If your roof starts leaking live a sieve, it's not only prudent to get a new roof but to install a short-term fix — buckets to catch the water, perhaps, or a tarp — before your house is ruined. So should it be with so-called tax inversions by U.S. corporations. The long-term answer may be tax reform, but right now the leaks have to be plugged.
What is a tax inversion? It's when a big U.S.-based multinational buys a company off-shore and then ships its own corporate headquarters there to avoid paying U.S. federal and state corporate taxes. One of the most striking examples was attempted earlier this year when Pfizer proposed moving its headquarters to Great Britain as part of its proposed $106 billion takeover of AstraZeneca, a deal which ultimately did not go through.
But plenty have been pursued since, including drug maker AbbVie, which announced last week it intends to buy British-based Shire for $54 billion and move its headquarters out of North Chicago, "inverting" itself by allowing AbbVie to be consumed by the smaller firm. There's only one reason to do this: avoid paying U.S. corporate taxes which come into play when foreign profits are returned to the United States.
The U.S. corporate tax rate of 35 percent is relatively high compared to the rest of the world, but it has so many loopholes that effective rates vary wildly. So even if Congress chooses to lower the tax rate, it's going to have a pitched battle on its hands as some corporations will be loath to give up their favored tax arrangements.
Meanwhile, the country is leaking future tax revenues like a roof made out of chicken wire and string. There have been 14 inversions announced this year alone. Billions of dollars of potential tax revenue are being lost, and that's shifting the federal tax burden from the big companies to smaller firms and average citizens — not to mention potentially expanding the federal deficit.
Treasury Secretary Jack Lew last week called on Congress to pass legislation to halt the practice, invoking the need for "economic patriotism." Obviously, it would be great to have a fairer tax code, but that's far too big a lift for the current Congress; tax-writing committees in both chambers tried and failed to pursue such reforms last year.
The longer Congress waits to take action, the more inversions will take place. Advocates say if the loophole is closed tomorrow — by requiring the foreign company to actually have a 50 percent or higher stake in the U.S.-based company instead of the current minimum of 20 percent — the U.S. Treasury can save about $20 billion over the next decade.
No doubt some conservatives will argue that the U.S. could remove the incentive for inversions tomorrow by lowering the corporate tax rate significantly. But such a plan is not reality-based. Ireland has the lowest tax rate in the world at 12.5 percent, so to match that would require the U.S. to find billions of tax dollars elsewhere, once again shifting the burden from corporations to mom-and-pop businesses and the public.
Clearly, this country needs a tax system that allows companies to compete in a global economy, but the tax code also requires fairness. Shame on CEOs who would put tax avoidance schemes ahead of their own nation's security and economic interests; that many of the recent proposals involve pharmaceutical companies does that industry no great honor.
If companies put as much energy into innovation and pursuing new ideas as they do into finding ways to shortchange the tax collector, global competitiveness probably wouldn't be much of an issue. In Maryland, lawmakers have been reluctant to embrace combined reporting, a system that would more closely police corporate profits earned within the state, but that might change if U.S. corporations continue to desert.
This is a more pressing "border security" issue facing the U.S. than 57,000 unaccompanied children from Central America — the export of tax dollars is far more costly. Let's force those dollars to stay at home and then find ways to fix the tax code. Once enough corporations are gone, there won't be much reason to institute reforms at all.
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