Government Subsidizes Corporate Failure and Penalizes Success

By: Uncommon_Wisdom

Tony Sagami writes: Since the market topped in 2007, I’ve written over and over about the major causes of the implosion — the multi-billion-dollar trade deficits, the tanking U.S. dollar, the lax lending practices, and the Fed’s low interest rate policy.

All of these factors and more led to overpriced U.S. stocks and a massive U.S. real estate bubble that popped hard.

Then came the multi-trillion dollar government spending spree to keep the economy moving.

But the drags on our economy remain in full force and have yet to play themselves out. Even worse there is a new threat to your portfolio that could pull the Dow Jones down to new lows and could push this painful recession into a full-blown depression.

Government Tax Grab Rewards Failure

The threat I am talking about is President Obama’s tax grab that is designed to reward failure. It bails out General Motors, Chrysler, AIG, and bank after bank, while raising the taxes on our most productive businesses and individuals.

The math is simple and irrefutable. Our government is spending so much money that it has to raise revenues wherever it can. The easiest targets are the evil, rich corporations and high-income Americans.

First it was the evil big oil companies, then terrible banks, and then the pollution-spitting auto companies, all labeled in various ways as enemies of the people.

What I see is a repressive anti-business government that is seizing control of American companies, setting wages and compensation for private Americans, and raising taxes everywhere it can.

The newest target of this policy is America’s high tech industry, but they aren’t taking the tax attack without a fight.

Here’s what I’m talking about. The current tax code permits American companies to defer paying corporate tax rates as high as 35 percent on most types of foreign profits as long as that money remains invested overseas.

The Obama administration wants to end the ability to keep foreign profits tax-deferred in hopes that these global companies will return the profits back to the United States.

For example, Microsoft paid an overall tax rate of 26 percent in 2008. Its annual report states, “Our effective tax rates are less than the statutory tax rate due to foreign earnings taxed at lower rates.”

The CEOs of Microsoft and Symantec, two of America’s largest tech companies, are none too happy with Obama’s plan to raise their taxes because of their foreign business.

In 2008, Microsoft had 95,029 employees worldwide, with 56,552 or 59 percent of them based in the U.S. and 38,477 (about 41 percent) based outside the U.S.

Microsoft CEO Steve Ballmer says it is his company’s “fiduciary responsibility” to shift jobs out of the United States to countries with lower corporate taxes.

Microsoft CEO Steve Ballmer said it is his “fiduciary responsibility” to shareholders to shift jobs out of the United States to other countries with lower corporate tax rates.

Ballmer also states that if Obama’s proposal to raise taxes on Microsoft’s foreign divisions is approved, “We’re better off taking lots of people and moving them out of the U.S. as opposed to keeping them inside the U.S.”

John Thompson of Symantec, the California-based maker of Norton anti-virus software, doesn’t like the taxes either, but he also takes offense to the name-calling.

Software companies are frustrated by being called tax cheats and compared with companies that moved their headquarters to low-tax countries such as Bermuda.

It is a little bit ironic that most of our most significant trading partners and partners globally have taken the tack that they’ll reduce corporate tax rates to stimulate economic growth and not raise corporate tax rates,” Thompson said.

IBM does business in 170 countries and employs 278,227 workers outside of the U.S. and 120,227 in the U.S. Think about that: IBM has more than twice as many workers outside the U.S. as it does inside the U.S.

Since IBM does business in 170 countries, I think it would be more accurate to call IBM a global corporation that happens to be based in the United States instead of a U.S. company with overseas subsidiaries.

And I certainly wouldn’t call Microsoft, Symantec, or IBM tax cheats for exploiting tax loopholes.

Increased Corporate Taxes Will Hit U.S. Companies Hard

Name calling aside, what really matters is that the increased taxes will cost America’s multi-national companies a mountain of money. The Obama administration itself expects to raise an additional $190 billion in taxes.

Before you say ‘big deal,’ you should ask yourself: What will those additional taxes do to corporate America’s profits? The answer is it will hit them hard.

Don’t take my word for it. Microsoft’s Ballmer estimated that higher taxes on foreign income will reduce profits for 30 companies that comprise the Dow Jones Industrial Average by 10 percent to 15 percent.

Yup … 10 percent to 15 percent!

By the way, there are some winners from this tax increase: The Indian IT outsource companies such as Infosys (INFY), Wipro (WIT), and Satyam Computer (SAY).

Your investment feet are not stuck in cement, and I urge you to add a healthy serving of Asian stocks to your portfolio diet.

Regards,

Tony

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