By Rob Portman
The medical device maker Medtronic is the most recent company driven overseas by uncompetitive tax policies.
American businesses are heading for the exits to escape the U.S. tax code. Medical device company announced recently that it planned to acquire the Ireland-based firm and relocate headquarters in Dublin, making it the biggest company yet to leave our shores for a more favorable tax climate. It’s just the latest example, and the flight will continue until the U.S. reforms its outdated, uncompetitive tax code.
The basic U.S. corporate tax rate is 39%, the highest on the planet. The average rate among other major industrialized countries is 25%. Worse, the U.S. tax rate applies not only to income earned within U.S. borders, but also to profits American companies make overseas.
That is in large part why more than 20 major American companies have reincorporated elsewhere in the past two years. In 2012, for example, Eaton, a manufacturing company from my home state of Ohio, merged with Cooper Industries, a much smaller Irish company. The new company established its headquarters in Dublin, substantially reducing its tax liability in the process. Businesses are willing to pay to put a few miles between them and the IRS: U.S. companies in 2013 paid upward of 55% more than their target’s market price for deals that allowed them to move overseas, according to a May report in this newspaper. Domestic mergers, on the other hand, usually only yield a 20% premium.
The U.S. tax system is also making American businesses more vulnerable to foreign takeovers. The American beer company Anheuser-Busch, for example, was absorbed in 2008 by Belgian-Brazilian firm, In-Bev. Other brewers have followed suit, driven by tax savings. The largest U.S.-based beer company in 2013 was DG Yuengling & Son, which has a U.S. market share of about 1.5%. Sam Adams is the second-largest, with a market share of 1.3%. The sad reality is that foreign purchasers, which can relocate their targets’ headquarters overseas, have a huge advantage over U.S. purchasers. Thanks to our tax code, American firms are both less able to fend off foreign purchasers and less able to grow and become more competitive through acquisitions.
Meanwhile, the tax code limits job creation because it encourages U.S. firms to keep foreign earnings outside the U.S. and away from the U.S. tax collector. About $2 trillion that could be used to expand jobs and opportunities in the U.S. now sits overseas, according to Bloomberg estimates. American workers, who according to a 2006 Congressional Budget Office report bear nearly 74% of the corporate tax burden, end up with lower wages and reduced benefits.
Forcing U.S. companies to stay here is no solution. Congress has tried that before, and several of my colleagues have again proposed ratcheting up existing IRS rules that penalize certain cross-border mergers. That piecemeal approach will only hurt American employers and workers who, as a result, will be even less competitive in a global economy built on free movement of capital and labor.
The president and Congress should instead overhaul the tax system, as other countries around the world have already done. To attract investment, Canada in 2012 lowered its federal corporate tax rate to 15%, the last cut of a seven-point decline that began in 2006. In fact, every single one of our major foreign competitors has reduced its corporate tax rate in the past 20 years.
Industrialized countries have also modernized their international tax rules. Every other country in the G-8, and 26 of 34 member countries of the Organization for Economic Cooperation and Development, now have “territorial” tax systems. A country with a territorial system generally taxes only income earned inside its borders; active business income earned abroad is taxed only in the country where it is earned.
Here’s what the U.S. can do to catch up: First, cut the corporate tax rate to 25%, bringing America in line with the OECD average. That would undoubtedly spur job creation. It would also bolster revenues, as the nonpartisan Joint Committee on Taxation showed in its February analysis of Ways and Means Committee Chairman Dave Camp’s tax-reform proposal.
Second, simplify the tax code, which is rife with special preferences, and use the money saved from closing those loopholes to finance the 10 percentage point rate reduction.
Third, create a more competitive international tax regime. Roughly 80% of the world’s purchasing power and 95% of its consumers are beyond U.S. borders, and American companies must be able to compete for these customers. As such, the U.S. should adopt a territorial-type tax system that taxes active business income only where it’s earned. In addition, we should implement clear, enforceable rules to prevent sheltering income in low-tax countries.
Congress should act immediately to end the flight of U.S. businesses by overhauling the corporate tax code. That would go a long way in making America a magnet for investment again.
Mr. Portman, a Republican, is a U.S. senator from Ohio.