Without tax reform, more companies likely to leave US

Recent cross-border merger and acquisition activity involving U.S.-based companies has garnered considerable attention. Once a cross-border merger or acquisition is being considered, one of the many optimizing decisions that must be made is where to locate the legal headquarters of the surviving company.

What sets the recent activity apart is that the U.S.-based companies are choosing to be taxed as foreign rather than U.S.-based companies. This has led to a growing chorus of tax experts, lawmakers and economists calling for reform of our outdated, anti-competitive tax system. There is increased urgency surrounding this issue as world-class American companies have proposed or are considering mergers with foreign companies and moving their legal headquarters abroad. Unless our tax system is made more competitive, the number of corporate redomiciliations will continue to grow.

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There’s no question that deficiencies in our tax code are making U.S. businesses less competitive in the global marketplace and stifling investments here at home. The U.S. tax code was last reformed in 1986 – when foreign operations constituted a much smaller share of the revenues of U.S. companies and foreign competition was less intense. Since 1986, other governments have modernized their tax systems to promote economic growth, while the U.S. tax system has become antiquated. Since the 1986 act, the average statutory corporate tax rate (combined national and state levels) of the other OECD member countries has fallen from 44.3 to 24.8 percent, while the U.S. corporate rate has increased slightly to 39.1 percent – the highest in the OECD. Over this time period, the number of OECD member countries that have adopted territorial tax systems has more than tripled, from 9 to 28, while the U.S. continues to subject the active business income earned by the foreign subsidiaries of U.S. based companies to U.S. tax when that income is distributed or invested in the U.S. These features of the U.S. corporate tax code make it unattractive for multinational companies to be headquartered in the United States.

So what can be done to stem the tide of American companies leaving our shores? First, we must recognize that piecemeal fixes are the wrong approach. Moving legal headquarters abroad through cross-border mergers is a logical way for a growing number of U.S. companies to counter the competitive disadvantages imposed on them by the current U.S. tax system. Measures that make this option more difficult will exacerbate rather than mitigate the flaws of this system, further undermining the competitiveness of U.S. companies relative to foreign companies headquartered in countries with territorial systems and significantly lower corporate tax rates. U.S. companies and American workers will succeed in the global economy only if they can compete on a level playing field with their foreign-based competitors.

The good news is there’s broad consensus from both sides of the political aisle about the need to reform our corporate tax system to promote economic growth, job creation and investment. First and foremost, the U.S. needs to adopt a tax system that leaves behind our outdated international tax system and embraces one that removes tax barriers to reinvesting the foreign earnings of U.S. companies – now in excess of $2 trillion – at home. Second, the U.S. needs to reduce its corporate tax rate to boost the attractiveness of the United States as a location for investment by profitable domestic and foreign companies. Finally, the U.S. needs to broaden the corporate tax base by eliminating special breaks and preferences that result in large differences in the effective tax rates for particular industries. This will allow industries to compete on a level playing field and will generate revenues to finance a sizeable cut in the corporate tax rate without contributing to America’s long-run debt. These three principles are at the core of a corporate tax reform that would promote growth and job creation here at home.

We are approaching a critical moment for American tax policy. Corporate expatriations are sending a clear message: the U.S. tax code is too complex and too unwelcoming for job-creating investment. It’s time for lawmakers in Washington to step up to the plate and provide a competitive tax code for American companies and workers.

Holtz-Eakin was director of the Congressional Budget Office under President George W. Bush. Tyson chaired President Bill Clinton’s Council of Economic Advisers. They serve as economic advisers to the Alliance for Competitive Taxation, a group of leading American businesses supporting comprehensive tax reform.