Railing against corporations that leave America to relocate to another country is a winning tactic. Republican presidential candidate Donald Trump has fully endorsed this strategy during his stump speeches. When speaking about American business expats, he recently told supporters at a campaign rally in New Hampshire, “You can tell them to go f*** themselves.”
Many economic factors, stretching from labor costs to regulatory burdens to foreign demand, have led U.S. companies to move some or all of their operations out of America. But one of the main causes, especially when it comes to relocating a corporation’s headquarters abroad, is America’s internationally uncompetitive corporate-tax system.
The fault lies with the federal government, not corporate managers fulfilling their legal duties. Despite Trump’s rather heated rhetoric, his own tax plan shows that he fully understands this cause when he is not tossing applause lines to his supporters.
America’s combined federal and average state corporate-tax rate of 39 percent is the highest in the developed world. But it was not always this way. America missed the global party when it came to lowering corporate tax rates.
Since 1988, the average corporate-tax rate for 34 Organisation for Economic Co-operation and Development countries has fallen from 44 percent to 25 percent. Over that time, the U.S. rate actually increased. Even the Nordic countries that Democratic presidential candidate Bernie Sanders so admires have lower corporate-tax rates than America does. Finland has a corporate tax rate of 20 percent, Sweden’s is 22 percent, and Denmark’s is 24 percent.
American companies also have to pay federal taxes on the income that they earn overseas if they bring that money back to America. This is the case even though these earnings were already taxed by another country. Besides the United States, only five other OECD countries tax corporate income earned outside their borders, down from 19 in the 1990s.
Rather than spending these foreign earnings in America, corporations choose to leave their overseas profits out of the IRS’s reach. According to a Bloomberg News review of the securities filings of 304 corporations, U.S. companies are holding more than $2 trillion in profits abroad. Allowing these profits to be repatriated would be a boon for the U.S. economy, as domestic investment would drastically increase.
Inversions are one of the most visible signs that the U.S. corporate-tax code is broken. These moves involve corporations merging with foreign companies, though inversions do not mean that the businesses stop operating in the United States. Rather, corporate headquarters move to other countries to reduce tax burdens. These are the types of deals that occurred between Pfizer and Allergan (Ireland), Medtronic and Covidien (Ireland), and Johnson Controls and Tyco (Ireland).
Notice a trend? Ireland is a popular destination for corporations looking to move their headquarters out of the United States, because its corporate tax rate of 12.5 percent is just one-third of America’s rate.
Despite the Obama administration’s efforts to make inversions more difficult, just last month Waste Connections agreed to buy Progressive Waste Solutions so that it could move its company headquarters north to Canada, which has a combined national, provincial, and territorial corporate-tax rate of 26.5 percent. Burger King made a similar move when it merged with the Canadian donut chain Tim Hortons.
#share#Even if Trump wants America to remove itself from international trade, the reality is that capital is increasingly global in today’s economy. The longer Americans are forced to wait on corporate-tax reform, the more companies will leave the country in search of better deals. Late last week, House Ways and Means Committee chairman Kevin Brady (R., Texas) warned that the number of corporate inversions could reach 30 in 2016 — a historic high.
Corporations that take steps to shield themselves from punitive taxes are not blameworthy — and Trump clearly understands this. Trump’s tax-reform plan even states: “Too many companies — from great American brands to innovative startups — are leaving America, either directly or through corporate inversions. . . . Companies leaving is not the disease, it is the symptom.” Trump says his plan will make “America globally competitive again” by lowering the top federal tax on business income to 15 percent.
Trump understands companies are not to blame for inversions. He stated in a November 2015 Bloomberg interview: “There is no way you can stop [inversions] really other than lowering the taxes because right now. . . . It is prohibitive to bring that money in. They’d have to pay so much, they’d have to be fools to bring it in.”
If America were to get serious about ending inversions and stimulating the economy, it can follow the example of the United Kingdom. In 2009, it abandoned a world-wide corporate-tax system in favor of a territorial system and lowered its top rate from 28 percent to 20 percent. Some detractors predicted that the changes would plunge the U.K. economy into recession. The opposite happened. Inversions stopped, and the U.K. economy grew much faster than did its European peers.
Corporate-tax receipts are also not particularly profitable for the government, accounting for only 10 percent of U.S. federal revenue. Lowering the corporate-tax rate and solely taxing income earned in the United States would not cost the government that much in tax receipts, especially after accounting for the increased long-term economic growth that would accompany these reforms.
Even President Obama realizes the many benefits of corporate-tax reform, and he has called for lowering the top U.S. corporate-tax rate to as low as 25 percent. If the 25 percent rate were enacted across-the-board, the non-partisan Tax Foundation estimates, U.S. GDP would increase by 2.3 percent. Cutting the rate to 15 percent, the same level as Canada’s national rate, would increase GDP by 4.3 percent.
And what about the American workers who Trump repeatedly claims are getting left behind? Cutting the corporate-tax rate to 15 percent would increase their wages by 3.6 percent and create nearly 800,000 full-time jobs. If America were to go even further, Boston University professor Laurence Kotlikoff estimates, eliminating America’s corporate tax rate would increase real wages by as much as 12 percent.
#related#As a self-proclaimed business genius, Trump knows that corporations have a duty to their shareholders. If companies can increase their profits by moving their headquarters to another country, it is not only a smart move but also the right action for executives to take. This holds especially true once a competitor in the same industry completes an inversion. Other corporations need to follow to remain competitive, as we’ve seen in the pharmaceutical industry.
As with many of Trump’s other economic pronouncements, such as those on international trade, foreign competition, and currency valuation, his campaign rhetoric on why companies leave the United States is not rational. But even he understands that the string of companies moving their headquarters abroad is a symptom of America’s broken corporate-tax code and of federal incompetence, not proof that corporations are evil. If Trump needs any more proof, he can simply look at his own tax-reform proposal.
— Jared Meyer is a fellow at the Manhattan Institute for Policy Research. Follow him on Twitter here.