Monday, October 24, 2011

Stifling American Businesses' Global Competitiveness

Last week the World Bank released its annual Doing Business report, which ranks 183 national economies on their ease of doing business based on an analysis of ten economic factors: Starting a Business, Dealing with Construction Permits, Getting Electricity, Registering Property, Getting Credit, Protecting Investors, Paying Taxes, Trading Across Borders, Enforcing Contracts, and Resolving Insolvency. As the Bank explains, "a high ranking on the ease of doing business index means the regulatory environment is more conducive to the starting and operation of a local firm." In short, the higher a country is on the list, the better its business environment.

The topline number for the United States isn't bad: we rank 4th on the list behind Singapore, Hong Kong and New Zealand.  However, a closer look at the US rankings reveals some serious concerns:

As you can see, the United States ranks an embarrassing 72nd globally in "paying taxes" - defined by the Bank as "the taxes and mandatory contributions that a medium-size company must pay in a given year as well as... the administrative burden of paying taxes and contributions").  Basically, US companies pay higher corporate taxes - and have a more difficult time paying them - than 71 other countries.  Such a tax burden has a crippling effect on American companies global competitiveness, and the World Bank study is further proof of just how desperately the current US tax system needs a fundamental overhaul.  The Obama administration has repeatedly promised to reform the US corporate tax system but has yet to provide even a proposal (shocking, I know).  Fortunately, there appear to be several GOP Presidential hopefuls who, unlike the current White House resident, are serious about lowering the ridiculous tax burden that US companies now face.

The United States also ranks poorly in other key economic areas, such as starting a business (13th) and trading across borders (20th) - both vitally important for business formation and global competition.  Contrary to what you might expect, the trade category doesn't analyze protectionist tariffs but instead measures the "time and cost (excluding tariffs) associated with exporting and importing a standardized cargo of goods by ocean transport."  As I've frequently discussed here, such "trade facilitation" (e.g., customs rules, export controls, etc.) issues might be boring, but they're just as important as tariffs (and sometimes even moreso).

Finally, it's important to note where some of the big developing countries rank on this list.  Brazil ranks 126th overall; India ranks a frightening 132nd; and the global powerhouse China ranks only 91st.  In short, it's far easier to do business in the United States than it is in China, and this massive divide in the costs of doing business helps explain why global companies don't all instantly move to the countries with the cheapest labor supplies (and why a lot of them are coming back to the United States after dabbling abroad).  Keep that in mind the next time you hear someone ignorantly rambling about the "race to the bottom" or some politician peddling protectionism as solution to the "inevitable decline" of America's global competitiveness.  In fact, there are a lot of obvious ways that the government could create a better business environment for American companies, and decline is anything but inevitable.

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