Taxes follow us wherever we go – you can run but you can’t hide. Just as we have to individually pay taxes on our earnings, so do corporations on their earnings (profits). As you could imagine, just as we strive to pay the minimum amount of taxes we required of us, so do companies. When a company is so big it’s global this becomes a bit easier. Because of differences in countries’ tax policies, other countries have cheaper tax requirements than the U.S. Other countries may also have cheaper operating costs or cheaper access to required inputs, like energy. These potential financial benefits could encourage global companies to shift production abroad, to foreign affiliates. The potential tax benefits to shifting production abroad and claiming profits in a more “tax friendly” country can be quite significant.
How might this affect other aspects of our country's financial well-being? Consider our trade deficit (below, on a monthly basis).
So what about U.S. companies shifting production abroad? When companies source production abroad, and then ship the items back to the U.S. for final consumption by us, it gets counted in our balance of trade (the U.S. checkbook for export sales and import purchases) as an import. This does not have to be a negative thing – to stay competitive companies are going global. Having everything based in the U.S. may be prohibitively expensive if the company wants to grow profits and stay competitive. However, the more negative our trade balance is, the more it drags down our country’s economic growth. Technically, imports are money out the door to another country. At least with taxes we receive some public goods, like education, social security, and a national defense.