Business CEOs are blaming high U.S. corporate taxes for making American companies ripe for takeovers by foreign firms, an argument meant to build momentum for tax reform.
The Business Roundtable, a group of executives of large companies, this week published a report by the accounting firm EY finding that the country’s high corporate tax rate and outdated tax provisions have resulted in U.S. companies disproportionately being acquired by foreign owners in mergers and acquisitions.
It’s a line of argument that flips the political logic that led President Obama last year to criticize businesses for moving their headquarters to low-tax countries in so-called inversions, calling them “corporate deserters.”
Now, businesses are saying that the outdated tax code makes it uncompetitive to keep headquarters in the U.S., and that companies face pressure to move their headquarters, whether through an inversion or by an outright foreign takeover.
“The bottom line is: Whether it’s inversions or whether it’s just looking at regular M&A activity … what we’ve found is the problem is the U.S. tax code,” said Matt Miller, the Business Roundtable vice president overseeing tax and fiscal policy.
What’s unique about the U.S. corporate tax code is that it has the highest statutory rate of any developed nation, at 35 percent, and that its “worldwide” system taxes companies on income earned in other countries when it is brought back into the U.S.
In recent decades, most advanced economies have moved toward lower rates and “territorial systems” that only tax income earned domestically.
As a result, U.S. multinationals with lots of business overseas could cut their tax bills on those foreign earnings simply by being headquartered in a country with a territorial system. They would still pay full taxes on U.S. earnings, but get to access their foreign earnings without paying the taxes the Treasury Department would have required.
The report commissioned by the Business Roundtable used mergers and acquisitions data from Thomson Reuters and examined the relationship between takeovers and countries’ tax rates on income earned abroad. It found that if the U.S. corporate tax rate were 25 percent, the U.S. would have been a net acquirer of businesses over the past 10 years, rather than losing them.
Sales of U.S. companies to buyers from other advanced economies would have fallen from $1.3 trillion to $1 trillion over 10 years. Meanwhile, U.S. purchases of foreign-owned companies would have risen from $1.2 trillion to $1.4 trillion.
The majority of takeovers are not tax-driven, Miller noted, and it’s good when they aid business. The problem is when they are about reducing taxes. “The goal for the business community is that [mergers and acquisitions] behavior would be driven by the market, not by U.S. tax policy,” he said.
It appears that, like inversions, foreign takeovers of U.S. companies are becoming more frequent. There were 1,386 cross-border mergers and acquisitions worth $275 billion targeting U.S. businesses in 2014, according to the financial reporting company Dealogic. That was the most since 2010.
Those deals don’t mean that factories, plants and offices are moving out of the U.S. But the public should still care, the report claims, because domestically owned businesses “are more likely to conduct more of their research and development activities in the United States.” That, in turn, means higher wages for U.S. workers.
The report did not attempt to estimate how tax receipts have been affected by the tax-driven foreign takeovers.
Some experts, especially on the Left, have expressed skepticism that the U.S. tax code has hurt companies’ competitiveness, given the multitude of tax breaks and tax avoidance strategies that allow corporate lawyers to avoid paying taxes on income earned abroad. A Government Accountability Office study found that corporations paid an effective tax rate of just 13 percent in 2010.
“We don’t think these companies are paying their fair share of taxes, not that they’re overly taxed,” said Frank Clemente, executive director of the advocacy group Americans for Tax Fairness.
Noting the strength of corporate profits in recent years, Clemente asked, “Where is the U.S. uncompetitive right now? Who doesn’t want to do business in America?”
Nevertheless, Treasury Secretary Jack Lew, who previously accused executives seeking inversions of lacking “economic patriotism,” has said in recent weeks that only comprehensive tax reform will eliminate the pressures for companies to move their headquarters abroad.
That is the goal for the Business Roundtable, according to Miller, who said his organization has been meeting with the working groups set up by the Senate Finance Committee to develop reform legislation.
He said they’ve had “strong engagement.”
Correction: This article has been updated to correctly identify the group for which Frank Clemente is executive director. It is Americans for Tax Fairness.
