Are CFOs Behind the Idea of Lowering the Corporate Tax Rate?

There’s a lot of talk about lowering the corporate tax rate – even abolishing it altogether. Just a few weeks back I was at a corporate finance event which featured a number of high profile public company CFOs discussing various topics – and this tax topic stole the show (and you can’t frequently say that about any tax topic!) with some vehement attacks on the current corporate tax regime.

It should not be controversial to say that I think all American businesspeople want to invest in the U.S. and see this country grow productively, thus improving everyone’s economic standing. However, a variety of investment options exist for virtually every spending decision these days so “buying American” is not always so simple. To wit: do I hire my team in the U.S., or do I hire in Asia and bring on three times the bodies? Do I put a plant in the Midwest or build in Singapore, or perhaps outsource manufacturing completely overseas? Do you not take that available tax deduction in Switzerland or do you? I could go on, but you get the idea. It’s all too easy and logical for companies to invest every dollar wherever they think it best suits their business needs and will drive the greatest profitability – after tax.

CFOs and other corporate leaders are not in business to move the U.S. economy, they are in their roles to move the economy of their own company. And let’s not jump on corporate leaders who want their company to succeed. I think this desire is at the very heart of capitalism and it’s great because that may be our company, sending its profits our way as investors, or perhaps it’s our employer giving us that all-important paycheck. In today’s global economy the alternative to going “all out” is to choose to be going out of business. So you have very little choice other than optimizing everything you do for maximum profits.

This leads to something that lies at the heart of the corporate tax kerfuffle: CFOs and other corporate finance leaders would love nothing more than to directly support the U.S. economy, but they can’t do that at risk to their companies’ survival. That would fly in the face of everything capitalism is about. So when asked about tax issues, I hear CFOs saying “I’d be happy for my company to earn money in the U.S. and pay U.S. taxes, if only they weren’t prohibitively high.”

This country has one of the highest corporate tax rates in the world, second only to Japan. There are tax havens, such as Bermuda and the Cayman Islands, and very “first-world”, low tax countries such as Switzerland and Singapore that offer simple alternatives. Even if companies operate in other high tax jurisdictions globally, it’s frequently seen as making more sense to “park” earnings in those countries, attempting to offset with operating expenses or acquisitions rather than repatriate to the U.S.. That is why there is so much corporate money “trapped” overseas right now. Money that could otherwise find good use right here in the U.S..

So why are the aforementioned CFOs so angry? Because they would rather invest their companies’ money in the U.S., but they feel their hands are tied by U.S. corporate tax policy, and that investing more in the U.S. would be “choosing” to reduce their companies’ profitability - and that’s an unnatural act in the capitalist world.

So what’s a country to do? Legislate that companies use their own disadvantageous tax jurisdiction? That just wouldn’t fly in Congress and certainly wouldn’t support the “free” economy that’s such an integral part of the American dream. Maintain the status quo? Why continue with the current failed policies? Why lose out on all of those companies bringing their earnings (and at least some jobs) home to the U.S.? And why not reduce the incentive to base operations in tax havens or leave cash overseas? Maintaining the status quo and doing nothing is a losing proposition for all involved – and it is certainly proving to be just that.

A third option is to reduce our corporate tax rate and get in the game. I don’t mean make it disappear altogether – but level the playing field. Corporations benefit tremendously from the U.S. infrastructure, rule of law, healthy commerce, etc.. They should pay their fair share to support all that goodness. But the U.S. government should get competitive with other jurisdictions and remove the incentive to do so much investing outside the country. While they’re at it, they should remove the incentive to avoid taxes on money earned here. Remove the tricks and loopholes that support special interests to the detriment of all others and make the new rate stick!

We know what the current tax regime has wrought – massive avoidance tactics, jobs moving overseas, and a dis-incentive to invest in the U.S. if you have equal pre-tax economics in a lower tax country. It just makes sense to incent companies to operate in the U.S., create American jobs, earn money in the U.S., and repatriate foreign earnings to the U.S.. At the end of the day, more companies will pay taxes in America if they’re not so busy fearing and avoiding them – which is all too common today. This is not a republican or democratic discussion, just one about how we make our economy stronger.

This is just one CFOs opinion. I’d be interested in hearing what others (CFO or not) have to say. And please leave the politics at home: this is about economics and how you run your company.