A ruckus is raging these days in Washington, D.C., over “tax inversion,” a strategy to avoid taxes by relocating a company’s headquarters from the United States to a low-tax country. It’s a legal way for American companies operating globally to avoid crushing double taxation on overseas earnings, and it’s become commonplace in America for three reasons. First, the United States, unlike other developed countries, taxes a company’s income no matter where on the globe it is earned. Second, America’s 35 percent tax rate is the highest among the world’s developed nations. Third, multi-national American companies are double-taxed because they pay U.S. taxes on their foreign income after they have already paid taxes in the countries where they conduct business.
Almost as bad, U.S. companies are at a disadvantage to foreign competitors, which have a lower tax burden that allows them to charge lower prices while keeping the same profit margins.
Liberal Democrats in Congress and the White House have called U.S. companies unpatriotic if they move their headquarters outside the United States to avoid the over-taxation. But the liberals just want the extra tax money. They refuse to deal with the real reasons so many firms are moving abroad: We have the most dysfunctional tax system in the developed world, and it requires fundamental reform, not political name-calling. Tax avoidance is as American as apple pie. We are all entitled to avoid taxes. It only becomes illegal if you “evade” taxes.
Officers of U.S. companies that operate abroad have fiduciary duties to shareholders and obligations to their employees and their families. That means officers have the motivation and the duty to level the playing field by seeking lower tax payments. The best way to do that is to merge with foreign companies, which reduces the tax bite on U.S. corporations. These foreign corporations will still conduct business and trade in America, and they will continue to pay taxes on all income generated within the United States. Further, the evidence shows that firms that expand globally will also expand domestically in the United States.
America’s corporate tax is ripe for reform. If Beltway liberals were interested in solving the problem instead of making political hay, they would forge tax reform to make U.S. companies more competitive. They could solve this problem by lowering the corporate tax rate, eliminate tax breaks and stop double taxation. But Obama won’t do that unless he can raise more money to spend on entitlements. Obama and the congressional liberals are like the schoolyard bully who steals your lunch money and then berates you for moving to a new school.
Legislation proposed by Democrats focuses on preventing inversions, putting a giant damper on decisions by global entrepreneurs, who will choose to avoid the extreme burdens of incorporating in America. It will also push high-paying executive and management jobs overseas, making the Democrats’ policies counterproductive — another example of economic ignorance and unintended consequences.
Tax inversion in the business world is a symptom of a deeper problem spreading in America: High taxes are causing Americans to leave for other shores. Record numbers of Americans are cutting the cord. About 8,000 Americans have renounced citizenship in the past five years, an increase of more than 200 percent. The exodus is partly due to the federal campaign to hunt down accounts owned by Americans abroad.
Here’s the bald-faced truth that the tax-and-spenders cannot step away from: There are 34 member countries in the Organisation for Economic Co-operation and Development. In the last 17 years, 31 of those countries reduced their corporate tax rates because they realized it would attract jobs and capital. The U.S. government’s executive and legislative branches have not learned that lesson. That leaves three straggler countries. Besides Norway and Chile, who do you think the third dawdler is? You got it! As a result, America’s failure to reform its tax system has made our country less competitive and more underemployed after five years of the weakest economic recovery since the Depression.