It’s the military, stupid

By Cate Long
August 18, 2011

The U.S. Chamber of Commerce has published a letter to Congress’s new Joint Select Committee, aka the supercommittee, with the changes they would like to see made to the budget and tax code. The supercommittee’s brief is pretty broad; it will be looking at ways to balance the federal budget by raising taxes and/or reducing expenditures.

The Chamber, which represents business interests, strongly insists that the supercommittee slash entitlements and reform the tax code by lowering tax rates. From the Chamber letter:

The Chamber urges you to consider how the current tax laws act as an impediment to worldwide competitiveness, a deterrent to saving and investment, and an obstacle to innovation and entrepreneurship. Accordingly, the Chamber believes that the current code needs a comprehensive reform to lower overall marginal tax rates, to encourage saving and investment, to foster global competitiveness, increase capital accumulation, attract foreign investment, and drive job creation.

The problem with the Chamber’s argument about lowering tax rates to increase our global competitiveness is that the United States already has some of the lowest corporate tax rates in the western world. Here are corporate taxes as a percentage of GDP from the OECD. (Countries in dark green collect the lowest amount of taxes, countries in red collect the highest) In the Western Hemisphere only South American countries have lower corporate tax rates than the U.S.

Taxes on corporate income as a percentage of country GDP.

The fact is that the U.S. collects a lower amount of total taxes as a percentage of GDP than most of the western world. We are clearly competitive already on the basis of tax rates. Data source: OECD.

Total taxes as a percentage of a country’s GDP

America could be much more competitive, balance the budget and reduce the national debt if we brought our military expenditures in line with our global competitors. This would result in hundreds of billions of dollars in annual savings. For some odd reason the Chamber of Commerce prefers to insist that social entitlements are the sole cause of the federal deficit. Let me just suggest to the Chamber, “It’s the military, stupid.” I’d urge the Chamber to take a more global view based on the data. It might rethink its insistence on lower taxes and slashing entitlements to be globally competitive.

Military spending as a percentage of a country’s GDP

Data source: World Bank.

Link to all data and charts.

17 comments

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

apples to oranges.

Corporate taxes in other countries include costs that US companies have to deal with separately. Health insurance for employees is covered in taxes in many countries.

I do agree that virtually eliminating the standing military is necessary, but doing so right now will be a major jobs killer. Better to redirect it into doing something useful for the time being (like building nuclear power plants) and phase it out in a decade or so.

Posted by vboring | Report as abusive

So basically the writer wants the US to go back to a pre-WWII military? S

I must ask this: What happens to the hundreds of thousands of people who will lose jobs as a result of massive defense cutbacks? Going by the suggested decrease in the article, hundreds of thousands of soldiers will have to be discharged and thousands more of those who work in the defense industry will lose their jobs because the military will either stop or seriously decrease placing orders for equipment and supplies.

The defense debate is an odd one. The anti-Keynesians are in this situation PRO government(mass employment of citizens, massive investment of tax dollars to private industry) while the pro-Keynesians are advocating cutting funding.

If you cut defense than what do you do with those who will lose their jobs? And how will us stepping back from from our role as policeman, impact world trade(and thus our economy)? We have already seen the damage pirates in Somalia cause a disruption. What happens if there is no force there to guarantee stability?

I am no suggesting that we don’t cut drastically from defense. I am simply asking questions that need to be answered before we commence snipping.

Posted by quattro4 | Report as abusive

Rick Perry says global warming is just a theory, not been proven.

Creationists say Evolution is just a theory, not proven.

Here’s another theory:

“Nation building and chasing terrorists in remote places like Iraq and Afghanistan makes us safer.”

“Land Wars in Asia” are winnable. U.S. military intervention is a viable strategy.

Fifty years after Vietnam — after Iraq and Afghanistan, Panama and Grenada — there is no evidence that the world is a safer place because of the trillions … that Republican Chicken hawks have wasted …. in trying to educate the uneducable, democratize the illiterate, instill western values into the lawless and corrupt tribesmen in godforsaken places that pose no threat to our national security.

Posted by VietvetforObama | Report as abusive

Exactly… it’s always been the military; and the PACs; and CODELs; on and on and on… Could always use the military to help guard the borders. Them just being there may stop most of the illegal immigration.

Posted by diplobull | Report as abusive

Not sure why corporate tax rates for the non-western world aren’t listed here. It’s kind of hard to draw conclusions with only half the necessary data.

Posted by longtermthink | Report as abusive

I wish I had the non-western world data but the OECD just listed these countries. Check the “Data source” link.

“the pro-Keynesians are advocating cutting funding”

quattro4, I think it’s important to realize that modern advocates of Keynes realize he was being slightly tongue-in-cheek when he suggested paying people to dig holes and paying other people to fill holes. If the government needs to employ people, it’s better to employ them doing something productive than something unproductive. Military spending, with few exceptions, is pretty much the definition of unproductive…we are quite literally paying people to blast holes in the ground. The amount of military spending necessary to secure our borders is (judging by what other developed nations spend as a percent of GDP) far less than half of what we are spending now. Everything else is just paying people to blast holes in the ground.

As far as what to do with the people who are laid off…do you really need to ask? I mean, how hard is it to figure out that if we’re currently paying people to blow stuff up, then for the same cost we could simply employ them to build things. We have bridges collapsing from disrepair and highways that are an embarrassment compared to the rest of the developed world. We completely lack a modern rail system, even though rail travel is the most energy efficient form of travel so far developed (excluding bikes, which are not quite practical for travel between cities). That’s just the tip of the iceberg. There are countless government services currently being cut, many with significant negative impact to citizens. We could simply reallocate the money currently being spent to blast holes in the ground toward filling the gaps. It’s so obvious you really have to squeeze your eyes shut pretty hard not to see it.

Posted by devinm | Report as abusive

Total taxes as a % of GDP doesn’t seem like it’s telling the whole story. Governments can take in revenue through a variety of sources, like VAT and personal income taxes to name two big ones. Tariff’s would be another.

What would be nice, is if we could measure the amount of dollars paid by a corporation in proportion to how many dollars that corporation earns. I don’t know, we could call it a “corporate tax rate”.

Posted by jim3000 | Report as abusive

@longtermthink

Gee, lets do a tax comparison with Sierra Leone, maybe their tax rates are lower. Of course they are amongst the poorest countries in the world, but who cares! Lets compare rates! “Western” is just a euphemism here for “first world” and other phrases that are no longer politically correct.

Posted by SourRon | Report as abusive

In your graphs just do not count the state tax on top of the federal… in California we pay over 44% combining Fed and State way higher that most of Europe with no medical and a miser retirement for the employees… Of course we could spend less for the military, but where u think u can employ our veterans? Potato fields? We need to create a better fiscal environment for the small business so they can hire again and bring down unemployment at 3%.

Posted by robb1 | Report as abusive

I think that there is something missing here. The reason the US collects a taxes in a low ratio to GDP is because companies use a lot of tricks and loopholes of a needlessly complex tax code to avoid the tax.

What the chamber of commerce says makes perfect sense. If you simplify the tax code and charge a lower tax rate, companies have less incentive to expatriate their earnings and the US would collect more taxes.

Posted by djlowballer | Report as abusive

Hmmm, seems to me giving a lot of that military money to welfare families would help the overall economy more. You could spend $100 million on an F-22 that sits on a runway and bleeds value, or you could give it to families to buy food. Supermarkets then pass more money onto farmers, and so on. Consumer spending is what keeps the economy rolling, not weapons sitting around gathering dust.

Not to mention our billion-dollar weapons tech can be stolen by a Chinese hacker who gets paid a few bucks a day.

Posted by Andao | Report as abusive

We have a couple of wars we need to finish or somehow get out of before we can reduce our military budget. As a matter of fact, if we get out of these wars, we probably won’t have to reduce our regular military budget. By the way, the reason the rest of the “free” world has such small military expenditures is because they depend on us to protect them.

Posted by soWhatever | Report as abusive

Jeffrey Immelt: “Stuff that the deficit commission came up with, which was a lower corporate tax rate ending every loophole, is what we would take, with a territorial system, we would take in a heartbeat. The fact is I’d take Germany’s or Japan’s or the U.K.’s corporate tax policy today, sight unseen, without any dispute, I would take any of those tax policies today.”

http://www.reuters.com/article/2011/08/1 8/us-ge-immelt-idUSTRE77H7IG20110818

Call that bluff.

Posted by klhoughton | Report as abusive

Bringing our military spending in line with our global competitors? Is this author stupid? The same competitors who can’t defeat Colonel Qaddafi without our help? Or the ones just launching an aircraft carrier? Or the ones whose conscripts are killing themselves with alcohol? Or the ones living in caves? Is this author capable of understanding the global order, or does he have a political narrative in his head where actual understanding should be?

Posted by kulthur | Report as abusive

Unfortunately, Mr. Buffett largely ignores the flaws, loopholes and complexity of the U.S. tax code, all of which are far more responsible for the imbalances he seeks to correct. This brings me back to the connection my (astute) friend drew to the story about G.E.’s taxes. Even though the corporate tax rate is an infamous 35%, G.E. paid far less than that last year to the IRS (the exact amount was still being debated the last time I checked, but most estimates still put it well below even 20%). The problem is not necessarily that the U.S. government needs to raise tax rates , it’s that it needs to raise taxes . We need to close the loopholes that allow companies, and individuals, to avoid paying for their fair share of the government services and security that are vital to the health of our nation. There are, essentially, two tracks to take here: addressing the methods (secrecy) and addressing the motivations (big rewards, low to no consequences).

On the methods side, policy makers should enact legislation that would require banks to collect the beneficial ownership information for all account holders. Tax information should also be exchanged automatically between all countries on each other’s citizens. Both of these strategies would significantly inhibit the ability of individuals and corporations to hide the true nature of their tax obligations to the U.S.—and to other governments.

Another set of changes to the rules should focus on the motivations, or cost-benefit ratio, of evading taxes. Making tax evasion a predicate crime for anti-money laundering would subject those prosecuted to much steeper (jail) sentences, which raises the risk to their reputation and their lifestyle for engaging in such behavior. Requiring reporting by MNCs of all profits and taxes paid on a country-by-country basis would also raise the reputational risk for using overly aggressive tax planning. (Investors would also benefit from knowing exactly where a company is making money and where it is losing money—helping them gauge the strategic risks the company faces.) Finally, international commerce laws should be updated to require personal signatures that the prices of goods and services have not been altered for the purpose of evading taxes or customs duties in a given cross border transaction. No rational employee is going to want to risk jail time for herself or himself in order to save the company some money.

http://www.financialtaskforce.org/2011/0 8/19/oracle-of-omaha-sees-big-picture-mi sses-loopholes/

Posted by Cate_Long | Report as abusive

Vietnamvet, I hate to break it to you but every major US involved war of the 20th century was a Democrat war. WWI, WWII, Korea, and Vietnam are ALL democrat wars.

Posted by Adam_Wentworth | Report as abusive