In the House of Representatives, Chris Van Hollen (D-Md.) and Sander Levin (D-Mich.) have recently introduced the Stop Corporate Earnings Stripping Act of 2016. It’s the latest effort to clamp down on U.S. corporations that relocate assets, operations and revenue abroad.
The central issue involves so-called “inversions”: U.S. companies moving their headquarters overseas, so as to pay lower corporate tax rates. Inversions also let companies avoid paying U.S. taxes on international earnings.
But the real problem with inversions is in their removal of capital investment — and its associated growth potential — from the U.S. economy. That lost capital is not measured simply in hundreds of billions of lost dollars, but also in human capital development. After all, many inverting U.S. corporations are in fields of high technology and highly skilled medical and pharmaceutical research. The costs to America are real and growing.
Unfortunately, liberals such as Van Hollen, Levin and their ilk fail to realize that inversions are only a symptom of an economic problem rather than the problem itself. The underlying cause of inversions is twofold: U.S. corporate taxes are too high and too complicated. Ultimately, to reduce inversions and foster private investment in higher-skilled workers and higher profits (the fundamentals of economic growth), the United States must embrace two key reforms.
First, and most obviously, the federal government needs to reduce corporate tax rates. Today including state taxes, the U.S. corporate tax rate averages 39 percent. In contrast, the corporate tax is 12.5 percent in Ireland, 20 percent in the United Kingdom, and just under 28 percent (though generally lower with deductions) in Canada. Unsurprisingly, those countries have become favorite destinations for U.S. corporate inversions.
And while liberals pretend that taxes are of peripheral importance in corporate decisions, consider the great exodus of investment from California to Texas, and liberalism’s regulation-fetishism in punishing American workers. Put simply, taxes matter and U.S. corporate taxes are too high.
Liberals such as Van Hollen and Levin fail to realize that inversions are only a symptom of an economic problem rather than the problem itself
Conversely, Britain shows how a competitive and simple corporate tax code can work wonders. Entering office in 2010, Britain’s Conservative Prime Minister David Cameron lowered corporate tax rates. Taking this action amidst the recession, Cameron was vulnerable to leftist slurs that he was a “tool of big business.” Yet today, economic facts vindicate Cameron. In 2014-2015, the U.K. was Europe’s top destination for foreign direct investment. And in its latest report, the Organization for Economic Co-operation and Development projected that Britain would have the world’s fastest growing major economy in 2016. That’s economic activity that boosts British wallets across the economic spectrum.
But to keep American businesses in America, we must also restore their ease of operation.
That leads us to the second imperative: the federal government must simplify the tax code. Again, the U.K. offers example here. Having personally studied English law, I can attest that Britain’s tax code is far simpler than that of the United States. Offering limited but useful deductions, filing simplicity and equivalency across the range of businesses, the U.K.’s corporate tax system encourages Britons to establish corporations and foreign corporations to re-establish in Britain. More importantly, Britain’s tax code centers in an objective reading of economic reality: in a globalized economy, corporations will invest in the location that affords highest returns on investment. Today, the United States is low on that list.
The tragedy of the liberal approach to the U.S. tax system is its self-flagellating quality. By extending regulations and embracing anti-private sector policies, liberals only push opportunity abroad. In doing so, they fail to realize that where there is a profit incentive abroad, companies will maximize their pursuit of that advantage. Moreover, liberals don’t seem to realize that at the level of ultimate regulation, many U.S. corporations would simply cease operation and re-establish abroad! And as I’ve noted for Opportunity Lives, under Hillary Clinton and Bernie Sanders things may soon get worse.
This is not to say that American conservatives are perfect here. Too many Republicans still flirt with corporate cronyism.
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Public disgust with these tendencies helps explain the rise of charlatans like Donald Trump. And in pushing for a reformed corporate tax code — with lower rates and greater simplicity — conservatives must also be willing to annihilate loopholes and all but the most important deductions for investment.
Nevertheless, regulations and taxes are a mortal enemy of investment and opportunity. For America’s better future, serious corporate tax reform is a necessity.
Tom Rogan is a Senior Contributor for Opportunity Lives and writes for National Review. He is a panelist on The McLaughlin Group and a senior fellow at the Steamboat Institute. Follow him on Twitter @TomRtweets.