The increasing number of U.S. companies doing “tax-inversion” deals, in which they merge with a foreign company in part to take advantage of lower overseas taxes while keeping their main base of operations in America, highlights the longstanding need to reform the United States’ highest-in-the-world corporate tax rates.
Rather than demonizing these companies for doing something legal to create shareholder value and urging Congress for an urgent “fix,” the Obama administration should seize the opportunity to leverage the bipartisan support that already exists for comprehensive tax reform.
These deals have been going on for years but have been picking up steam, driven in part by companies’ fear that Congress may ban them while not offering any real tax reform.
The news that drugstore-chain operator Walgreen Co. is pursuing such a deal triggered alarm bells with the administration last week. Treasury Secretary Jack Lew went on television and sent a letter to Congress, urging a “new sense of economic patriotism” and swift legislative action to bar these types of deals, which the Congressional Joint Committee on Taxation recently estimated might cost the U.S. $20 billion in lost tax revenue over 10 years.
As Columbia Law School professor Michael Graetz wrote in The Wall Street Journal: “To ask, ‘How do we stop American companies from leaving for more favorable tax jurisdictions?’ is asking the wrong question. The right question is ‘How do we make the United States a more favorable location for investments, jobs, headquarters, and research and development activities?’ ”
This is another example of politicians trying to shame corporations for political points rather than addressing an issue intelligently in the best interests of American employment and the economy.
The U.S. has the highest statutory corporate tax rate in the world, and, as Graetz points out, most other developed nations don’t impose taxes when companies reinvest overseas foreign earnings at home. Though some point to big corporations that manage to avoid taxes through various subsidies and loopholes, that is not true of the vast majority of companies. Why, if companies already can pay a zero effective tax rate in the United States, would they be so eager to do deals that allow them to avoid U.S. taxes?
This is another example of President Barack Obama’s lack of understanding and experience when it comes to economic policy.
James Pethokoukis of the American Enterprise Institute recently noted that “rather than create a better, pro-growth U.S. tax environment, Team Obama wants to trap U.S. companies in an uncompetitive domestic situation.”
The result of keeping U.S. corporate taxes high and simply banning tax inversions would be to harm the competitiveness of U.S. companies and drive more money and jobs from the U.S.
That’s not economic patriotism, that’s economic cluelessness.
