Thursday, July 14, 2011

Some Things are Certain

Like having to wait (in line, in traffic) when you have the least amount of time to do so.  One thing that is said to be certain for everyone, regardless of age, race, gender, and income bracket: Taxes.  Few people can say they like taxes with complete sincerity.  It’s hard to say goodbye to 25-33% of your hard earned salary before you ever really had it.  And everyone wants a piece: we pay Federal, State, and Local taxes.  We get taxed upfront in our salaries and taxed on the backend through sales taxes and property taxes.   There’s a tax for everything.  Try booking an airline ticket and see how taxes impact the final price.  Or how much your bonus check would have been if it weren’t for our friend, Tax.  Imagine if you won the jackpot lottery, how much you would lose to the Tax?

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).  


Like our own bank statements, this is not a pretty picture.  Not even the “great recession” gave us a reprieve on having a trade deficit (the amount we export relative to the amount we import).  And while a good part of this deficit is due to oil, not all of it is.  Data released Tuesday indicates that in May our trade deficit was just over $50 billion, with the crude oil & petroleum products deficit at over $30 billion.  The non-petroleum goods deficit was over $33 billion, and services had a trade surplus of almost $15 billion.  In May exports decreased by $1 billion over April while imports gained by $5.6 billion, not great, and prices aren’t helping: data released yesterday shows that thanks largely to oil, import prices are increasing at their fastest rate since 2008 (up by 13.6% in the last year).

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 i
n 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.

The actual effect of globalization and offshore tax incentives on our trade deficit is hard to measure.  But the affect is certain.  Looking at the non-petroleum goods trade deficit, we see a stand-out in consumer goods (the stuff we buy).  In May we exported $14 billion in consumer goods and imported $43 billion.  We imported over $2 billion more than we exported in TV’s/VCR’s, toys and games, and pharmaceutical preparations (medication).  We sure do like our iPads and Nintendo Wii’s.  So while some things are certain (there’s no such thing as a free lunch), perhaps “certain” is up to interpretation. 
(Bureau of Economic Analysis, Census Bureau, Bureau of Labor Statistics)

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