The real tax problem

Dilemma isn't location of corporate HQs; it's archaic tax laws

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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.

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.  FILE/ASSOCIATED PRESS
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.

“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 Unfortunately, it draws attention away from what is really wrong: America’s outdated and punitive corporate tax code.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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Bodhisattva 08/03/14 - 05:31 am
I'd go for a 25% rate with

I'd go for a 25% rate with ALL other breaks removed. No offshoring, no inversion, no other tricks, gimmicks, special treatment, or loopholes. Of course, who do you think got all of the loopholes in the tax law in the first place? US corporations and their billions (if not trillions) of campaign donations, lobbyists, insustry groups, ALEC, think tanks, little tricks like hiring the wife of a SCOTUS justice, invitig certain justices to privat meetings where all of that kind of planning takes place where they can be wined and dined in the lap of luxury without the pesky presence of the press or anyone else who is kept out by a private army of security details, then they rule on cases involving these issues without even considering recusing themselves.
In 2013, the GAO under bipartisan request by Sen. Carl Levin (D-Mich.) and Sen. Tom Coburn, (R-Okla.) conducted a study on M-3 (Non-small, or large) corporations using 2010 data (the most recent available) and found that profitable US corporations paid a 12.6% effective tax rate. When non-profitable corporation were added, it went to a 16.6% rate. When federal, state, and foreign taxes were together, the prfitable companies still only paid 16.9% of their worldwide income in taxes. "Even with the inclusion of unprofitable filers, which increased the average worldwide ETR to 22.7 percent, all of the ETRs were well below the top statutory tax rate of 35 percent."
The question remains, with the lobbying power of US corporations, and the power they now hold, do you actually expect them to stand still and allow their loopholes to be ondone and a rate of 25% to be put i place when the profitable companies are paying around 1/2 that amount now, and do you expect the GOP to go along with laws that do that? The last time there was a vote to even end subsidies to oil companies, one of the most profitable businesses in the country, it died in a House committee and couldn't get past a GOP filibuster in the Senate, 51-47, with 47 Democrats, 2 Independents, and 2 Republicans voting "Yea", and 43 Republican, 4 Democrats voting "No", with 2 not voting (Republicans Mark Kirk and Orin Hatch). I'll believe the GOP drops the rate to 25% and takes away all of the "gimmes" to corporations when I see it. They might do the first part, but they'll never take away the corporate welfare. They only want to take that away from real people.

jimmymac 08/03/14 - 07:13 am

Obama campaigned that he would overhaul the tax structure if he got elected. Well we see now that was just another one of his lies as he's not even tried. There should be a flat tax for all Americans and corporations with no deductions. Period! having a houseful of kids that load the system shouldn't exclude you from paying taxes. A corporation doing a majority of their business in this country but moving their headquarters to a off shore location in name only shouldn't do the same. It won't happen because all politicians have their hands out to lobbyists to make sure things stay the same.

deestafford 08/03/14 - 08:27 am
The left has this idea that all money...

The left has this idea that all money belongs to the government and any money it allows us to keep is called a "tax expenditure" and paying taxes is patriotic. The more you pay, the more patriotic you are.

Of course, if that creed was carried to its logical end that would mean 49% of the population would be unpatriotic because that is the percentage who pay no income tax.

The answer to our tax system/burden would be to implement THE FAIR TAX. It would make America the economic power house of the world and in a few years we would have a balanced budget and a few more we would be without a national debt.

Of course, it is a cliff to scale because it takes all the power away from the politicians.

curly123053 08/03/14 - 08:47 am
FairTax !

This right here is the reason I have been fighting for the passage of the FairTax Amendment since Bush was president and both houses were Republican. The US Government PUNISHES the corporations for their productivity through legal armed robbery in the name of so many corporate taxes. I remember seeing a paper with a list of corporations who stated they would move their operations back to the US if the FairTax became law back in 2007 or 2008 after all the UNFAIR taxation was gone. We would see an explosion of jobs in America with passing the FairTax.
I was at first skeptical when I first heard about it, but I eventually started checking into it. This is NOT a Republican bill, or a Democratic bill. This is a taxpayer's bill designed to give you and me more control over our taxes. That is why it never got a hearing even when everything in DC was Republican during Bush's administration. The politicians are NOT ready to cut us Americans free of their "puppet strings". Income taxes gives them CONTROL over the people and they like that kind of control. The FairTax Amendment gives you and me control over our taxes and takes it away from the politicians, plus that amendment is the ONLY tax plan that dismantles the IRS for good. One more thing. Google the Communist Manifesto before you shoot me down and you will see that the Income Tax is listed as a Tenet to the Communist Manifesto for keeping the people under the control of the government. Since the income tax was imposed look back and see how much more control the government has put on We The People. We no longer run our government. Our government is now running us.

carcraft 08/03/14 - 10:47 am

Yes, PATRIOTIC JOHN KERRY, OUR CURRENT SECRETARY OF STATE AND FORMER PRESIDENTIAL CANDIDATE hide his yacht in Rhodes Island to avoid Massachusetts taxes. Corporations exist to provide a service or goods to earn a profit for investors. Corporations don't exist to provide money to governments. Obama's job czarist, head of GE moved GE's MRI division to China to avoid taxes and regulations. So liberals can't claim government raising taxes and increasing regulations is OK to heck with profits for investors. Well then investors simply put their money in overseas investments!

hoptoad 08/03/14 - 02:43 pm
Every business, mom and pop,

Every business, mom and pop, small or large, or corporation has a right to make money and spend money how they see fit and for the good of their business. They also have a right to place their business and their money wherever they choose.

This goes for private citizens, too. What we earn should be ours to do with what we wish.

It will be hard pressed to get the Fair Tax or any other tax reform passed by either party. Government is afraid they will have less of our money to pee away and a whole lot less control over our lives.

oldredneckman96 08/03/14 - 03:22 pm
Sales Tax.

“I don’t care if it’s legal” to move a corporation overseas, President Obama said. He does not seem to care about the law one way or the other. That said, we should have a straight sales tax on all retail goods and services. No loop holes, no exemptions. Everyone who buys leases or trades for anything retail would pay the tax. Only licensed retailers would have to deal with the IRS. What you do with your money, save it, spend it, make overtime to get it, it would be your choice when to spend it and let it be taxed. The poorest person living on 1$ a day would pay the same % as the richest man in the US. That is fair and equal. That could be the law, but we will have to get Obama out of the WH to hope for a president that will enforce it.

corgimom 08/03/14 - 08:06 pm
If you reduce corporate taxes

If you reduce corporate taxes that means that WE, the little people, will pay more.

Nobody can stop a company from locating overseas. Let them go.

The foreign corporations that locate here make up for it.

Did you see where Smithfield was bought by a Chinese corporation?

Corporations would not be able to do any business, anywhere, if not for government roads, sewer systems, power, and water. They most certainly should pay taxes, they use those services as much as individuals. But a corporation has to make an enormous amount of profits to pay significant taxes-there are so many deductions, loopholes, and tax credits that most of them can shield most of their money from taxes.

carcraft 08/03/14 - 10:17 pm
Corgimom, if you drop rates

Corgimom, if you drop rates you increase tax revenue as has been demonstrated by Canada.

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