New Anti-Inversion Rules Ignore the Real Problem of High Corporate Income Tax

As threatened, the Treasury Department took additional steps to combat corporate inversions – the practice of buying out a foreign company in order to relocate and reincorporate in a country with a more favorable tax code or business environment. President Obama praised the Treasury’s actions saying that this helped close “loopholes” that allow corporations to get out of paying their “fair share.”

Pursuing a strategy to maximize profitability is to be expected as a normal business practice, regardless of attempts to characterize this as unscrupulously taking advantage of “loopholes.” And the concept of corporations paying their “fair share” evaporates when you consider that corporate taxes are ultimately borne by consumers, who pay a higher price for goods and services from highly taxed companies, and who would benefit greatly from lower taxes in myriad areas of life and commerce.

Currently, the United States’ federal corporate income tax rate of 35 percent (39.1 percent when you add in state and local taxes) is the highest in the developed world and far above the Organization for Economic Cooperation and Development (OECD) average of 24.7 percent, making the U.S. an extremely uncompetitive place to do business. Our friends at the Tax Foundation took a look last summer at how consumers and the economy would benefit from corporate tax reform; specifically, if our rates were lowered to the OECD average, the United Kingdom’s rate of 20 percent, and the Canadian rate of 15. Unsurprisingly, the results indicated that the lower the rate the better the economic benefit. Here are some specifics from the report:

  • A lower corporate tax rate would create 425,000 – 613,000 new jobs.
  • Reducing the corporate income tax rate to 25 percent would boost GDP by 2.3 percent.
  • Wages would increase by between 1.9 percent and 3.6 percent if the corporate tax rate were lowered.

The March jobs report showed a slight slip in unemployment back up to 5 percent, ostensibly due to more people entering the workforce and looking for jobs. Reducing the corporate tax rate would not only encourage more U.S. corporations to stay in the U.S., it would create hundreds of thousands of new jobs, bolstering our precarious economic outlook.

In announcing the new regulations, both President Obama and Treasury Secretary Lew urged Congress to take action to prevent future corporate inversions. However, their rhetoric focused more on “closing loopholes” and making it harder for corporations to invert – in essence holding domestic firms hostage – than on addressing the root cause of this behavior.

Unfortunately, for Pfizer, Allergan, PLC, and their customers, who were the target of the Treasury’s latest actions, the new regulations appear to have achieved their goal: the pending merger has been called off. Pfizer, however, will continue to seek out restructuring options in order to remain competitive in the global marketplace.

Our burdensome business environment forces corporations to waste resources working in and around an increasingly complex regulatory and tax regime. Rather than trying to maintain a strangle hold that squeezes corporations, Congress should bring our corporate income tax in line with our competitors. Doing so would re-open our doors to business and redirect corporate efforts toward innovation and growth.