When Michigan Repulican Rep. Dave Camp’s comprehensive tax reform plan died earlier this year, so too did the hope that Congress would tackle America’s economic competitiveness problem anytime soon.
But as evidenced by this summer’s wave of U.S. companies “inverting” into more business-friendly foreign countries, there is a price to pay for the Capitol’s complacency.
America has a problem, and the D.C. tax inversion debate isn’t helping. In fact, it has uncovered a growing chasm between the government policies that U.S. companies need to compete globally and Washington’s ability to provide them.
American businesses and workers are in trouble if this chasm isn’t bridged soon.
The U.S. has always been ambivalent about globalization. We worried when the Japanese bought Rockefeller Center and the Belgians acquired Anheuser-Busch. And we still wonder about the trade-offs between low-cost goods and lost manufacturing jobs. But for the past few decades, we have pushed forward as Democrats, Republicans and Americans to a more connected, and on balance, more prosperous world.
There is no turning back in any case, not when S&P 500 firms — which employ more than 24 million people in the U.S. — generate almost half of their revenues overseas.
But rolling back globalization is precisely what some in Washington have been suggesting lately with a variety of punitive measures to ban or discourage companies from relocating abroad.
The D.C. response to inversions has already triggered a number of unintended and unwelcome consequences ranging from more U.S. companies rushing to move their headquarters overseas or sell themselves to foreign companies, to foreign multinationals threatening to reduce their investment and hiring at their U.S. subsidiaries.
Even worse, Washington’s self-destructive behavior is totally unnecessary, as other countries have shown how to successfully navigate the exact same challenge the U.S. is currently facing.
In 2008, the United Kingdom was in a panic about a wave of domestic companies leaving the country for more friendly tax domiciles such as Ireland and Luxembourg.
But the U.K. didn’t — as the U.S. is trying to do now — try to close the proverbial barn door after the horse had bolted.
Instead, it built a better barn.
The U.K. reformed its onerous tax code, moving to more of a territorial tax system and gradually reducing its corporate tax rate from 28 percent in 2010 to 20 percent by 2015. It also instituted a new “patent box,” which applies a low 10 percent tax to profits derived from certain qualifying patents.
According to a January 2014 report from the nonpartisan Tax Foundation, these reforms “turned the tide” in making the U.K. a more attractive destination for multinationals.
U.K. companies that had previously moved their headquarters to other countries — such as WPP and Dyson — came back home. Meanwhile, a recent Ernst and Young report found that 60 global multinationals were considering relocating their global or regional headquarters, and the jobs that come with them, to the U.K. — a 50 percent increase over the previous year.
Lest you think this was a giveaway for British businesses, the corporate tax rate reductions were paired with a new bank levy and the closure of certain tax loopholes, and Britain’s total tax and corporate tax revenue as a share of gross domestic product have held steady.
Despite this recent evidence from America’s close ally across the pond, Washington hasn’t taken notice.
A course correction is in order.
A good place to start would be with the recognition that a tax inversion isn’t good or bad. It is just a business strategy that, like all strategies, can be good for companies, their investors and their employees in some case and not so good in others. All inversions are not created equal.
The second point — and this bears repeating — is that the Washington policy response to date not only isn’t curbing inversions, it’s actually encouraging more of them. And if Congress or the Treasury move to ban or effectively stop inversions, it runs a real risk of eroding the U.S. tax base and hurting our economy now and in the future.
That is why the only way forward is for Congress to lead the way in addressing the various tax and regulatory problems that are conspiring to push more U.S. companies abroad.
It’s won’t be easy and I don’t envy the members who have to find a way to do it. But it has to be done.
The globalization issue is settled and America is all in. It’s about time we gave our companies the tools they need to win.
Edward J. Reilly is the global CEO of the strategic communications segment at FTI Consulting.