Monday, July 28, 2014

Time to Change the US Corporate Tax System

There is a new term that is becoming part of America's daily vocabulary: "inversion."  Investopedia explains corporate tax inversion as:
Re-incorporating a company overseas in order to reduce the tax burden on income earned abroad. Corporate inversion as a strategy is used by companies that receive a significant portion of their income from foreign sources, since that income is taxed both abroad and in the country of incorporation. Companies undertaking this strategy are likely to select a country that has lower tax rates and less stringent corporate governance requirements.
Most recently we have seen the Walgreens company is planning on becoming a non-citizen.  They plan to take the money that they earn in the United States and hold onto it as non-American citizens:
Walgreens, the USA's largest drugstore chain, with more than 8,500 stores, soon will decide whether to take advantage of a loophole in U.S. tax law that would allow it to save billions of dollars by moving its headquarters to Europe, where it is on the verge of acquiring controlling interest in Alliance Boots, a Swiss-based company that operates drugstores in Britain. 
Other companies that are no longer US citizens include Pfizer and Medtronic.  
Pfizer is one of the most aggressive U.S. companies reporting income in countries with lower tax rates than the U.S. as a way of reducing their effective tax rate, according to data compiled by Bloomberg. The drugmaker had the second-highest amount of profit kept overseas, $63 billion, behind only General Electric Co., according to securities filings as of March. 
USA Today reports on Medtronic:
In one recent high-profile "tax inversion," Medtronic, a venerable Minneapolis-based medical device manufacturer, agreed last month to buy rival medical-device maker Covidien PLC for $42.9 billion. Covidien has its "headquarters" in Massachusetts but is "domiciled" in Ireland, which has some of the lowest corporate tax rates in the world at 12.5 percent. The U.S. corporate income tax rate is 35 percent, the highest in the world. 
"When you invert, it makes it easy to strip income out of the U.S. and put it into a tax haven," said Martin Sullivan, chief economist at Tax Analysts, which provides analysis of tax laws and current events for tax professionals and the business community. "U.S. tax rules treat U.S. income and foreign income differently. When that is the case, the states would almost certainly lose revenue because when income is stripped out of the U.S. federal tax base, it is also being stripped out of the state tax base." 
Ken Santema from SoDakLiberty suggests that the reason behind the inversions is simply that the corporate tax rates are too high.  
If the US is serious about ending corporate inversion the current tax rates must be lowered. Unfortunately that isn’t likely to happen any time soon. Too many people think corporations aren’t taxed enough and too many politicians have been bought by big business to provide special tax breaks. In such an environment it is unlikely anyone will look at the obvious answer: cut corporate taxes to a flat rate with no special deductions.
That may be part of the problem, but the corporations are providing less and less to the US Federal Revenue:
America is broke,” declared House Speaker John Boehner a few years ago. But clearly the country is not broke; we are just being robbed, as many corporations create ways of avoiding, dodging, shirking and generally not paying their taxes. The share of federal revenue coming from corporate taxes has dropped from around 32 percent in 1952 to 8.9 percent now. As a share of gross domestic product, it has fallen from about 6 percent of GDP then to less than 2 percent now. Meanwhile the rest of us — including small domestic companies that don’t have armies of tax consultants — have to make up that shortfall, either through increases in things like payroll taxes, or through cuts in the things government does to make our lives better. 
The reality is that the corporate tax rate is not too high, but we have created a system that benefits the powerful lobbyists hired by these corporations and ignores the smaller corporations.  While Walgreens is getting a tax break, Lewis Drug has to cover Walgreens leaving.

What to do about it?  First, I say that these corporations can no longer give to political campaigns.  They are "persons" according to five Supreme Court Justices and it is illegal for foreign nationals to donate to political campaigns.  They should also restricted on their ability to lobby in Congress.  All of the CEOs and other top officials should renounce their citizenship and be required to apply for green cards to live in the United States. 

Another idea is to do something like Mr. Santema suggested.  Make it a level playing field and then you don't have to have such a high rate.  Instead of a flat rate, because companies like Pfizer will still hide profits, one idea is to make their profits more open and establish a Sales Tax Apportionment of Global Taxes.  This idea recently has been pushed in a study by Michael Udell and Aditi Vashist (this is a PDF) to make all companies (US based and Foreign based) pay taxes on sales done in the United States.  The idea would allow for more companies paying their fair share and it could allow for the decrease of the tax rate, helping those companies like Lewis Drug.


  1. Ireland charges 12.5% and America charges 35%. Time to lower our tax rate to 12%.

  2. If we dropped ours to 12.5% then Ireland or somewhere else would go to 11%. Many of the companies want a 0% tax rate. The above proposal looks like it would allow for a significant lowering of the overall rate because it would broaden the base. The companies sell and have everything in the US, but they are able to use loppholes and others to avoid paying taxes.