Latest posts by Donald Kendal (see all)
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With recent news about Burger King and medical device manufacturer Medtronic relocating their headquarters outside of the United States to avoid high corporate taxes, the subject of corporate inversions has been a big topic of discussion in the media. While President Obama and the Treasury Department condemn these moves and construct roadblocks to prevent inversions, they fail to see the reasons that drive these corporations overseas.
As Bernard L. Weinstein writes in a piece published by The Hill, “Inversions should be viewed as a reaction to our famously dysfunctional tax system, especially as it applies to corporations.” Simply put, our far-reaching and complex tax code is pushing business out. And who benefits from these moves? The countries that are now collecting the tax revenue by offering an overall smaller tax rate. Weinstein continues:
“Besides being notoriously complicated, inefficient and riddled with special interest provisions, the system leaves U.S. companies with by far the highest tax burdens in the industrialized world.
“The federal tax rate for corporations is 35 percent. But when you include state taxes as well, according to the Tax Foundation, the rate is more like 39.1 percent. Compare that to a net corporate tax rate of 15 percent just across the border in Canada.”
When just looking at the numbers, it is an obvious choice for these companies to move their headquarters out of the country. This is a case of people voting with their feet.
What is worse is when the tax code is used as a weapon against a specific company or industry. Weinstein elaborates on this concept as well:
“We’re seeing a shameless example of that right now in the federal government’s tax assault on America’s domestic oil and natural gas producers.
“President Obama has never shown much love for this industry. Now he and certain allies in Congress from both parties are trying to engineer a massive new energy tax aimed at these companies and dressing it up in the language of tax reform.”
When the tax code is used in this manner, it is seen as unpredictable and troubling. While today it may be the oil and gas industry, tomorrow fast food chains or convenience stores may be the target. This idea gives more incentive for businesses to avoid the U.S. tax system.
Instead of making it harder for companies to move their headquarters out of the country, the government should work to make the tax code more appealing. The goal of tax reform should be to get foreign companies to pull a corporate inversion and relocate their headquarters here in America.
[Segments of this article originally published in The Hill]