One of my TLU students called the other day perplexed over her research project. Zoey was analyzing Texas based companies and was struggling with their effective tax rates. Two in particular got her attention—Dell, the huge Round Rock based computer company and Sysco, the largest marketer and distributer of food, equipment and supplies in the United States, which is based in Houston.
She wanted to know how in 2011 Dell could rack up nearly $3.5 billion in net profits and pay less than 18% average tax on their earnings, while Sysco, with less than $1.2 billion in profits, paid 37% in average taxes.
Admittedly, there are many considerations that go into any corporation’s tax picture. However, Zoey honed in on where the sales and earnings were derived for each company. She quickly recognized that more than half of Dell’s sales come from outside the US, while nearly 100% of Sysco’s sales are in the US.
Zoey then recalled a conversation we had in April. As of April 1, 2012 the United States earned the distinction of having the highest corporate tax rate in the world—quite the cruel April Fool’s joke. She looked at me and said “I suppose this is one of those instances where being number one is not a good thing.” I chuckled and agreed.
I explained that multinational corporations are generally taxed in the location that produced the earnings. With many countries having significantly lower corporate tax rates, it is easy to understand why an effective corporate tax rate for a U.S. based company with worldwide sales might be quite a bit lower.
Zoey then asked a more provocative question, and one that should be discussed during the election: “If many countries only assess a 10% or 15% corporate tax rate and the U.S. assesses a 35% rate, doesn’t that encourage companies to invest and expand in those regions where capital is most efficiently deployed? Doesn’t that drive capital away from the U.S.?”
In my opinion, the obvious answer is yes. And in general, where capital is invested, jobs follow.
Furthermore, unlike the agrarian economy of 100 years ago, we live in a world where capital flows very freely—if not instantaneously. As such, capital will be, and should be, invested where it is most efficiently used.
Additionally, with rare exception, governments do not own companies—shareholders worldwide do. As such, the management of any company has a legal obligation to get the best rate of return they can for all of their shareholders. This requires them to understand the tax laws of any jurisdiction and to allocate corporate resources in a manner that will deliver the best returns. It also means that if governments have punitive policies that corporate leaders must react accordingly.
After discussing this, Zoey questioned whether or not any companies have left Texas. Unfortunately, Halliburton, Cooper Industries, Noble Drilling, Nabors Industries and Weatherford have all left their Texas headquarters behind and relocated outside of the United States—and yet Texas is one of the most tax friendly states within the U.S.
Corporations have left other states behind too. According to U.S News & World Reports, companies left California at a pace of five per week during 2011. That is truly painful.
With unemployment above 8% and climbing, hopefully all of our elected leaders (Republicans and Democrats) will realize, much like Zoey, that it is time for significant and meaningful tax reform that encourages companies to not only stay in the U.S., but to expand too.
President, Sather Financial Group