The U.S. tax code is out of line with the rest of the world and we are losing jobs because of it. The presidential candidates on the Left have mistakenly blamed businesses themselves for the inversions. The heavy burden of an outdated and unfair U.S. business tax code puts American companies and workers at a decided disadvantage.
Hillary Clinton released an ad highlighting Johnson Control’s recent inversion, criticizing it as, “gaming the system.” She claimed that under her presidency, companies that invert will be punished. Clinton doesn’t understand that businesses are inverting because of useless tax complexity. To end inversions, we must comprehensively address the reason our companies are pushed from their homes – America’s inefficient tax system.
Rather than making the tax code more competitive, Clinton has denied the problem. She proposed an ‘exit tax’ that would further penalize American businesses saying, “I want companies to know they’re going to pay a price. We’re going to make them give back the tax breaks they receive because we can take that money and put it to work.”
Former Director of the Congressional Budget Office and Republican economist Douglas Holtz-Eakin commented on Hillary’s proposal saying the need for this ‘exit tax’ assumes inversions would continue. Instead of layering the problem with a new tax, it needs to be addressed upfront.
American businesses that move their headquarters offshore get a bad reputation. The Left has used this issue to distort the truth about inversions and fund their political agenda. In a recent House hearing on international tax competition, congressional Democrats said the only concern should be eliminating deductions and credits to increase revenue. Also known as a tax increase. The economists on the panel explained this limited focus would do nothing to end corporate inversions. Attacking businesses only distracts from comprehensively understanding the problem.
President Obama has pretended to care about corporate tax reform but only in the form of a massive tax increase. The administration suggested a one-time levy on profit stored abroad on top of a recurring tax on future foreign earnings. His proposal is not realistic about the fundamental reasons for a business inversion.
Stopping corporate inversions involves two necessary reforms:
First, business income tax rates should be reduced. The gap between the U.S. and its competitors is wide — the combined state/federal U.S. business tax rate is more than 39 percent. Compared to direct competitors like Canada (26.3 percent), the United Kingdom (20 percent), and Ireland (12.5 percent), America is at a disadvantage to compete globally. The U.S. rate is two or three times higher – slashing competition and forcing companies offshore.
Next, the U.S. should end its current “worldwide” system of taxation and move to a territorial tax system. The U.S. finds itself with South Korea and Mexico as one of only six countries that has a worldwide tax system. This means that if you are an American business, the IRS attempts to tax everything you earn regardless of where you earn it. One of the main reasons for inversions is the U.S. double taxation on income earned abroad which already faced overseas taxation. Most other countries have a territorial tax system, meaning they tax money earned in their country but welcome the return of money earned abroad tax-free.
Hillary Clinton and congressional Democrats believe complicating the tax code and blaming competitive companies will stop inversions. They do not understand the fundamentals of corporate inversions. We must lower the U.S. corporate tax rate in order to compete. Coupled with a move to a territorial tax system, American companies will no longer face the need to invert.
Sarah Feldpausch is a policy associate at Americans for Tax Reform.