to find some good long-term holds in economically free countries that have a great respect for property rights and entrepreneurism. You might even consider an ETF to buy a stock market index in a country of your liking.

The ETF for the United Arab Emirates (NASDAQ: UAE) is relatively new and offers a simple way to gain some exposure to a foreign market without having to pick individual stocks.

Until next time,

Geoffrey Pike for Wealth Daily

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