From Bad to Worse
There is little doubt that the recovery from the 2009 recession has been weak. We all know people who have struggled for months or years to find a good job. We all know people who took a part time job or lesser paying job to make ends meet and still. Too many Americans are struggling to make ends meet.
That’s why it hurts to hear about American companies going overseas to save on taxes. In a process that is called “inversion,” a U.S.-based company buys an overseas competitor and then shifts its tax filing to that other nation. That ends up costing revenue for the government and sometimes lost jobs.
As a Congressman whose top priorities are encouraging job growth and balancing the federal government’s finances, it is frustrating to see companies flee the U.S. I don’t want to watch good jobs go to other nations, and profitable companies paying taxes to other nations instead of the U.S. makes it harder for us to balance our books.
Why is this happening? The U.S. is part of a global marketplace. This was not always the case. After World War II, the U.S. was the only industrialized nation that had not suffered under invasion and bombing. For the first few decades after the war, America was hands down the best place in the world to do business.
But as other industrialized nations such as Germany and Japan recovered and joined the international community, there was real competition again. More recently, countries across the globe have liberalized their economies. China, India, Brazil and many other nations try to attract successful companies to their shores.
Right now, the U.S. has the highest corporate tax rate in the industrialized world. Just a decade ago, we had the fourth highest rate. Even nations notorious for protectionist policies, like Japan, have reduced their tax rate to become more competitive.
President Obama’s administration has put forward a solution to the problem that could actually make things worse. Most inversions right now are on paper, it has little effect on the operations of a company. The Obama proposal would say that a U.S. company could not manage or control its operations from the U.S. if it wants to file taxes as a foreign entity. This would perversely encourage companies to shift their headquarters, and good jobs, to an overseas location. It would also do absolutely nothing to prevent foreign competitors from buying out U.S. companies and moving operations overseas.
Don’t just take my word for it, Columbia Law School professor Michael Graetz criticized the plan saying: “Make no mistake: Such proposals would do nothing to make the U.S. a more favorable place to locate multinational headquarters or investments. f they succeed—which is unlikely, given the creativity of tax planners and the potential large tax savings at stake—the most likely outcome will be more foreign takeovers of U.S. companies.”
Throwing roadblocks in front of companies looking for a better deal on taxes is like trying to dam a mighty river. Eventually, the water is going to find a way around. The only solution is for the U.S. to once again become competitive when it comes to corporate taxes.
The fact is that there are still many advantages to headquartering a company in the U.S. Many companies will pay a premium to stay here. Modest reform would have huge benefits.
Democrats and Republicans agree that reform is necessary. At the beginning of this Congress, the top Senate and House tax writers were working together on reform. That process broke down as the President made it clear that he wanted to use reform to raise taxes by a $1 trillion.
We can create a revenue neutral tax reform by lowering rates and then eliminating special breaks and lobbyist loopholes at the same time. The two parties will always fight over what the tax rates should be, but when we agree that a policy is destructive we should fix it in a neutral fashion. More rules aren’t the answer when it’s reform that is needed.