Another Reason for Tax Reform: Etsy Corp

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Posted by Hal Smith on Monday, August 24th, 2015, 12:33 PM PERMALINK

Yet another American start-up has packed up and moved out of the country. This time, Brooklyn based Etsy was forced to establish a subsidiary in Ireland as result of a corporate tax rate that continues to drive entrepreneurs and businesses overseas.

In 2014, Etsy recorded 5 million members, including 1.4 million active sellers and 19.8 million active buyers. With such a large presence, Etsy sellers generated gross merchandise sales of $1.93 billion globally.

But Etsy it taking the revenues elsewhere. It made the logical and legal decision to move under the 12.5% corporate tax rates in Ireland. The United States undercuts any competitive business at a rate of 39%.

While the corporate tax rate is hard enough, the structure of the tax code ensures that if companies don’t move overseas they will choose to go in debt rather than make a profitable business.

Corporations are heavily pressured to choose debt financing over equity as a result of a tax structure that ensures that equity profits and the required returns to investors are both taxed. Therefore, startups, which struggle to find available credit and simply cannot get suitable bank loans are forced into this double tax.

According to the Tax Foundation, the U.S. has the highest corporate income tax rate amongst the 34 members of the Organization for Economic Development (OECD) and the third highest in the world.

The average corporate tax rate for these OECD countries is 25% -- a little over half what the United States draws from struggling startups.  

Once again the antiquated, overly complicated, and anti-competitive corporate tax code of the United States has forced another start-up overseas. Forcing entrepreneurs to other countries is the last thing this recovering economy needs, but with such inefficient and debilitating economic barriers like double taxation, who can blame them for leaving?

There needs to be a corporate tax rate of 20% in order to have the fair competition that fosters innovation and American entrepreneurship.

 

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