Why the US is doing nothing to stop the hemorrhaging of corporate tax dollars

August 25, 2014
August 25, 2014

The message to corporate America today is clear: If you’re not already looking for a “tax inversion” partner, you should be.

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Burger King shares are up 15% after it confirmed talks with the Canadian coffee and donut chain Tim Horton about a merger. Tim Horton’s shares are also up strongly on the Toronto stock exchange.

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If it happens, the tie-up would be the latest in a growing list of so-called “inversion” deals this year, which basically involve American companies buying or merging with peers whose headquarters are offshore, with the intention to move the corporate headquarters of the new entity to these locations, where corporate tax rates are lower.

America’s statutory corporate income tax rate is 35%, the highest in the developed world (Canada’s is 26.5%). But actually, hardly any one pays the 35% rate. A report by the Government Accountability Office last year found that the average effective rate paid by US companies is just 12.6% (after companies claimed tax credits and exemptions, and used tax havens). Separate analysis by Goldman Sachs (where the investment banking division is the top adviser on inversion deals) found that effective tax rates had never been lower, with just 10% of S&P 500 firms paying the statutory rate over the past decade.

This is clearly a problem for the US, which already has structural, long-term budget issues. How to fix it remains a contentious issue. US Treasury Secretary Jacob Lew has said the White House is looking at ways to “very materially change the economics of inversions,” though specifics of how it would achieve that remain unclear. Meanwhile, US companies spend huge sums lobbying furiously against their loopholes being closed.

Conservatives argue that the statutory rate should be reduced, along with measures to close the loopholes. Economist Greg Mankiw has even provocatively argued that the corporate income tax should be abolished entirely. Perhaps more reasonable is his suggestion that profits already taxed in overseas countries not be taxed again when they are repatriated. US companies have trillions of dollars stored offshore, and are loath to bring it back because of this double-taxation.

As with most things in Washington, there is no quick fix to this problem. And both sides of the political aisle in Washington depend on corporate funding to win elections. I wouldn’t bet on an elegant solution any time soon.

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