International investors are becoming increasingly apprehensive on the economy of the United States. The government of the United States continues to enact policies that have a negative impact on business and investment. Rates of poverty are rising and the average standard of living for the past few years, has been declining. The latest news this week was the contraction of the economy for the first quarter in the United States by 2.9%. Labor participation rates have declined to rates last seen in 1978 (62.8%), a time when the economy of the United States was in deep distress. Inflation, debt, and the increasing difficultly to obtain credit, are adding to the woes of business creation and expansion.
The corporate tax rate in the United States is at a punishing high rate of 35%. The current tax law in the United States requires that companies pay the corporate tax rates in the countries where their profits are earned. In addition, if the company wishes to bring any of these profits to the United States they must pay the difference between the foreign rate and the American tax rate.
This policy has lead to the situation where cumulatively, companies based in the United States have over $2 trillion USD (United States Dollar) being held abroad. Five companies alone based in the United States have a combined total of $400 billion USD of profits, being held overseas. They include Apple, General Electric, Merck, Microsoft and Pfizer.
The last time that the United States government dealt with this issue was in 2004. This one year tax holiday, led to over $300 billion USD being repatriated and reinvested back in the United States. In that one year alone, profits could be brought to the United States by individual companies at no cost.
The argument you will often hear is because of various provisions in the tax law known as loopholes, most companies don’t actually pay this rate. Although this is true, the final rate still ends up at around 27% where the world average is 20%. The only major country with higher rates of corporate taxation is Japan.
An investor might ask why would the United States not institute a more favorable tax policy? The answer is simple. It is all about politics, and it is not just limited to the tax issues for business and investment.
Small business regulations are surging in the United States. Compliance with governmental laws and regulations is a much greater burden on small companies than larger ones. It also hinders the very formation of small business, job creation and in the end economic growth.
Small businesses matter immensely because they create 2 out of every 3 new jobs in the United States. At present, they employ half of of the country’s workforce.
Between 2008 and 2013, government regulations went from being small business’s fourth largest problem after insurance, taxes and sales to being the the number one issue. The cost of federal regulations in the United States have increased over $70 billion USD from 2009 to the end of 2012. In 4 years, government regulations had increased by 13%.
Another issue is the rising inequity of the increasing regulatory burden. This is because compliance to government regulations has a high fixed cost. So this actually favors larger companies. The cost per employee is lower than it is for a smaller business. The final outlay for a company with 19 or fewer workers to comply with all federal regulations in now in excess of $10,000 USD per employee. It is less than $8,000 USD for companies with 500 or more employees.
The end result, is a reduction in the creation of new businesses both small and large. It also reduces employment and investment by raising the cost of business activity in general. Heavier regulations makes the domestic companies in the United States less competitive internationally, as well as motivating them to move more operations overseas.
As reported by the government of the United States nearly 2/3 of small businesses that currently offer health insurance to their employees, will pay more for coverage as a result of new rules in the health care law.
Another unintended consequence of the new health care law is that since companies that employ fewer than 50 full time workers are not required by law to provide health insurance, there is an incentive not to hire new employees. If there is a need for new workers they will be hired part time or on an outside contract basis.
Another concern for small and large businesses in the United States is the expanding reach of the Environmental Protection Agency (EPA). An example of this is the recent goal to expand the definition, and thereby control in the United States on all navigable waters. Despite already existing state and localized jurisdictions, the EPA intends to impose new federal mandates for water quality in local water and land uses. This will particularly impact small businesses. In reality, it introduces new government restriction in a business expansion or development on privately held property, as well as decreasing the value of land.
The EPA would also like to expand the RRP Rule (Renovation, Repair, and Painting) to cover commercial buildings in addition to private dwellings, which are already covered. Although the goal is to deal with lead dust, it will add to the cost of doing business in the United States.
New proposed rules on greenhouse gas emissions by the EPA on coal and natural gas power plants, are expected to raise the price of electricity substantially. Affordable energy rates are a major concern for all business and manufacturing companies in the United States. Higher rates will particularly impact energy intensive businesses such as heavy industry.
The EPA is also in the process in reformulating the definition of solid waste. It will add a sizable amount of new paperwork, which will have a greater burden on small businesses. The issue is that written documentation needs to be provided that all material is being recycled responsibly.
Additional costs to business for compliance with the ADA (Americans Disabilities Act) is another concern. It mandates access improvements to your business premises, ensuring that entrances, exits, bathrooms, aisles, service counters, and the like meet federal regulations. Compliance can be costly, especially for a small company.
Costly litigation costs by supposed non compliance of federal, state and local laws can also hinder business creation and expansion.
The ease of filing law suits by employees, customers and other sources can easily put a small company out of business as well as necessitating higher insurance premiums in order to combat this issue. Tort reform has become an urgent need, but political barriers have continued to delay it.
The end result in the present push by the government of the United States to expand greater control, over a larger portion of economic activity, is to reduce investment. As it becomes more difficult to open and maintain a business or company in the United States, it reduces economic growth. Less investment leads to fewer businesses, jobs, and entrepreneurial expansion.
In order to reverse this trend, the political environment in the United States will need to change course. The present policy to increase taxes and regulations on business activity, has the perverse result of ensuring that less of this economic activity will actually occur.