A Simple Lesson from Immigration Applied to Corporate Tax Inversions

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Regardless of the perspective, one lesson is clear from the immigration issue facing the country—people long to live and work in the United States of America. The U.S. remains attractive to millions seeking a better way of life. Despite this lesson from immigration, many in government appear to have missed the point when it comes to the corporate inversion discussion.

Corporate tax inversion is the process of relocating corporate headquarters to a country with lower taxation. Often, these corporations “invert” by acquiring a smaller company already doing business in the country with the attractive tax policies. Two primary aspects of the U.S. code incentivize business leaders to invert. The first of these two issues is the U.S. average federal and state corporate tax rate. At almost 40% (39.27% www.taxfoundation.com) the U.S. is one of the world’s highest. Compare that with France at 34.4%, Canada at 36%, and Ireland at 12.5%.

The second aspect of this issue is the idea of repatriation—bringing profits earned abroad home to the U.S. According to the Center for American Progress (2014), there are trillions of dollars in U.S. corporate profits overseas. Companies do not repatriate these profits due to the stiff cost of doing so. Yes, much of those funds are in U.S. institutions. Yet, these funds are not taxed costing the federal government approximately $50 billion annually (www.americanprogress.org), and limiting how the funds reinvest. Generally, corporations who pay taxes on profits earned abroad are subject to additional tax in the U.S. if the foreign tax was lower than the U.S. rate. Consequently, corporations leave those profits on the balance sheets of their foreign subsidiaries.

The American citizen pays the price in lower economic growth and lost tax revenue.

The solution is simple to understand and is obvious in U.S. immigration. Ask any person seeking to immigrate to America, “Why do you want to come to America?” and the response will be some derivation of, “…because it is more attractive than where I am now.” This simple, but powerful idea is the solution to the corporate tax inversion challenge. If we ask corporate leaders contemplating inversion why, we will certainly hear, “…because it is more attractive than where we are now.” Given this clear message, are policy-makers scrambling to make America more attractive? Not exactly. The response has been new policies to make tax inversion more costly reducing the appeal of such inversions while making business in America more cumbersome.

Consider what would happen if the U.S. was the most attractive global locale to do business. The Americans for Fair Taxation, since 1995, claim that if America had the most attractive tax climate, the flow would reverse from corporate emigration to immigration. A reversal would mean a better footing to compete globally. Ultimately, companies would seek to locate in the U.S. bringing employment with them.

In this global economy, no country has the luxury of ignoring the business climate of the rest of the world, and there is a compelling argument to improve the business climate in the U.S. This issue is not isolated to large corporations. According to the U.S. State Department, 99% of businesses in America are small and three-fourths of new job opportunities come from small business. Moreover, these emerging small businesses provide new entry points to minority and women in the economy.

With this in mind, the country’s policy-makers should be asking, How do we make America the most attractive business destination in the global neighborhood?

People and businesses flee the undesirable and seek the attractive.

Here are the taxation rankings across the globe.

Global Corporate Taxation Rates

Rank

Country

Federal Rate

Combined Federal & State Rate

1

Japan

30

39.54

2

United   States

35

39.27

3

Germany

26.38

38.9

4

Canada

22.1

36.1

5

France

34.43

34.4

6

Belgium

33.99

33.99

7

Italy

33

33

8

New   Zealand

33

33

9

Spain

32.5

32.5

10

Luxembourg

22.88

30.38

11

Australia

30

30

12

United   Kingdom

30

30

13

Mexico

28

28

14

Norway

28

28

15

Sweden

28

28

16

Korea

25

27.5

17

Portugal

25

26.5

18

Finland

26

26

19

Netherlands

25.5

25.5

20

Austria

25

25

21

Denmark

25

25

22

Greece

25

25

23

Czech   Republic

24

24

24

Switzerland

8.5

21.32

25

Hungary

20

20

26

Turkey

20

20

27

Poland

19

19

28

Slovak   Republic

19

19

29

Iceland

18

18

30

Ireland

12.5

12.5

Source: OECD, http://www.oecd.org/dataoecd/26/56/33717459.xls

 

About the author

Nicholas Markette Dr. Markette directs finance and strategy for Zenith Media Tracking while teaching and researching at Grand Canyon University.

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2 Responses to A Simple Lesson from Immigration Applied to Corporate Tax Inversions
  1. PLR
    September 30, 2014 | 4:50 pm

    Great analysis of the issue at hand. Some large companies are getting press because they are on the move to foreign countries as their headquarters.

    I like your solutions. Something should be done to make business more attractive here in the US and not make it more punitive. We need to be a global leader in the taxation matter and not by being one that can brag about being the country that collects the highest percentage. The US is losing out with this type of mentality.

  2. r. roskell
    October 1, 2014 | 2:28 pm

    well done…1000 attaboys..