Last week, U.S. Treasury Secretary Jacob J. Lew called on Congress to eliminate corporate “inversions,” the practice whereby U.S. companies relocate their headquarters to countries with more desirable tax structures. Concern over the erosion of our corporate tax base is important and shouldn’t be taken lightly. That said, what is of greater concern is our inability as a country to address the global competitiveness of our corporate tax rate. U.S. corporate tax rates are not yet competitive enough, in part due to the fact that Congress has yet to pass a fully-comprehensive tax code that addresses competitiveness.
The negative focus on inversions will unfortunately have the reverse effect of what is intended, and will instead drive companies away from America, causing a deterioration of tax revenues and severely curtailing job growth by making our country less desirable for entrepreneurs.
Our markets have the second highest tax rates in the world, a burden that stifles the ability of U.S. companies to grow, create jobs and innovate. The corporate tax rate in the U.S. is 35 percent. Popular countries for inversion deals all have corporate tax rates significantly lower than the U.S., including the U.K. (21 percent), Ireland (12.5 percent) and the Netherlands (25 percent). The average developed country tax rate is about 25 percent, according to the Organisation for Economic Co-operation and Development, and our largest trading partners — China, Canada and the U.K. — all have lowered their tax rates, putting the U.S. at a big disadvantage. Between those gaps with the U.S. sits a lot of cash for companies to use for investing in new equipment and infrastructure — or to hire on new employees in the U.S. and across their worldwide operations.
Though seemingly counter-intuitive, inversion is a critical arrow in the quiver of U.S. companies — and other startups — as they seek to grow by raising capital. It is properly regulated — and can be undertaken within a mergers and acquisitions deal by which a U.S. company’s shareholders walk away with a maximum of 79.9 percent ownership in a newly created entity overseas.
The proposal would severely limit merger-related inversions by raising the threshold of foreign share ownership required for such a deal from more than 20 percent to more than 50 percent. This level would be impossible for many American companies to match. There are few companies out there equal to the size — and ability — of say, Apple.
If the federal government were going to attempt to prevent inversions, I would then strongly caution the impact of unintended consequences.
First, it will bring about a disincentive for creating new U.S. companies. The inversion option is part of the calculation of starting and growing businesses, precisely because it can provide entrepreneurs with a strategy to access cash held overseas without incurring additional tax expense.
In relation, nothing could be worse for the future of the corporate tax base than to smother companies as they’re ready to take their first entrepreneurial breath. Why would anyone ever start a business in the U.S. with such stringent restrictions on their corporate strategy? It reminds me of how the Eagles so poetically put it in “Hotel California” — “You can check out any time you like, but you can never leave.”
Rep. Elijah Cummings, D-Md., right, hugs Harold Schaitberger, General President of the International Association of Fire Fighters, after the Congressman spoke at the IAFF's Legislative Conference General Session at the Hyatt Regency on Capitol Hill, March 9, 2015. The day featured addresses by members of Congress and Vice President Joe Biden.