We Have Met the Enemy, and He Is Us
by Tom Yamachika, President Tax Foundation Hawaii
A recent article by Mark Weinberger, now the Global Chairman and CEO of the international accounting firm EY (formerly known as Ernst & Young) says that there are three big issues that are holding our country back in international competitiveness. All three of these issues have special significance for us in Hawaii and each is an issue that we (as a nation) created ourselves.
One is free trade. In bygone times our country was very protective of domestic markets, but in modern times more goods and services, or pieces of goods and services, are being imported. Especially for us in Hawaii, we have key export markets in Asia. Weinberger points out that between 2000 and 2010, Asian nations concluded 48 trade agreements. Of these, the USA was a party to only two. Our federal government is currently negotiating two major multinational trade agreements, including the Trans-Pacific Partnership, or TPP. The TPP is not without its enemies; some organizations say that it would give the USA trade deficits and job loss, downward pressure on wages, upward pressure on the cost of medicine, and new attacks on our environmental and health safeguards, among other things. Weinberger says we have a historic opportunity to drive the agenda for trade cooperation with Asia, and that if we don't, then China will. Where do we, as a nation and as a State, stand on this?
Another issue is immigration. Our immigration system is outdated, inefficient, and deathly slow. Congressional gridlock on measures to fix the problem is also infamous. Weinberger complains that this country is missing out on many opportunities to acquire significant talent, primarily because people who have the talent can't get visas. Weinberger points out that of the Fortune 500 founders, 40% of them are either immigrants, or children of immigrants. Heck, the vast majority of those who live in this country are immigrants. Those of us in this State are all too familiar with the success of our immigrants and their children.
And then there are taxes. Weinberger points out that the USA used to have a globally competitive tax rate. Now, among the 34 countries in the Organization for Economic Co-operation and Development (OECD), the USA has the highest corporate tax rate, and it is the only country that taxes companies headquartered domestically on their worldwide incomes at a rate higher than 30%. So if I had a company based in Honolulu and it made money from sales of product to Thailand, most countries would let Thailand tax that money exclusively. Ours taxes it, and gives a foreign tax credit for tax Thailand has imposed, but there are complex limitations on the foreign tax credit so that I might not get the full credit for taxes paid in Thailand. And in any event, because the U.S. tax rate is higher than Thailand’s, there will be net cash paid out to the U.S. on the business that was done in Thailand. The bottom line is that our businesses are at a disadvantage in the global marketplace.
In Hawaii, the state income tax treatment of corporations is more in line with the rest of the world. Hawaii corporate income tax is only applied to that share of the company’s income that is attributed to Hawaii, although we, and most other state corporate income tax systems, compute that share differently from the Feds. Maybe the federal government can learn something from the state systems.
On Earth Day, April 22, 1970, the comic character Pogo told us, “We have met the enemy and he is us.” Pogo was referring to environmental awareness, but the truth in that message applies to other contexts, like this one. The challenge going forward is simple but difficult: now that we know the enemy, can we do something about the problems?
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