Tag Archives: tax inversion

Why It Is Imperative to Lower the U.S. Corporate Tax Rate

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Several large U.S. corporations have recently announced that they are planning to merge with foreign companies and move their corporate headquarters to a low tax country such as Ireland or Great Britain.  The Obama Administration proposes to disallow such tax inversions by requiring that after such a merger at least 50% of the stock of the new company would have to be foreign owned.  Such a regulatory fix is unlikely to solve a much more fundamental problem.
CaptureThe Tax Foundation has just published a new study, “Tax Reform in the UK Reversed the Tide of Corporate Tax Inversions,” describing a similar situation in Great Britain just a few years ago and what was done to reverse it.  Basically GB took two actions:

  • Implementing a territorial tax system where profits are only taxed in the country where they are earned, and
  • Lowering the corporate tax rate from 28% in 2010 to 21% in 2014 and 20% in 2015. The GB rate had already been somewhat lower than the U.S. rate since the early nineteen-eighties.

These two changes in the corporate tax code have had a dramatic effect. First of all, the number of corporations in GB has been increasing steadily.  By 2017 GB is likely to overtake the U.S. in total number of corporations.
Capture1Secondly, GB actually raises more corporate tax revenue than the U.S. and has been doing so for some years. It should be clear from this discussion that the U.S. should significantly lower its corporate tax rate.
Capture2The biggest problem in doing this is public opinion.  The organization Wallet Hub has just published its “2014 Tax Fairness Survey” which shows that only 10% of the population believes that taxes should be higher on wages than on investment income, whereas 33% thinks the reverse.  An equal tax rate on both is preferred by 57% of respondents.
Capture3This will make it politically difficult, for example, for the U.S. to match GB’s 20% maximum rate on corporations since even middle class U.S. taxpayers pay a tax rate of 25% or higher.  However it might be possible to abolish the corporate tax altogether if dividends and capital gains were then taxed at the same rate as wage income.
The most important thing, however, is to significantly lower the corporate tax rate, one way or the other, in order to incentivize U.S. multinational corporations to keep more of their business and profits in the U.S.

Stopping Corporate Tax Dodgers

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Several large U.S. companies have recently announced that they are planning to merge with foreign companies and move their corporate headquarters to a low tax country such as Ireland or Great Britain.  The Obama Administration proposes to disallow such “tax inversions” by requiring that after such a merger at least 50% of the stock of the new company would have to be foreign owned.  Otherwise the firm would still be considered American for tax purposes.  Such a technical fix is unlikely to solve a much more fundamental problem.
As the latest issue of the Economist, “How to stop the inversion perversion,” makes clear, “America’s corporate tax has two horrible flaws.  The first is the tax rate, which at 35% is the highest among the 34 mostly rich-country members of the OECD. … The second flaw is that America levies tax on a company’s income no matter where in the world it is earned.  In contrast, every other large rich country taxes only income earned within its borders (a so-called ‘territorial system’).  Here, too, America’s system is absurdly ineffective at collecting money.  Firms do not have to pay tax on foreign profits until they bring them back home.  Not surprisingly, many do not: American multinationals have some $2 trillion sitting on their foreign units’ balance sheets.”
CaptureA relatively simple solution to this glaring problem would be to lower the corporate tax rate to 25%, the OECD average, and shift to a territorial system.  Revenue losses would be offset by closing loopholes and deductions.
A better, but likely more controversial, solution would be to completely eliminate the corporate income tax and then tax dividends and capital gains at the same rate as earned income.  This would avoid the double taxation problem whereby profits are taxed first at the corporate level and then again for individuals as dividends and capital gains.
The overall goal in this entire endeavor should be to boost the economy, thereby creating more jobs, and additionally to raise the tax revenue needed to pay our bills.  Fairness is important but growth is even more important!