With the economies of the U.S. and Europe sputtering along on fumes, politicians are quick to blame regulation and taxation as the main cause of a lackluster business environment. Yet, according to the World Bank’s 212 page “Doing Business 2012″ report, released on Wednesday, there is less red tape for setting up shop in the U.S. than there is in all of Europe, Latin America, Africa and most of Asia.
The World Bank uses indicators such as time spent to set up a business to getting credit, among other things, in benchmarking the 183 countries it ranks in “Doing Business”. The report measures and tracks changes in the regulations applied to domestic companies in 11 areas in their life cycle–such as investors rights, taxation, cross border transactions, legality and enforcement of contracts and bankruptcy law. A fundamental premise of doing business is that economic activity requires good rules that are transparent and accessible to all, not just big business. Such regulations should be efficient, the World Bank states, striking a balance between safeguarding some important aspects of the business environment and avoiding distortions that impose unreasonable costs on businesses. “Where business regulation is burdensome and competition limited, success depends more on whom you know than on what you can do. But where regulations are relatively easy to comply with and accessible to all who need to use them, anyone with talent and a good idea should be able to start and grow a business (legally),” the World Bank said.
Where does the supposed regulation and taxation crippled U.S. stand in the rankings? It is number four, trailing behind New Zealand (3), Hong Kong (2) and Singapore (1).
What it looks like from the research desks at one of the most powerful and elite multilateral institutions on the planet is a U.S. that does not have the government in its way, but a U.S. whose government is more out of the way than it is in every other major economy on earth, including mainland China.
An economy’s ranking on the ease of doing business does not tell the whole story about its business environment. The underlying indicators do not account for all factors important to doing business, such as macroeconomic conditions, market size, workforce skills and security,all factors where the U.S. would outperform the three countries that are ahead of it in the rankings.
What the rankings of the World Bank do examine are the key aspects of the regulatory and institutional environment that matter for companies. The top 20 economies on the list have implemented effective, yet streamlined procedures for regulatory processes such as starting a business and dealing with construction permits as well as strong legal protections of property rights. They also periodically review and update business regulations as part of a broader competitiveness agenda and take advantage of new technologies through e-government initiatives, the World Bank says.
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How did the United States rank according to the ease of doing business using different measurement metrics: 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:
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According to the study, the U.S. is No. 1 in large advanced economies for simple regulations and a general low cost of doing business, contrary to what many politicians say about what troubles the U.S. economy.
While taxation remains an issue, it is not enough to make the U.S. a difficult place to conduct business. The U.S. tax code is cumbersome and puts the U.S. behind most of its peers in the Organization of Economic Cooperation & Development, or OECD.
The data shows the average tax that a medium-size American company must pay or withhold in a given year, as well as measures of the administrative burden in paying taxes, equates to 46.7% of total profits in the U.S. compared with 42.7% in the OECD despite having less number of taxes to pay than its advanced economy rivals (11 for U.S. vs 13 different taxes for OECD). U.S. companies also spend more time preparing for taxes than its peers, averaging 187 hours compared to 186 hours. When it comes to paying taxes, the U.S. ranks with Taiwan, while Hong Kong and Singapore are in the top four. The U.S. ranked no. 13 in ease of starting a business, ahead of all the nations of Europe, but Hong Kong and Singapore again, as well as Canada, Australia and New Zealand.
Overall, however, the ease of doing business in the U.S. remained unchanged at No. 4 worldwide even as Washington complains that the regulatory and tax burden is making matters worse.
As an aside (and this is essentially a blog, so we’re allowed our own two cents from time to time), what troubles the U.S. economy is a decade long spending spree on behalf of our companies and citizens. We wanted to live like Madison Avenue, when we were really all a bunch of Mayberry locals. The deleveraging process is long, painful, and on going and every money manager from Tokyo to New York will say the same thing. They will all say that low interest rates are irrelevant to an economy that does not want to take risks. The Fed can force a bank to lower interest rates, but it cannot force a bank to make a loan to customers that do not want loans in the first place. The S&P can be trading at multiples below historic averages, but a P/E of 12 dropping to a P/E of 7 isn’t going to make Calpers and the Missouri Teachers Union allocate 70% of its retirees pension money into stocks; it’s going to put it into Treasury debt. The U.S. economy is suffering because of a combination of historic deleveraging, lackluster support from fiscal policy makers in Washington, and a general, yet pervasive, lack of business confidence. The U.S. economy is not suffering because of taxes, energy policy, or Obamacare as data and polls have shown consistently.
COMMENTARY: I agree with the findings of the World Bank. I have been reporting similar findings in research that I have conducted about the U.S. business environment and taxation. What I have found is that there are so many tax loopholes, that many corporations pay little or no taxes at all. Individuals do not get those same tax breaks. When it comes right down to it, individuals, especially the middle class and those making under $250,000 are paying for the majority of federal and state budgets.
Having worked as a CFO and controller for a number of companies, I have come to realize the tricks that corporate founders and executives play to minimize corporate income taxes and their own taxes. I knew of one millionaire business owner who had his house mortgage payments paid by one of his corporations. He lived in a multi-million dollar home in Hillsborough, California, one of the wealthiest communities in America.
What is really going on is a class war, with the richest Americans carrying out media campaigns that stretch the truth or outright lie about the true state of things, and nobody is doing their own research to learn the truth. Yes, American taxpayers, we are carrying the big corporations. That's why we need major tax reforms in this country so that everybody pays their fair share. If you are a corporation and want to export jobs overseas, there out to be a penalty for doing that. If you keep cash deposited in foreign banks to avoid taxes, there out to be a penalty for that.
What I really find interesting is that Forbes, a publication that is read by mostly the wealthiest Americans, investors and corporations, is reporting this.
Courtesy of an article dated October 20, 2011 appearing in Forbes
Yes, I've read about the tactics big corporations use to modify their taxes. I personally think raising corporate taxes can be of great assistance to a country. With the economic turmoil nations are experiencing, tax modifications sure are a good way to keep an economy away from hitting rock bottom.
Posted by: Clemencia Summers | 02/05/2012 at 02:26 PM