In case you missed it, the top U.S. corporate marginal tax rate is 35%, the highest of any developed country. As a result, some of the dim-bulbs in Congress are now complaining that it is unpatriotic for industry to participate in “corporate inversions,” a political fuzz-it-up phrase for moving their headquarters to a foreign site as a tax-avoidance measure.
Indeed, the corporate share of U.S. national tax revenues has fallen from 30% in the mid-1950s to 6.6% in 2009 due to legal and regulatory loopholes in tax collections, which are instigated by this same political class. Political loonies are out of touch with American reality.
In an inversion, a U.S. company purchases a foreign firm and then transfers the American headquarters to the country of the acquired company. This does not reduce taxes a buying firm owes the U.S. government because income earned in the U.S. is taxed at U.S. rates. What is unique is that, unlike most nations, America imposes taxes on a firm’s global income, not just income earned here. So, multinationals avoid an extra tax layer by leaving non-U.S. earnings offshore. A result is that these funds are not returned for U.S. investment.
A bottom-line observation is that U.S. government must stop taxing American firms’ profits when they are brought home. Our government must treat our businesses like other nations treat theirs. Even a study by Laura Tyson, formerly head of President Clinton’s Council of Economic Advisers, found that this simple tax-code change would add $114 billion annually to the U.S. investment base.
With the current political climate and ineptitude by Congress, the U.S. Treasury has enacted several regulations to make inversions more difficult and punish companies that have already done so. While only about 50 inversion deals were completed since the early 1980s, half were done since the 2008-2009 credit crisis. Executive Order actions are a favored move by this Administration and invite your attention at Treasury (IRS) Code Section 7874, which broadens the definition of inversion. Treasury Secretary Jack Lew is promoting the idea that “we should prevent companies from effectively renouncing their citizenship to get out of paying taxes.”
An additional avenue to coerce payments is to reclassify debt as equity, with a formerly deductible interest payment now classed as a dividend. In yet another move, Senator Chuck Schumer (D-NY) wants to mitigate the ability to restrict a company’s right to deduct interest expenses (see Code Section 163(j)). In another restriction, the Senate Appropriations bill (DOD Appropriations Act of 2015) prohibits any federal contract award to a firm that reincorporated in offshore jurisdictions (specifically the Cayman Islands or Bermuda). Probably the most injurious of all these tricks is reclassifying deductible interest payments as dividends.
The Stop Corporate Inversions Act of 2014 by Senator Carl Levin (S. 2360) and Congressman Sander Levin (H.R. 4679) (both Democrats from Michigan) dated May 20 is an example of one of the most egregious oversteps. The Stop Corporate Expatriation and Invest in America’s Infrastructure Act of 2014 (H.R. 4985) dated June 26 and No Federal Contracts for Corporate Deserters Act of 2014 (S. 2704 and H.R. 5278) introduced July 30 are among the most problematic on this subject. Recently, Senator Orrin Hatch (R-UT) urged that any and all inversion-oriented legislative proposals adhere to four principles:
- It must serve as a bridge to comprehensive tax reform.
- It must not be retroactive.
- Any approaches taken should move the U.S. toward a territorial system of taxation.
- It must be revenue neutral.
The odds of a Senate vote on these matters were increasing at the time this was written in early October.
Let me add here that inversions and tax policies are not the only reasons driving U.S. enterprises away. The control mindset of leftist politicians and bureaucrats is a related issue forcing business hardships. I am involved in a situation where the government (EPA) imposes onerous regulatory requirements ($300-500,000 and two to three years to complete) to make and sell an inert, inorganic filter media that kills “pathogens,” which are classed as a “pesticide” by our federal government. Think also of American immigrant David Tran, who formed and operates the successful “hot sauce” producer Sriracha. He opined that U.S. regulatory impositions today are greater than what he fled from before and after the Vietnam War. Our government is out of control.
America has passed that tipping point that I warned you of in last month’s column. What you read here is all part of that issue. Whether and how America can or will overcome such matters is our national dilemma.