By Senator Tom Coburn
As our nation faces serious economic challenges, one of the few policy goals that unite all sides in American politics is the urgent need for economic growth. Enthusiasm for grand bargains ebbs and flows but all sides understand that private sector job growth is a key part of what it will take to prevent the collapse of our safety net, reduce our unsustainable debt and deficits, and end our dreary era of wage stagnation. Few policies would do more to encourage an economic resurgence than corporate tax reform.
The reality in corporate America today--like it or not--is that upper management routinely considers the regulatory environment when making key decisions. In the last three years, at least five Fortune 500 companies used a complicated legal maneuver to relocate abroad--taking an average of $39.7 billion in annual taxable revenue with them. These companies are "leaving" the country, but only on paper to avoid U.S. income taxes.
Congress is responsible for creating the complicated tax code we have today that encourages hallmark American businesses, like Sara Lee and Eaton Corporation, to use inversion mergers to avoid billions of dollars in U.S. taxes. By inverting, a domestic business can acquire an overseas entity and move--or domicile--in the lower-tax country where the new acquired entity is located.
Consider the case of Pfizer. The pharmaceutical giant, with more than $61.2 billion of revenue in 2013, has made repeated attempts to acquire its British competitor, AstraZeneca, in an effort to take advantage of what would essentially be a 22 percent tax break. Using an inversion, Pfizer would see its corporate tax rate drop to 21.3 percent from 27.4 percent, and could save itself about $1 billion a year.
Frustrated by the uncompetitive U.S. tax structure, Pfizer's CEO, Ian Read, told the Wall Street Journal, "There should be a tax rate that allows us to compete in the global marketplace." Read is right. While some politicians may feel tempted to criticize Read, they only have themselves to blame for the inefficient tax code we have today that pushes business overseas.
There are other examples. Actavis, another Fortune 500 pharmaceutical company, acquired Ireland-based Warner-Chilcott PLC last year. This transaction allowed the company to reincorporate in a lower-tax country to avoid US taxes, while maintaining a majority of its corporate functions in New Jersey.
In some cases--as with Pfizer--inversions are voluntary. In other cases, inversions are involuntary. Our corporate tax structure essentially imposes a weak balance sheet on many U.S. companies that makes them targets for international takeovers.
In today's global economy, there are many legitimate reasons why foreign operations (production, distribution, etc.) are essential for U.S. companies. Yet, this is not the case in most voluntary inversions which are primarily designed to avoid higher taxes. Congress must avoid creating artificial incentives that encourage companies to move abroad solely to take advantage of lower tax rates.
Congress agrees on little these days. But there is bipartisan consensus that increasing investment at home is vital. By overhauling the tax code, ending corporate loopholes, lowering tax rates and treating everyone fairly, Congress could stop this mass exodus of capital and tax revenue.
Our inaction is eroding the U.S. corporate tax base, which effectively lowers government revenue and creates higher debt. All of this translates into less opportunity and lower standards of living for future generations.
Politicians are slow to act in part because today's political culture, which tolerates and sometimes celebrates demagoguery, has given "corporate" tax reform a bad name. That is, of course, nonsense. Corporate tax reform is not about advantaging "the rich" but creating a fair system that promotes economic growth and job creation for all Americans, especially among the middle class. Plus, our system is hopelessly outdated. We need a corporate tax system that reflects 2014--rather than 1954--economic realities.
Solving our long-term economic challenges will require many hard decisions and "heavy lifts." Among those lifts corporate tax reform may be the lightest lift of all. In fact, it may be the single most important thing President Obama and a divided Congress can accomplish.