I Can’t Tolerate the Nonsense on Corporate Tax Reform Any More
Corporations are adopting a new tactic to lower their taxes—renouncing their U.S. “citizenship” and adopting headquarters where there are lower tax rates. These are called “inversions.” Nothing changes in the corporations’ operations, but the “paper changes” result in lower taxes. Inversions are threatening to erode corporate taxation even further than has already occurred, which is a lot.
Corporate spokespeople would have you believe that the real problem is our corporate tax code, which they claim is in real need of “reform.” This is a total distraction, and also total nonsense.
Here’s what John Engler of the Business Roundtable said about the wave of corporations renouncing their citizenship, similar to many other quotes from business folks readily available (you can hear that same mantra from the Washington Post editorial team):
“We’re seeing one more manifestation of why the business tax structure needs to be fixed. We’re the proverbial frog that’s being boiled, and a few frogs have decided to jump out.”
I’m not a tax expert but it’s so easy to detect the mountains of nonsense being thrown around here. What is this corporate tax reform that is so necessary? The claim is that the statutory 35 percent rate is too high, even though the current average effective tax rate (what is paid on average, after taking all the various loopholes into account) of 27.1 percent (as of 2008, according to the Congressional Research Service) is comparable to the effective rates in other OECD countries (27.7 percent, weighted by GDP). The proposed corporate tax reform is supposed to be revenue neutral, which means that statutory rates can be lowered only if loopholes are closed to offset the revenue losses (this is called “broadening the base”). Revenue-neutral reform necessarily means that some firms will pay more while others pay less.
The first thing to note is that corporate tax reform is not the answer for many inversions. There are many examples of firms that have renounced their citizenship, or that are considering doing so, that pay taxes at a rate lower than the average effective tax rate. That means that corporate tax reform, if truly revenue neutral, could only raise their tax rate, not lower it—so a reformed corporate tax system clearly would not have prevented their inversions! Here are a few examples: before inverting, AbbVie paid just 22.6 percent of its global income in taxes, Medtronics just 18.4 percent, and Mylan just 16.2 percent. Revenue neutral tax reform would end up raising the rates of multinationals like these, further incentivizing tax inversions.
Second, if corporate tax reform were so easy, then it would have been done already. The fact is that the firms that benefit from these loopholes don’t want to give them up—and some of the loopholes may even make for good economic policy. Where, by the way, are the detailed suggestions of the Business Roundtable or the Chamber of Commerce on which loopholes can be closed so that we can substantially lower the overall tax rate from 35 percent to, say, 28 percent? The answer is that they have no plan, for the simple reason that some of their corporate members would be hurt in order to help others. Until they can get in a room and come up with a plan, they should stop blabbering about the need for corporate tax reform. We certainly should not put off addressing inversions until we have an impossible-to-achieve corporate tax reform.
In the meantime we need to make these corporate inversions much more difficult to achieve, so we don’t see our revenue further erode, as per Rep. Sander Levin’s (D-Mich.) proposal, or the Senate Democrats’ proposal to withhold federal contracts from American multinationals that invert. It’s also possible the Obama administration could act on its own to limit these kinds of tax dodges. Even better, why don’t we stop the inversions and then find a way to close loopholes to get more corporate tax revenues, reversing the years of their downward trajectory and raising revenue we can use to meet the nation’s needs?