There’s a lot in the news this week about “corporate inversions.” That’s when a U.S. company with a foreign subsidiary becomes a foreign company with a U.S. subsidiary.
Not surprisingly, Congressional Democrats are out demonizing these companies for daring to look out for their shareholders, employees, and customers. What you won’t hear many Democrats talk about is why these companies feel compelled to do an inversion in the first place.
In a word, it’s all about the U.S. corporate tax rate, plus a few other details.
The U.S. has the highest tax rate on businesses in the developed world. Our corporate tax rate (including states) is 39.1 percent. Flow-through firms face an even higher rate, approaching 50 percent depending on their state.
Compare this to business taxes overseas, which average about 25 percent in the developed world.
Each of our major trading partners–Canada, Mexico, Japan, the United Kingdom, Germany, and France–have business tax rates lower than ours. There are also minor trading partners (Ireland and the Netherlands being good examples) who have significantly lower rates and have been attracting capital recently.
Combine this with the fact that the U.S. has a worldwide tax regime (exposing our companies’ profits earned abroad to potential double taxation) and painfully slow cost recovery tax rules, and you have created an atmosphere where corporate inversions become very attractive.
If you want to reverse this trend, there’s only one way to really do it–lower the tax rate that businesses pay. At the very least, companies here should not face a tax rate higher than the 25 percent average rate they would face elsewhere in the developed world.