Last month the administration, having fixed all the real problems in the United States, took on a purely imaginary issue: inversion. Inversion takes place when a company located in the United States shifts its headquarters off shore to avoid the extortionate 35% corporate income tax rate. Mind you, the company doesn’t have to shift either facilities or workforce, just its headquarters. Obama and his treasury secretary have both labeled the practice as “unpatriotic.”
But stopping companies from renouncing their citizenship just to get out of paying their fair share of taxes is something that cannot wait. That’s why, in my budget earlier this year, I proposed closing this unpatriotic tax loophole for good. Democrats in Congress have advanced proposals that would do the same thing. A couple Republicans have indicated they want to address this too, and I hope more join us.
Dutifully, the anti-science/anti-knowledge left has weighed in supporting the administration. Last week Walgreen’s announced that is was no longer considering an inversion.
In reality, if patriotism is defined as creating jobs for Americans in America rather than providing more slop for the political trough, then inversion is the most patriotic thing a company can do.
But what’s gotten lost in the discussion is that tax inversions have benefits for the American economy. They make it easier for companies to invest in the United States. They raise profits for U.S. shareholders, who can channel more funds back to America. Companies that locate overseas should be praised for making the right decision, not scolded for being un-American. What is more American than doing what is best for your company?
Take a U.S.-based multinational that wants to bring back overseas earnings to expand its factory in Detroit, or build a new factory. Under the current system of taxation, that multinational would have to pay a tax of 35% on the amount it brings back into the country. If it returned $100 million, it would have to pay a tax of $35 million and only $65 million would be available for investment.That is because U.S.-based multinationals face a federal corporate tax rate of 35% on worldwide income, not just income generated in the United States. State taxes are extra. America is one of only seven Organisation for Economic Cooperation and Development countries that taxes companies on worldwide income, and the others have significantly lower corporate tax rates.
The United States, in fact, charges the highest tax rate in the developed world. The average of OECD countries is 24%. Some countries, such as Ireland, have corporate tax rates that are closer to half that.
If a foreign-based multinational had headquarters in Ireland, and wanted to bring back $100 million to invest in its plant in Detroit, then all the $100 million would be invested. None would go to the Treasury. Residents of Detroit would be better off, and the shareholders of the company would be better off. America would grow because companies generally spend money more effectively than does the government.
The real issue is a corporate tax rate that penalizes companies for maintaining their headquarters in the United States. Until we bring out tax structure into compliance with that which exists in the rest of the civilized world we will continue to see companies exercise their patriotism by leaving in US.