New Treasury Department Regulations Will Not Fix America’s Competitiveness Problem

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Posted by Alexander Hendrie on Tuesday, April 5th, 2016, 7:00 AM PERMALINK

The U.S. Treasury Department yesterday released new regulations they claim will curb business inversions. In reality, this is the latest in a line of regulations that have and will fail to address the underlying problem because they are treating a symptom rather than the root cause of inversions. 

America has a competitiveness problem, and inversions together with foreign acquisitions are the consequences of this problem. By choosing to treat the symptom rather than the disease, Treasury is ensuring American businesses face the tough choice of fleeing the U.S. tax system or remaining headquartered in the U.S. and facing a crushing disadvantage when competing with foreign businesses.

The newly announced regulations take direct aim at inversions by implementing new regulations on earnings stripping, the process by which international businesses borrow and allocate debt across subsidiaries. The new regulations also modify thresholds at which a newly inverted company is counted as foreign or domestic under the U.S. tax code.

While these regulations may clamp down on pending inversions, they do nothing to fix the underlying problems of the tax code. Treasury has already announced past regulations in September 2014 and November 2015, yet these have done nothing to stem the tide of new inversions.

Instead of new regulations, the solution to this problem should be tax reform. In fact, Treasury Secretary Jacob Lew even acknowledged that tax reform is the best way to address inversions when announcing these new regulations.

As it relates to inversions, tax reform must address two issues.

First, America must reduce its corporate tax rate to a globally competitive rate. Currently, the U.S. has a combined state and federal average of 39.1 percent, far above the average rate in the developed world, which is just 25 percent.

While other countries have pro-actively reduced their business tax rate to compete in the global economy, the U.S. rate has remained unchanged since the Tax Reform Act of 1986. As a result of this inaction, the U.S. rate remains at a level far above major competitors.

Second, lawmakers must scrap the outdated worldwide tax system and move toward a territorial system. Of the 34 countries in the Organisation for Economic Co-operation and Development, the U.S. is just one of six that retains the worldwide system.

This means that any U.S. business with operations overseas must first pay taxes in the country it earned this income and then pay U.S. taxes when bringing this income back. This double taxation leaves American businesses at a substantial disadvantage, because they face higher taxes and a more complex system than their competitors.

While these latest regulations may temporarily halt the mass exodus of American businesses, they will do nothing to address the underlying competitiveness problem. Rather than wasting time pushing for complex new regulations, Treasury should work with Congress toward a permanent solution: tax reform that makes America competitive again. 

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