Reply #19: it should always be changing to find the optimal rate [View All]

[alc]

It can be too high or too low which the loudest people on either side won't admit. People with money to invest look at one major thing: return on investment (ROI). Yes, you need a consumers, but market size/share goes into the ROI calculations as do a lot of other things such as taxes. Higher taxes mean lower ROI.

A lot has changed since 1935
* non-US economies have grown significantly so you can make a lot of money selling outside the US (and thus avoid US taxes if you also manufacture outside the US)
* infrastructure in other countries has grown significantly so you can manufacture more in other countries
* education in other countries has grown so there is a supply of labor at all levels
* communication has improved so you can control a foreign company from the US
* US markets are saturated. Unless you have a new thing that Americans don't have you won't grown the market in the US. The only option is to increase market share (vs. market size) which is very difficult which is very difficult and doesn't add jobs (Coke & Pepsi spend a lot of money to get <1% increase with a new flavor)

It used to be that the best ROI came from expanding in the US, even with high tax rates. You could get the best manufacturing (labor & infrastructure) plus growing markets that far outpaced foreign markets plus full control over your plants. None of that's true any more so it doesn't make financial sense for an international company to grow in the US. Even for small and medium companies it's better financially to move much of the business offshore, especially if you have foreign sales (which is cheap and easy given modern communication).

If a company has an expansion with a 10% pre-tax ROI, that ends up with around an 7% ROI with 30% tax compared to 9% in a country with a 10% tax. If the pre-tax ROI is only 5%, a 30% tax makes it financially not much better than a lot of "safe" investments so it doesn't make sense to invest in expansion. Since lots of countries will give low rates that's where large companies expand and people with lots of money invest for the best ROI.

Government revenue isn't just about corporate taxes and cap gains. It also depends on the amount of profits that they are applied to and the taxes on employees. An increase in tax rate will move some profits and employees to a country where the US can't tax them. The key for the government is to find the rate where some profits/jobs move but not too much, and this is constantly changing based on foreign taxes, infrastructure, labor, and markets.

Startups and small businesses are a little different, and that's where US job growth is. Taxes do have an affect with them: how much will the owner make after taxes after investing all their own money and 1-2 years of living on nothing? If a venture capitalist is involved who wants the best ROI and can deal with the foreign legal and administrative issues then even a startup is likely to be offshore.