American multinationals have long tapped foreign markets to take advantage of lower labor costs, looser regulations, and simpler tax structures that can make doing business overseas more cost-efficient than in the U.S. But it's not just jobs migrating abroad—it's now tax dollars too, a senior index analyst at Standard & Poor's says. (S&P, like BusinessWeek, is owned by The McGraw-Hill Companies (MHP).)
Last year marked the first time that American companies contributed more to the tax pools of foreign governments than they did domestically, according to analyst Howard Silverblatt's annual S&P 500 Global Sales report, released July 14. The study was based on income taxes paid and reported to the U.S. government by just over half the companies on the S&P 500. Companies are not obligated to provide such detailed breakdowns of foreign sales. In 2008 foreign income tax payouts accounted for more than 55% of their total income tax expenditures, up from 45% in 2007—an $11.5 billion increase. Federal income tax payouts declined 29%, or almost $44 billion, over the same period.
This trend has been occurring for some time. Over the past four years, U.S. companies have increasingly paid a higher percentage of their total income taxes to foreign governments, which accounted for 45% in 2007, up from 39% in 2005. But Silverblatt's findings represent another data point among many showing that the U.S. was hit harder than many foreign countries in 2008 as the global financial crisis picked up steam. While the U.S. economy contracted, emerging economies grew to take market share. Just as important, he notes, the results further prove that an enormous middle class is emerging for products that U.S. companies provide.
Domestic Sales Lagged
American consumers are still the largest consumer base around the world, "but if you're a salesman you don't ignore new customers," Silverblatt says. "It's not who you have but who you want to get, even though they may be smaller [markets]." Foreign sales increased by almost 8% in 2008, with companies in the energy, industrial, and information technology sectors posting the highest gains. Meanwhile, domestic sales lagged, increasing only 2.5%.
In 2002, U.S. gross domestic product made up almost 30% of gross world product, and U.S. equities dominated more than 57% of world markets. By last year, however, those figures plunged to roughly 21% and 41%, respectively. Silverblatt predicts these downward trends will continue, as more companies move to produce and sell their goods and services in countries such as India, China, and Pakistan.
Benefiting the U.S.?
With $44 billion less in tax revenue in 2008, says Silverblatt, the U.S. Treasury is experiencing a double hit. As more workers lose their jobs, the Treasury received less while also needing to fund higher levels of unemployment benefits. "I know we talk in trillions these days, but that $44 billion is a lot of money and I only expect it to grow," Silverblatt says. Financials alone in the S&P 500 paid 16 times as much in foreign income taxes as domestic, $13.3 billion compared with a paltry $817 million, all while suffering massive losses.
While money that may once have been destined for the U.S. Treasury is redirected to bank accounts overseas, this outcome ultimately benefits the U.S. economy in the bigger picture, contends Rosanne Altshuler, co-director of the Urban-Brookings Tax Policy Center. "This shows us that more and more opportunities for profitability and expansion are abroad. Whose firms do you want to take advantage of those other markets?" she says, while admitting that shareholders are surely benefiting more than workers losing their jobs. "If it was profitable to have more sales at home they'd be operating at home. They're choosing to expand markets because that's where the sales are."
With more and more sales coming from overseas, Corporate America's "leverage" with a weak U.S. dollar increases, says Alexander Young, an equity strategist at S&P. As many analysts forecast improved growth by the fourth quarter of 2009, Young predicts the dollar will continue to weaken, calling it "a timely catalyst in helping S&P 500 companies meet investors' lofty expectations."