August 27 2014
Rachel DiCarlo Currie
With its plan to purchase Canada’s Tim Hortons restaurant chain and base the new company north of the border, Burger King has drawn renewed attention to the politically explosive issue of corporate inversions. In recent months, U.S. multinationals such as Pfizer, AbbVie, and Mylan have all at least attempted similar maneuvers. Now one of America’s most iconic fast-food giants is joining the exodus and seeking to relocate its headquarters to a country with a more hospitable corporate-tax system that features lower statutory rates and a territorial (rather than worldwide) scope.
(An alternative tax system for corporations that do business abroad might solve the problem. The editors of National Review explain why U.S. multinationals would be attracted to a territorial tax system: “Our federal government claims worldwide tax jurisdiction, whereas most other countries tax only business activities within their own borders. For example, a Switzerland-based firm doing business in its home country, France, and Italy would pay Swiss taxes on its Swiss business, French taxes on its French business, and Italian taxes on its Italian business. A U.S.-based firm would do all that, too -- but it would also be subject to U.S. taxes on top of whatever it paid overseas, minus a credit for its foreign taxes. That means that U.S.-based firms always pay the higher rate between two countries, and they must do double the tax paperwork.”)
While inversions are perfectly legal, Democrats are attempting to make them more difficult and/or less desirable, with Treasury Secretary Jack Lew calling for “a new sense of economic patriotism.” Yet trying to stop the trend by adopting fresh anti-inversion laws or regulations is precisely the wrong response. “Such proposals would do nothing to make the U.S. a more favorable place to locate multinational headquarters or investments,” Columbia law professor Michael Graetz wrote in the Wall Street Journal last month. “If they succeed -- which is unlikely, given the creativity of tax planners and the potential large tax savings at stake -- the most likely outcome will be more foreign takeovers of U.S. companies.”
Graetz served as the Treasury Department’s Deputy Assistant Secretary for Tax Policy in the early 1990s, and he is a longtime advocate of radical tax reforms aimed at boosting investment and economic growth in the United States. Here’s how he described the need for a U.S. tax overhaul in his Journal piece:
“Ireland, Canada and the U.K. now have emerged as favored places to locate corporate headquarters. Their treasury officials are thrilled that U.S. companies want to relocate there. These countries have more in common than the English language and well-educated, motivated workers. They have all recently reformed their business income taxes to lower rates. At 35%, we now have the highest statutory corporate rate in the Organization for Economic Cooperation and Development, which has 34 developed countries as members. And, unlike the U.S., the vast majority of OECD countries do not impose taxes when their companies reinvest their foreign earnings at home. When U.K. or Irish treasury officials talk about their low-rate business-tax systems, they don’t speak about patriotism; they talk about being ‘open for business.’
“The U.S. is the only OECD country that doesn’t have a national tax on consumption. Relying, as we do, so heavily on individual and corporate income taxes to pay for federal expenditures hobbles us in today’s global economy. Political leaders from both parties should demonstrate their own ‘economic patriotism.’ They need to stop just talking about tax reform. The time has come for them to sit down together and enact a tax system that is fair, simple for the vast majority of Americans, and much more conducive to economic growth.”
Graetz has outlined the latest version of his proposed tax-reform plan in a National Tax Journal article. (For a summary of the Graetz plan by Washington Post editorialist Charles Lane, go here.) I shared my own thoughts on tax reform in a recent IWF policy paper.