The Tax Man Cometh...

Love it or hate it, the Microsoft Corporation is one of America's most successful companies. Despite a rise in the use of other operating systems, Windows continues to boast a market share of approximately 88%. As a vital part of the American economy, the company continues to be successful, with a hotly anticipated new operating system, Windows 7, set to come out at the end of the year. Employing 56,000 Americans, Microsoft is no small business. Unfortunately, all that may change, at least here in America.

Announced in early May, the Obama administration plans to close a loophole in business tax code that will cost Microsoft millions of dollars. Currently, Microsoft's effective tax rate is just over one quarter of profits at 26%. This is due in large part to development and licensing practices that allow it to avoid paying rates as high as 35%-40%. This rate, higher than many European and Asian tax rates, means that Microsoft can save potentially as much as 15% of their profits by moving overseas.

Thankfully, that's not Microsoft's plan as of now, at least not completely. However, Microsoft's CEO notes that these tax changes mean that US jobs are more expensive to Microsoft, and that adjustments will have to be made. He notes, “We’re better off taking lots of people and moving them out of the U.S. as opposed to keeping them inside the U.S.” Other companies, like software giant Symantec, maker of Norton AntiVirus and other programs, agree, stating that tax policies such as the one proposed would, "hurt domestic investment, reduce shareholder value and increase the cost of employing U.S. workers."

John Thompson, chairman of Symantec, noted that he personally felt that raising taxes was counterintuitive to the government's stated desire of fostering an economy of innovation. He stated, “It is a little bit ironic that most of our most significant trading partners and partners globally have taken the tack that they’ll reduce corporate tax rates to stimulate economic growth and not raise corporate tax rates.”

It's in vogue to demonize business in the current economic climate, and at times with good reason. But it's poor economic policy to increase taxes on responsible businesses that contribute both to our economy and to innovation. Higher taxes mean lower profits, and lower profits are a demotivating factor in job creation. Lower profits also mean less incentive and fewer resources for innovation. In an economic climate such as this, with unemployment hovering above 9%, the last thing we need is more jobs moved overseas- the last thing we need is more taxes.

Sources: pcmag.com; bloomberg.com