Business

US Tax Code Causes Businesses to Flee Overseas

Free-market advocates say Treasury Secretary Jack Lew wants to treat the symptoms rather than the cause of U.S. businesses seeking lower taxes overseas.

Lew is the latest Obama official to make the case for restricting the ability of U.S. companies to merge with foreign companies in order to relocate to lower-tax countries. (RELATED: Tax Avoidance is Like Renouncing Citizenship, Obama Says)

The controversial process is known as corporate inversion.

Lew acknowledged in the Washington Post Sunday that “there is nothing wrong with cross-border merger activity,” provided it be “based on economic efficiency, not tax savings.” However, he wrote the trend toward inversion has accelerated in recent months, and many of the companies that have sought tax savings through this strategy “are for all intents and purposes still based in the United States.” (RELATED: Dem Senator Says CEO Daughter’s Business Move Should be Illegal)

In the long term, Lew argued, “enacting comprehensive business tax reform is clearly the best way to address the problems in our tax code that trigger inversions.” Given the difficulty of achieving bipartisan consensus in Congress on such a politically fraught issue, though, he claims legislation restricting corporate inversion must be enacted in the meantime, “before our tax base is so eroded as to damage the prospects of comprehensive reform.” (RELATED: Union Boss Demands Companies Show Patriotism, Pay More Taxes)

While agreeing on the need for comprehensive business tax reform, many conservatives and other free-market advocates dispute Lew’s assessment that inversion is just a cynical ploy to avoid paying U.S. taxes.

Curtis Dubay, a research fellow at the Heritage Foundation, points out in a recent column for the Daily Signal that “any business, no matter where headquartered, pays the 35 percent U.S. corporate tax rate on income earned within our borders.”

The real motivation behind inversion, he says, is the “worldwide tax system”, whereby U.S. businesses are taxed on their foreign earnings. The U.S. is the only industrialized country in the world with such a system, putting domestic companies at a disadvantage relative to foreign competitors who are “free to make investments that the U.S. worldwide tax system makes unprofitable for U.S. businesses.”

Jason Fichtner of the nonpartisan Mercatus Institute, a free-market think tank, believes anti-inversion legislation serves mainly to deflect attention from the real issue of U.S. competitiveness. “Legislative proposals that attempt to treat the symptoms of the corporate tax code’s problems—rather than issues causing them—are doomed to fail,” he told The Daily Caller News Foundation.

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