Taxes, Labor, Income

Mar 13, 2011 by Editor Fred D

It was 1990 and Germany had won the war, just beating Sweden at 54.5% to 53%. (Numbers herein are from OECD and are “Corporate Income Tax Rate” unless otherwise noted.) Where was the United States in this melee, it was 38.7% or at 16^th. This may be sustained but only if things are moving upward.

Germany has cut their rate to 30.2% with the United States increasing to 39.2% leaving Japan at 39.5%, but Japan is planning to cut their rate to 34.5%. That will leave the United States at number 1 at 39.2%. All the major European countries have cut their rates with Ireland cutting there rate all the way down to 12.5% making them the lowest of the counties.

Now comes the interesting part of this, if you are in a 401k or own stock or funds you worry about your dividends. What if you are in a union or some scheme, public or private sector, where you get a pension? That money is not put in a safe, it is invested. The manager, of your say pension fund, is charged with finding a company that has a record, so as to increase the value of your holdings.

As long as those funds increase everyone is happy and making money. Now let’s take a look at today, profits are down, mass unemployment and the fund managers still have to make a profit. So they demand of the companies to cut costs to keep profits up. The company, that is expected to pay a dividend, so your 1^st grade math teacher can draw her pension, has to look at every avenue to cut costs.

They will look at basic costs, such as travel, meals, entertainment, office supplies, cost of part-timers, and other smaller items. When those cuts don’t yield needed funds they start to look at other items, maybe like GM, they will choose to build that new facility outside the country. They save on construction costs, labor, labor related expenses and taxes.

They may increase that dividend back to a leave that is expected but if the economy does not improve they are still expected to maintain that level. As Treasury Secretary Mellon wrote “The history of taxation shows that taxes which are inherently excessive are not paid.” They would just move the investment to somewhere they could avoid the tax.

If you are a company and 20% of your shares are held by pension fund managers, there may come a time when you will have to say, well if we move the corporate office from the United States where we are paying 39.2% to say Ireland at 12.5%. That is about a 68% savings. Or in numbers, if you are taxed on profit of $100,000,000 million at 39.2% that is $39,200,000, now at 12.5% it is $12,500,000. That is a savings of $26,700,000 and that can be paid in dividends to that retired math teachers pension fund so she can get her retirement check.