The Engine Driving the Growth of U.S. Companies

publication date: Jul 16, 2009
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According to new analysis by Standard & Poors, for the first time ever, foreign income taxes paid by the 500 large companies in the S&P 500 index paid have exceeded U.S. federal income taxes paid. This surprising result occurred in 2008.

In fact, foreign income taxes paid by S&P 500 companies actually increased by $11.5 billion or 9.3%, as U.S. federal income taxes declined $43.9 billion, or 29.1%.

This is both encouraging and discouraging. The growth overseas has saved and is bolstering the U.S. economy. We are less dependent upon domestic growth for corporate profits. Those who have followed our advice this past year online (see articles in the "Preferred Portfolios and Investments" section) have benefited from our foreign fund recommendations which are positioned to take advantage of this overseas growth.

What's discouraging and challenging is making up for lessened revenue coming into federal government coffers. That's why the growing federal budget deficit is concerning given increased government spending. It also highlights the importance of corporate tax rates around the world. The U.S. has one of the highest corporate income tax rates in the world (the U.S. is second only to Japan - see chart below) so the many larger companies which can choose where they wish to do business are increasingly finding domiciles with lower corporate income tax rates.


Comparing U.S. State Corporate Taxes to the OECD

OECD Overall Rank

Country/State

Federal Rate Adjusted

Top State Corporate Tax Rate

Combined Federal and State Rate (Adjusted) (a)

 

Iowa

35

12

41.6

 

Pennsylvania

35

9.99

41.5

 

Minnesota

35

9.8

41.4

 

Massachusetts

35

9.5

41.2

 

Alaska

35

9.4

41.1

 

New Jersey

35

9.36

41.1

 

Rhode Island

35

9

40.9

 

West Virginia

35

9

40.9

 

Maine

35

8.93

40.8

 

Vermont

35

8.9

40.8

 

California

35

8.84

40.7

 

Delaware

35

8.7

40.7

 

Indiana

35

8.5

40.5

 

New Hampshire

35

8.5

40.5

 

Wisconsin

35

7.9

40.1

 

Nebraska

35

7.81

40.1

 

Idaho

35

7.6

39.9

 

New Mexico

35

7.6

39.9

 

Connecticut

35

7.5

39.9

 

New York

35

7.5

39.9

 

Kansas

35

7.35

39.8

 

Illinois

35

7.3

39.7

 

Maryland

35

7

39.6

 

North Dakota

35

7

39.6

1

Japan

30

11.56

39.54

 

Arizona

35

6.968

39.5

 

North Carolina

35

6.9

39.5

 

Montana

35

6.75

39.4

 

Oregon

35

6.6

39.3

2

United States

35

6.57

39.27

 

Arkansas

35

6.5

39.2

 

Tennessee

35

6.5

39.2

 

*Washington

35

6.4

39.2

 

Hawaii

35

6.4

39.2

3

Germany

26.38

17.0

38.9

 

*Michigan

35

6

38.9

 

Georgia

35

6

38.9

 

Kentucky

35

6

38.9

 

Oklahoma

35

6

38.9

 

Virginia

35

6

38.9

 

Florida

35

5.5

38.6

 Louisiana 35 8 38.5
 Missouri 35 6.25 38.4

 

Ohio

35

5.1

38.3

 

Mississippi

35

5

38.3

 

South Carolina

35

5

38.3

 

Utah

35

5

38.3

 

Colorado

35

4.63

38.0

 Alabama 35 6.5 37.8

4

Canada

22.1

14

36.1

 

*Texas

35

1.6

36.0

 

Nevada

35

0

35.0

 

South Dakota

35

0

35.0

 

Wyoming

35

0

35.0

5

France

34.43

0

34.4

6

Belgium

33.99

0

33.99

7

Italy

33

0

33

8

New Zealand

33

0

33

9

Spain

32.5

0

32.5

10

Luxembourg

22.88

7.5

30.38

11

Australia

30

0

30

12

United Kingdom

30

0

30

13

Mexico

28

0

28

14

Norway

28

0

28

15

Sweden

28

0

28

16

Korea

25

2.5

27.5

17

Portugal

25

1.5

26.5

18

Finland

26

0

26

19

Netherlands

25.5

0

25.5

20

Austria

25

0

25

21

Denmark

25

0

25

22

Greece

25

0

25

23

Czech Republic

24

0

24

24

Switzerland

8.50

14.64

21.32

25

Hungary

20

0

20

26

Turkey

20

0

20

27

Poland

19

0

19

28

Slovak Republic

19

0

19

29

Iceland

18

0

18

30

Ireland

12.5

0

12.5

*Michigan, Texas and Washington have gross receipts taxes rather than traditional corporate income taxes. For comparison purposes, we converted the gross receipts taxes into an effective CIT rate. See footnote 2 for methodology.

(a) Combined rate adjusted for federal deduction of state taxes paid

Source: OECD, http://www.oecd.org/dataoecd/26/56/33717459.xls


Some other findings from the recently released S&P report:

  • In 2008, S&P 500 foreign sales increased 8.5%, while domestic sales decreased 0.3%.
  • European sales represented 27.7% of foreign sales, with 9.3% coming from Canada.  Asian sales decreased to 13.2% from 16.8% in 2007.
  • For those companies providing detailed results, 47.9% of all sales were produced and sold outside of the United States in 2008, up from 45.8% in 2007 and 43.6% in 2006.
  • While the current recession has had significant impacts on local markets, the overall trend has not significantly changed.  Growth outside of the United States is expected to be greater than that of the growth within the U.S.
  • The shift of labor, capital, and resources are expected to continue outside of the U.S. where a growing worldwide middle-class is emerging, even as the U.S. is viewed with much higher political stability. (This trend and associate investment trends is extensively covered in Jeremy Siegel's book, Stocks for the Long Run, which is covered in the "Book Summaries" section.)




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Eric Tyson is the only best-selling personal finance author who has an extensive background as an hourly-based financial advisor and who does not accept speaking fees, endorsement deals or fees of any type from companies in the financial services industry or product or service providers recommended in his articles, books and his publications.

 

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