Amidst the cliched rhetoric decrying “unpatriotic” companies that accompanied the Obama administration’s recent move to address corporate inversions, it was easy to miss the fact that there is relatively little of substance that can be remedied via regulation alone, even with Treasury Secretary Jacob Lew stretching the limits of executive power.
That leaves us in need of a legislative fix, and as usual the Democrats have embraced an easy-to-understand and completely ineffectual solution, which is to simply tax U.S. corporations on every dollar earned, whether it is earned here or from foreign operations.
This may sounds like a logical approach but it doesn’t work. The problem it creates is that U.S. corporations will be given yet another reason to relocate their headquarters abroad, since no other countries have such a counterproductive policy. And if we were to do that, more companies would indeed move—and not just their legal domicile but their actual base of operations. As one corporate CEO remarked to me a few years ago, most companies headquartered in the U.S. are simply here because of a historic accident. The tax consequences of being based in the U.S. are not worth the benefits that come with it, compared to being elsewhere.
Actually moving a company’s headquarters out of the United States is not that unthinkable or difficult. Friends of mine who work for Caterpillar, based in my bucolic hometown of Peoria, tell me that the company regularly deals with executives who have little desire to return to HQ after doing a stint in Switzerland or Singapore. If there are substantial savings to be had from moving their physical headquarters to some major foreign city, their MBAs and senior engineers—many of whom fail to appreciate Peoria’s ineffable charm—may not put up all that much of a fuss. And what’s true for Peoria also holds for other places as well: The grandeur of life in the outer suburbs of Chicago isn’t all that it’s cracked up to be for many.
To be clear, having a U.S. headquarters is most definitely a good thing: Ask the denizens of St. Louis and Milwaukee how it affected the quality of life—as well as the number of high-paying jobs in the area—to lose the munificence of their breweries when both were acquired by foreign concerns.
We shouldn’t expect domestic companies to pay a higher tax rate than their foreign competitors and be competitive abroad. Liberal objections that the myriad tax breaks in the U.S. corporate tax code mean that the tax doesn’t make them less competitive are beside the point: If these corporations are giving up 40 cents of every additional dollar they earn, it creates a powerful reason to go elsewhere, regardless of the other tax breaks.
Truly fixing the flaws in how we tax foreign-sourced income will necessitate the cooperation of our major trading partners and some sort of multinational tax treaty to ensure the fair and equitable treatment of income across the globe. Negotiations to do precisely this have been taking place for some time under the auspices of the OECD (via the so-called BEPS plan) and the group recently issued an in-depth report on how the partner countries might address this issue. The administration participates in these meetings and knows that the blocking and tackling have been done on this issue. Preempting—and possibly side-tracking—these efforts with a clumsy and overtly political grab-bag of regulations is antithetical to the notion of being a global partner that plays nice with its friends.
Banning inversions is a non-solution, like other administration solutions that are meant to be politically appealing but do nothing to address the underlying issue. If low-income workers are struggling, the answer is not simply to make employers pay them more. To fix high energy prices we can’t simply dictate that cars be made more fuel efficient. Outlawing what we don’t want to happen may be good politics but it makes for terrible policy.
There is indeed a problem afoot in the taxation of U.S. multinationals. There is also a solution at hand that can be reached by cooperation in the political process—meaningful tax reform that results in a more competitive tax rate and fewer deductions, exclusions, and exemptions. It’s a pity the Obama administration evinces little interest in pursuing it.
Ike Brannon is a senior fellow at the George W. Bush Institute and president of Capital Policy Analytics, a consulting firm in Washington, D.C.
