Overtaxed businesses flee the U.S.

To remain competitive against punitive U.S. tax rates, companies have increasingly engaged in inversion where the U.S. company merges with a foreign company and moves their domicile to a foreign location, enabling the company to take advantage of its lower tax rates. The latest example is Pfizer’s $160 billion merger with Ireland’s Allergan, which will be the largest inversion ever and create the largest pharmaceutical company in the world.

For decades U.S. companies have reinvested trillions of dollars of foreign profits that have been taxed locally in additional facilities outside the country rather than bring the funds back to U.S. where they will be taxed again.

U.S. economic growth has declined steadily from 4 percent per year in the1960s to 2 percent over the last decade in an environment characterized by intense lower-cost foreign competition and outsourcing. Current labor force participation rates have declined to the Rust Belt levels of the1970s, and inflation adjusted wages have been flat since then. U.S. companies are using domestically generated profits at record rates to purchase their own shares, signifying that they see a shrinking economy that cannot support expanded capacity.

Whether it is the coal industry, big oil, big pharma or Wall Street, the government seems determined to undercut the major source of jobs in the U.S. — industrial development — through regulation and taxation. All other nations in the world foster strong government-company partnerships to ensure that they take advantage of foreign markets via trading and investment opportunities. As prime examples in the1970s the economic miracles of Japan, Taiwan and Korea with low-cost labor practicing mercantilism — maximizing exports to and minimizing imports from the U.S. — were built on the backs of previously high-paid but now unemployed U.S. workers. China and India have joined the mercantilists and profited from our naive views on trade. Beginning with the Rust Belt from the East Coast through the Midwest, the U.S. industrial base has been hollowed out as the nation has outsourced manufacturing, information technology and service jobs in return for low-cost imported goods and services.

In separate 2014 studies, the World Bank and International Monetary Fund estimated that China’s GDP is now equal to the U.S. With a current modest 7 percent annual growth rate China’s GDP will double by 2025; at 2 percent growth the U.S. economy will not double until 2050. All nations are island economies whether surrounded by water or other nations. A country’s economic strength is tied entirely to its Current Account Balance (CAB) or cash flow. Economically vibrant nations have large net cash inflows and failing nations show deficits. On an annual basis the U.S. continually runs a CAB deficit of about $400 billion, while China maintains a positive $300 billion per year CAB. Germany is the dominant country in the European Union with a positive CAB of $300 billion per year. In East Asia Korea, Taiwan, Japan and Singapore have a combined CAB of $300 billion per year.

Andy Grove, co-founder of INTEL, and Ross Perot, founder of EDS, have railed against our flawed free-trade policies. In the 1940s, Wolfgang Stolper and Paul Samuelson developed the treatise that became the basis for our free-trade policies. Five decades later Samuelson, considered the world’s greatest living economist at the time (he died in 2009), stunned his peers by admitting that he was wrong and that as a whole the U.S. is relatively worse off because of free trade. He observed that Americans are still working but free trade resulted in jobs that pay less and are shorn of benefits.

The U.S. is losing its position in the world by transferring $400 billion of national wealth annually to other nations following an idealistic trade policy coupled to punitive taxation that the rest of the world does not practice. Ten years ago Warren Buffett, the United States’ most successful business entrepreneur, concluded that our nation is being destroyed by free trade. He proposed a method to eliminate the growing U.S. foreign exchange deficit. Democratic Sens. Byron Dorgan of North Dakota and Russell Feingold of Wisconsin converted Mr. Buffett’s proposal to a bill named the Balanced Trade Restoration Act. It was not enacted.

It is in the nation’s extreme interest to lower the taxes on U.S. business to levels that are below other nations’ and eliminate the reason for inversions, and stop all taxation on foreign-generated profits to allow a free flow of funds back to the U.S. We need to move away from trade agreements such as NAFTA — which is disastrous — and TPP and implement the Buffett proposal. Rational taxation policies and the Balanced Trade Act will eliminate the CAB deficit, increase employment and reduce the federal budget shortfall. Alternatively we will continue our long unpleasant decline as China continually widens the economic gap with the U.S. as the world’s dominant economic power.