Corporate tax rate is the real problem

Published on Monday, 21 July 2014 22:35 - Written by

With furrowed brows and fever-dreams of what they could do with extra revenue, members of Congress are now looking for ways to keep corporations in the country. Democrats want to punish companies that move offshore to avoid high taxes; Republicans want to fix the tax code.

The way companies do this, typically, is by buying or merging with a foreign corporation (usually a smaller one) and reincorporating in that company’s country. Walgreen’s, for example, is merging with Alliance Boots, a European drugstore company, and will soon be a Swiss corporation.

The Republicans are right on this one.

“A lot more American firms could wind up moving overseas for tax purposes before Washington manages to do anything about the problem, despite new pressure from the Obama administration for congressional action,” the Wall Street Journal reports. “Overseas relocations by U.S. corporations appear to be accelerating in recent months, as evidenced by a wave of deals sweeping through the pharmaceutical industry. About 50 U.S. companies have reincorporated overseas during the last decade, as firms grow impatient with lack of change in the U.S. tax system and seek tax-friendlier environments.”

Treasury Secretary Jacob Lew wants “immediate” action to “shut down this abuse of our tax system.”

“What we need as a nation is a new sense of economic patriotism, where we all rise or fall together,” Lew wrote to Congress last week. “We should not be providing support for corporations that seek to shift their profits overseas to avoid paying their fair share of taxes.”

But nothing these companies do is illegal, or even unpatriotic. They’re responding to pressures of their own — to stay profitable and to manage their resources responsibly. Who can blame them?

The Democrats can.

“Let’s rally around an economic patriotism that says, instead of giving more tax breaks to millionaires, let’s give tax breaks to working families to help pay for child care or college,” President Barack Obama said last week. “Instead of protecting tax loopholes that let corporations keep their profits overseas, let’s put some of that money to work right here in the United States rebuilding America.”

But the problem isn’t those corporations — it’s the tax code, and in particular our ridiculously high corporate tax rate.

“At 35 percent, the U.S. corporate tax rate is the developed world’s highest,” the Journal reports. “The U.S. also is one of the few developed nations that still seek to tax their firms on their global earnings; most countries tax only domestic profits.”

These companies aren’t leaving because they’re unpatriotic. They’re leaving because our tax code is driving them out.

“Inversions are not the real problem,” says economist Howard Gleckman. “They are rather a symptom of the problem, which is that U.S. rates are higher than those in many other countries.”

Congress can help keep those companies at home by restructuring the tax code.

As a spokeswoman for Ways and Means Chairman Dave Camp (R., Mich.) told the Journal, “Companies will continue to move overseas until we address the fact that we have the highest corporate rate in the industrialized world.”