Why Can’t America Be a Tax Haven?

This was a question WSJ’s Steve Moore asked on CNBC’s “The Call” right after President Obama and Secretary Geithner announced new proposals to tighten tax loopholes and go after firms that try to avoid the high US taxes by keeping profits in foreign countries. And its a fair question.

If America wants to increase “fairness” they why not simplify the tax code, reduce taxes on a broad spectrum, and let companies come running to us, the U.S., with their capital to avoid high taxes in their home countries? Mr. Moore pointed out that under Reagan, in the 1980s, America saw a flood of capital come our way after tax cuts.

There is an incentive issue at play here. President Obama wants to keep American companies from avoiding taxes by keeping profits overseas rather than recording them here in the U.S. But why, especially during a downturn (though there are never really good times to raise taxes) try to influence countries with a punch in the face? Companies have been avoiding American taxes because they have no incentive to bring profits to American shores. By pointing a gun, the government is increasing incentives, but encouraging the search for more loopholes.

In contrast, by decreasing the tax burden, companies would want to keep more capital in the United States. Companies in other nations would want to invest here. And that would increase our tax revenues.

I recognize this is a very general argument, but we have some solid historical precedent backing this theory. Consider that Reagan’s tax cuts in the 1980s led to nearly a doubling in tax revenues (climbing by 99.4 percent). This is partially attributed to the dismal financial state the nation was in the preceding decade, which had brought revenues low, so admittedly it was easier to double. And I am not necessarily saying by extension that we should hearken back to the “heydays” of Reaganomics. But one of the most important parts of doubling the revenues was capital moving in from foreign investors who began to put money into American business and set up production and distribution centers on our soil. Why can’t we take a similar approach?