Punitive Action And Public Shaming Will Not Stop Corporate Inversions
For more than 200 years, the United States has been viewed around the world as the land of opportunity – a place where individuals with a dream and some hope could build companies that could turn into thriving economic engines. Lately, America is starting to sound more like the land of corporate punishment, if a company considers a tax break or a business merger that some politicians don’t like.
Corporate inversions occur when a larger U.S.-based company merges with a foreign competitor or a smaller rival, and the company headquarters shift to the foreign country. Most recently, Burger King made headlines when news of a proposed merger with Canadian donut king Tim Hortons became public. The president has resorted to name-calling, labeling inversions as “unpatriotic.”
The question should not be what is wrong with a company that moves its headquarters to a foreign country, but rather what is wrong with our country that is driving American businesses to flee our borders.
While inversions can occur for multiple business reasons, one of the main factors is clear: the United States’ total corporate tax rate is 39.1 percent, the highest rate in the developed world. It is no wonder that 47 U.S. companies have used inversions to reincorporate in a foreign country over the past ten years. Companies are not using this legal option because they want to rid themselves of their U.S. citizenship; they are reincorporating because the U.S. tax system is making it more difficult to compete in a global economy.
Moving with the hope of a brighter tomorrow is part of the human experience. In the 1930s, millions of people left the Plains states due to the Dust Bowl drought conditions, hoping to find work and better conditions elsewhere. My wife’s grandparents, like so many immigrants, left a period of upheaval in Italy to pursue the American dream. Today, many companies are looking to leave California because of its punitive tax and regulatory environment, while other companies are flocking to states like Texas for a pro-business environment.
If moving gives hope of a more successful or competitive future, whether you are a business owner, a family, or a corporation, you often have to take that opportunity.
Additionally, the foreign profits of U.S.-based companies are subject to double taxation – once where they are earned overseas and then again when brought back (usually for investment purposes) to the U.S. The vast majority of developed countries don’t do this. Businesses and coalitions have been calling on Washington to modernize this outdated tax system for years now.
Clearly, our tax system is dysfunctional and needs a serious overhaul, but we have yet to see true leadership from the administration on addressing the crux of the problem. Unfortunately, the White House believes that it should act on its own by trying to find ways to punish companies that are simply tired of being taxed at higher rates than anywhere else in the world.
Instead of resorting to public shaming and bombastic rhetoric, we need to get serious about creating an updated and competitive tax system that encourages companies to call the U.S. “home.” Less scolding, more leading.
Geoff Davis is a former U.S. Representative and served on the House Ways and Means Committee. Davis is now a managing partner at Republic Consulting LLC.