Closing the Curtain on the ‘Inversion Chronicles’

If any serious person remains unconvinced that America’s tax code is desperate for comprehensive reform, last week’s news of the impending Johnson Controls/Tyco merger will surely bring reality into focus.

Milwaukee-based Johnson Controls plans to relocate its headquarters to Cork, Ireland, where Tyco is domiciled, and most importantly, where corporate taxes are significantly lower than in the U.S.  The result, as with all inversions, will be fewer American jobs, slower economic growth, and an ever-diminishing tax base.   This move is the latest installment of what could be called the “Inversion Chronicles.”

The New York Times says it is the 13th such inversion announced in just the past 16 months.  Much ink, and ire, will be devoted to the corporate entities themselves, but they are not the villains.  Their actions are merely symptomatic of our outdated, hopelessly bloated and embarrassingly onerous tax system.

In the 30 years since it was last overhauled, the U.S. tax code has been allowed to expand restricting the country’s economic growth.  The tax code, which has exploded into a 74,000 page, 3.9 million-word monstrosity, can only be successfully navigated by an army of lawyers and accountants, so numerous now that they comprise their own economy, valued at $224 billion annually, with more than 6.1 billion labor hours expended.

This is unacceptable.

A key part of that part of the problem has been the corporate tax rate.  At 39.1 percent, America has the highest corporate tax rate of any of the industrialized nations.  The U.S. holds that lead, even while the worldwide tax rate has experienced a downward trend, dropping from 29.5 percent to 22.6 percent.  The resultant tax disparity has U.S. companies struggling to compete with our foreign counterparts, dampening investment and retarding job growth.

While it has long been clear that America’s corporate tax rate stifles growth and investment, it’s not just the rate, but the way in which it is applied that begs for reform.

Alone among its trading partners, the U.S. operates under a worldwide system for taxing international business income.  This means that when our government taxes American-headquartered companies it fails to distinguish between income earned abroad and income earned at home; all is fair game for Uncle Sam.  But because every other country operates under a territorial system, collecting taxes only on income earned within their own borders, foreign business competitors benefit from an inherent bias within our own tax code.  As U.S. economic policy, that is indefensible.

America’s government is hobbling American businesses, discouraging American investors, and burdening American employers and employees alike. It is counter-intuitive and counter-productive, with no discernible rationale.

Fortunately, America’s political leaders appear to be serious about achieving comprehensive tax reform sometime soon.  Both House Speaker Paul Ryan (R-Wisconsin) and House Ways and Means Chairman Kevin Brady (R-Texas) have publicly championed reform that includes major rate reductions.  Dave Camp, a former House Ways and Means Chairman, declared in a recent interview that a 20 percent corporate rate ought to be the new benchmark, and that 15 percent might even be achievable.

Finally, Rep. Devin Nunes (R-Calif.) commenced this legislative season with the introduction of a tax reform bill that would, among other things, institute an across-the-board rate of 25 percent, establish a territorial system, and allow businesses to deduct investment costs as they occur.

Less encouraging is some of the campaign-style vitriol that seems to land on America’s job creators, bearing itself out in politicized discrimination against profitable businesses.  For example, some elected officials persist in perpetuating the false claim that American energy companies benefit from “subsidies” and “loopholes,” even though they are actually using cost-recovery deductions available to – and claimed by most – American companies.  Such officials wish to repeal such deductions on this sector of the economy.

The U.S. Government should not be in the business of picking winners and losers with the tax code.  Nor should it be exiling American businesses to foreign lands to seek relief.  We need an updated and simplified lower rate that is uniformly and fairly applied.  That’s the kind of comprehensive tax reform that’s going to ensure economic growth and investment here at home while also enabling American businesses to compete more effectively on a global playing field.

Morning Consult