The real tax problem

Dilemma isn't location of corporate HQs; it's archaic tax laws
President Obama spoke about the economy at Los Angeles Trade-Technical College in Los Angeles on July 24. Obama is demanding "economic patriotism" from American corporations that seek overseas mergers to avoid U.S. taxes.

It’s probably foolish to hope all the attention currently focused on “tax inversions” – the paper practice of headquartering U.S. companies overseas to cut tax expenses – will lead to meaningful corporate tax reforms. It’s much easier and politically expedient for the Obama administration to simply denounce corporations as unpatriotic scofflaws.


“I don’t care if it’s legal” to move a corporation overseas, President Obama said in Los Angeles during his recent three-day fundraising swing. “It’s wrong.”

That’s a darling election-season sound bite to excite anti-corporate liberals and cajole Democratic lawmakers into pushing for a ban on corporate tax inversions. Unfortunately, it draws attention away from what is really wrong: America’s outdated and punitive corporate tax code.

It’s our 30-year-old tax laws that make more than a dozen U.S. multinational companies – such as banana distributor Chiquita Brands and medical-device maker Medtronic – want to go through gymnastic contortions to broker inversion deals. Drugstore chain Walgreens wouldn’t be proposing a similar deal if the United States didn’t have the highest tax rate in the developed world – an effective federal-state rate of 40 percent.

Indeed, of the 32 developed countries in the Organisation for Economic Co-operation and Development, all but the United States have reduced corporate rates during the past two decades. The U.S. rate has been unchanged since the last tax-code overhaul in 1986.

Even with special-interest loopholes and generous deductions, the United States still taxes corporations higher than Canada, China and the United Kingdom. And America is one of only a scant few countries in the world where its citizens and corporations are subject to taxes on income earned abroad.

When it comes to discouraging domestic economic development, U.S. corporate taxes are a double-whammy. First, they rob Americans of employment opportunities by making it more profitable for U.S. companies to grow their businesses overseas. Then, by making it more advantageous to leave those profits overseas, they rob the U.S. economy of potential investment capital and the federal government of tax revenue.

These prickly and outmoded tax laws literally are costing the U.S. billions in lost investments and revenue every year.

A more reasonable tax rate would incentivize corporations to repatriate their foreign profits, which they could use to pay dividends or increase their stock prices by initiating a share buyback.

Instead, all that cash – up to $2 trillion by some estimates – remains overseas. Tech giant Apple, for example, paid only 8 percent of its worldwide profits in U.S. corporate income taxes by piling up profits in operations overseas.

No wonder that, for all its compliance and collection costs, the corporate income tax produces very little revenue – just 1.8 percent of gross domestic product in 2013.

We agree with the conclusion of the National Bureau of Economic Research’s recent report “Simulating the Elimination of the U.S. Corporate Income Tax,” which advocates cutting the corporate tax to 9 percent with no loopholes. Such cuts can “produce rapid and dramatic increases in U.S. domestic investment, output, real wages and national saving.”

Canada – which slashed its federal corporate tax rate from 28 percent in the 1990s to its current 15 percent – collects more in corporate taxes today than it did in the 1990s because of increased investment and repatriation of profits.

If the Obama administration wants to stop corporate tax inversions, it should begin by reforming the maddening tax code that makes them so attractive, starting with lowering the nation’s onerous corporate tax rate.

Passing a law that simply blocks inversions, as Treasury Secretary Jack Lew has called upon Congress to do, is a finger-in-the-dike exercise. Corporations eventually would find a loophole to exploit or, worse, eschew paper mergers altogether for bona fide ones that would lead to more jobs and investment going overseas.

The Obama administration is well aware that an inversion ban is a nonstarter in a divided Congress. But it’s not going to pass up an opportunity to throw red meat to its Big Labor voting bloc by characterizing tax relief-seeking companies as unpatriotic.

“We should have some economic patriotism here,” Lew told CNBC.

It’s a little hard to swallow such emotional blackmail when Lew himself was involved in an overseas tax shelter during his term as senior State Department official. The New York Times last year reported his investment in a Cayman Islands-based fund housed in the “notorious” Ugland House, which Obama referred to in a 2009 speech as the “largest tax scam” in the world. Lew sold the investments at a loss only after being confirmed as director of the Office of Management and Budget.

Obama apparently overlooked the matter when he named Lew, his one-time chief of staff, secretary of the Treasury. The president was far less magnanimous recently in Los Angeles when he said companies pursuing foreign tax relief are “technically renouncing their U.S. citizenship.”

“You know, some people are calling these companies ‘corporate deserters,’” Obama said.

Not him, of course, because he’s not a name-caller – just “some people.”

Republicans, at least, have a real plan. U.S. Rep. Dave Camp, R-Mich., chairman of the House Ways and Means Committee, has proposed cutting the federal rate to 25 percent to bring it closer in line to the global median.

Republicans are wise to oppose any quick-fix inversion ban that doesn’t include comprehensive corporate tax reforms. In the long term, one without the other is meaningless.

There is nothing inherently wrong with cross-border commerce. America’s economy is strengthened when our companies do well overseas and when foreign companies make investments in the United States.

With global commerce being what it is today, multinational companies essentially can choose where they want to live.

Let’s make the United States the kind of place where an American company wants to stay.



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