Despite Being an Economic Superpower, America Simply Can't Compete With This

America may stand alone in just about every economic category, but it also stands out as being glaringly bad when it comes to this particular economic aspect.

Jul 6, 2014 at 9:22AM

For all intents and purposes, and not speaking solely from the heart with this being July Fourth weekend and all, America is the truly the world's greatest superpower.

Source: Christopher Connell, Flickr. 

Statistically speaking, the U.S. absolutely cleans house in most categories. GDP for the United States is nearly double that of China ($15.7 trillion in 2012 versus $8.2 trillion for China), the U.S. spends more on its military than the cumulative total of the next eight largest countries combined, it's the home to the vast majority of the world's top universities, and, of course, it has demonstrated tangible evidence of its success with both the Dow Jones Industrial Average and S&P 500 racking up new all-time highs this past week.

Long story short, I love this country, and there's little denying that it's one of the most economically influential nations in the world, if not d the most.

But that doesn't mean America excels at everything. In fact, despite being an economic superpower, there's one category where it ranks dead last.

America, the not-so-great
If you've been keeping up with the majority of business wheeling and dealing since the spring, you've probably caught a hint of the prevailing theme: corporate tax inversion. This is the practice whereby a U.S.-based company and its correspondingly high peak corporate marginal tax rate purchases a company in a foreign nation with a lower peak corporate marginal tax rate, anthen uses that purchase to relocate its headquarters to the foreign nation to pay less in taxes and thus keep more of its profits.

When it comes to taxing corporations, the home of the brave and land of the free is practically the king of the hill, in a bad way. The United States is only saved from the ignominy of being the highest-taxing country in the world by the United Arab Emirates, with its 55% tax on corporate profits. Within the U.S., before deductions, corporations could wind up paying as much as 40% in taxes on their profits. By comparison, according to research firm KPMG, the global average is just 23.57% (and again, this is before deductions).

Why does this matter? Simply put, lower corporate taxes can entice investment money, new businesses, and innovation. This isn't to say that U.S. businesses aren't already doing a great job of developing new technologies, products, and medicines organically, but the U.S. also needs a steady source of foreign investment and collaboration in order to thrive. High corporate tax rates discourage foreign investment in the United States.

In addition, if too many big businesses start latching on to the idea of relocating their headquarters outside the U.S. via overseas purchases, then the U.S. Treasury could begin facing tax revenue collection shortfalls. U.S. News in May noted that the U.S. Treasury could see $2 billion in lost tax revenue annually from instances of corporate tax inversion throughout the remainder of the decade. Had Pfizer (NYSE:PFE) been able to successfully purchase AstraZeneca (NYSE:AZN), the tax savings alone probably would have eclipsed $1 billion per year and greatly increased this annual U.S. "tax-fleeing" estimate.

Is America stymieing foreign investment?
Yet it isn't just that the U.S. has the highest corporate tax rates of any major economic power -- it's that its top-end rates are static while a number of other leading nations have dropped their corporate marginal tax rate to appeal to foreign investors and to encourage economic growth.

Have a look at how the U.S. stacks up next to a few other global giants:

Graph by author. Data source: KPMG.

With the exception of France, which has kept its corporate tax rate consistent at 33.33% since 2006, all other economic powers have lowered their corporate tax rate since 2006. For a small business, the difference in taxation may not matter, but for a drugstore giant Walgreen (NASDAQ:WBA), which is being pressured by its shareholders to complete its purchase of Alliance Boots and relocate its headquarters to Switzerland. where corporate tax rates are just 17.92%, it could mean the difference of having an extra $800 million in its pocket, annually.

Unless the U.S. can find a way to end the corporate tax inversion loophole, or it lowers its corporate tax rate to levels that would be conducive enough to attract foreign investment, I'm afraid this is a problem that's likely to become more pervasive as the tax gaps widen and as domestic growth becomes more scarce. This means potentially good news for overseas investors and shareholders that own companies in countries with minimal corporate taxes (ahem, Ireland!), but it also may translate into more nail-biting for the Treasury and U.S. government as the two contemplate ways to tackle an ever-growing $17.6 trillion in national debt.

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Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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