Lawmakers scrambled this week to raise the alarm about the prospect of companies moving out of the country to save on taxes, a development that plays into the hands of populist presidential candidates.
The problem is that U.S. businesses can save money on taxes by moving their headquarters overseas, and they are doing so in increasing numbers this year as the election forestalls the possibility of Congress working on tax reform and as European countries implement new tax rules.
“We’re hearing the beginning of a giant sucking sound,” Rep. Kevin Brady, the Republican chairman of the House Ways and Means Committee, said Thursday at an event in downtown Washington, D.C. “Many more companies could be forced to restructure,” he warned.
Brady, a conservative Texan, has sounded like a far more populist politician in recent weeks as he has dialed up his warnings about what will happen to the country if the government does not act to fix the incentives pushing companies out of the country.
He has warned that as many as 30 companies could undergo corporate “inversions,” this year, based on the fact that three did so in January alone, up from an average of two in recent years.
An inversion is a tax maneuver in which a U.S. company buys a smaller business in a low-tax jurisdiction and places the headquarters of the new company there, thereby avoiding the 35 percent U.S. tax on overseas earnings.
One of the three companies to announce an inversion in January was Waste Connections, a trash-collection company headquartered in Brady’s Houston-area congressional district. Waste Connections bought Progressive Waste Solutions, headquartered in Vaughan, Ontario, aiming to lower its effective tax rate from 40 percent to 27 percent, according to a Bloomberg report.
Waste Connections’ inversion may have personal meaning for Brady, but other, larger transactions have caught the eye of presidential candidates.
Sen. Bernie Sanders, the Vermont socialist campaigning for the Democratic presidential nomination, on Thursday drew attention to a report that pharmaceutical giant Pfizer could avoid $35 billion in U.S. taxes through its inversion with Dublin-based Allergan.
On Sunday, Sanders’ rival Hillary Clinton released an ad that featured her standing in front of the Duluth offices of Johnson Controls, the Milwaukee-headquartered energy efficiency company that announced in January that it would merge with Ireland-based Tyco.
“They’re gaming the system and moving profits to Ireland so they can avoid paying taxes here at home,” Clinton says in the ad. “It’s an outrage.”
The anti-inversion message is an easy one for Democrats, who have competed to offer populist proposals on the campaign trail.
Among Republicans, only Donald Trump has consistently drawn attention to inversions, a development that plays into his narrative that the U.S. is losing to other countries because of poor negotiations by its leaders. The real estate tycoon has said that only he among Republican candidates has the understanding of the tax code and the ability to cut deals needed to stop corporations from fleeing the U.S.
The exact scale of the problem is not clear. The Joint Committee on Taxation, Congress in-house tax experts, estimated in July that further inversions could cost the Treasury $41 billion over 10 years if no action is taken. In contrast, the government is expected to take in $3.9 trillion in corporate taxes over the same period.
Whether the pressures on companies to invert have increased since then, as Brady’s comments suggest, is not clear. New incentives have come into play, most notably the failure of an effort last year to reform business taxes and the finalization of an Organization for Economic Cooperation and Development agreement to prevent the erosion of countries’ tax bases. The agreement’s rules, businesses worry, could prompt companies to move not just headquarters but also jobs and equipment overseas.
“By standing still we are simply falling behind,” said Caroline Harris, chief tax counsel for the Chamber of Commerce. “As noted, hundreds of companies are acquired or taken over each year. If we make no effort to improve our system so American businesses can compete globally, there is no reason to think this will change.”
Brady’s committee this week took the first steps toward developing legislation to address the underlying issues, which are thought to be that the U.S. has the highest corporate tax rate among developed nations and that the country imposes an unusual worldwide tax on all overseas profits.
That effort, if it is to be successful, must win over Democrats in the Senate and White House. That will be difficult, given underlying disagreements over whether it should raise tax revenue.
But while lawmakers might not agree about the form of the legislative solution, Democrats do share Republicans’ concerns about what’s happening.
“It is vital that Congress triage the inversion virus and the rampant tax gaming we have seen that erodes our tax base,” Sen. Ron Wyden said Thursday in a speech delivered at the Brookings Institution, a Washington think tank.
“There is a dangerous type of feedback loop developing,” the Oregon Democrat warned. “It threatens to winnow down our tax base more and more.”
