Both Republicans and Democrats, including President Obama, have criticized our counterproductive corporate tax code. With the rates nearly twice as high as the average in Europe and Asia, our system puts U.S. companies at a severe disadvantage to their foreign competitors. But our elected officials haven’t done much to fix the problem.
An estimate in excess of $2 trillion of “stranded capital” -- yes, that’s twelve zeroes behind the two -- that belongs to U.S. businesses is stuck overseas because of Congress’ failure to change the tax code. If this “stranded capital” was allowed to come back to the U.S. without the IRS gouging for its undeserved share, those dollars would be invested back into U.S. jobs and could be ample stimulus to turn our economy around.
The primary impetus behind such mergers is synergy. Typically, the foreign-based company is successful in markets that complement the U.S. company’s strengths. But the tax change is important. It helps level the playing field against foreign businesses that get to keep more of what they earn, reinvest it, innovate, and grow.
Unfortunately, some politicians, including our own Sen. Dick DurbinDick DurbinReid defends relationship with McConnell in farewell speech Depleted Dems look to Senate for 2020 nominee Dem senator threatens to slow-walk spending bill MORE (D-Ill.), are using overheated rhetoric to describe a perfectly legal decision by such great U.S. businesses as AbbVie, a pharmaceutical company that employs 8,000 in North Chicago. In a tone of mockery, Durbin also cited Walgreen’s, a beloved company based in Deerfield that is reported to be considering an inversion after a merger with the global pharmacy chain Alliance Boots that should make anyone in Illinois proud.
Recently Durbin penned a column titled, “A decision to desert America.” Other critics of inversion are using such terms as “unpatriotic,” “renouncing citizenship,” and “defectors.”
It’s time to tone down the language and tell the truth about inversions. An inversion is a symptom of a disease: our broken corporate tax system. Inversion is also an option that’s open to only a few companies and, if a firm qualifies and chooses it as an alternative, inversion affects only the tax paid on profits earned abroad – not at home.
Durbin suggested that it was unfair for AbbVie and Walgreens to benefit from programs like Medicare and Medicaid and then “avoid paying federal taxes.”
Actually, the senator would be happy to learn, by looking at the tax code, that companies that invert will continue to pay the same U.S. taxes it has always paid on its U.S. profits, including those generated through the sale of drugs under Medicare and Medicare.
What changes is the treatment of the profits earned in foreign countries by AbbVie and its new subsidiary, Shire, a U.K. drug-maker. The United States, along with only a handful of other countries, has a “worldwide” tax-collection system for the international earnings of our companies.
So when U.S. firms earn profits in a foreign country, they pay taxes to that country (say, 20 percent) and then pay more taxes (an additional 15 percent in this instance) if they bring the cash that remains back home.
As a result, many companies prefer to invest their earnings abroad, or park the money in foreign accounts, rather than repatriating it. For example, according to Goldman Sachs, Stryker, a medical device maker, holds $4 billion in cash abroad; Merck, the pharmaceutical company, $21 billion; Johnson & Johnson, $29 billion.
Much of this estimated $2 trillion in stranded cash could be brought back and plowed into capital investments in the United States if our rates were lowered and our corporate tax system changed to the “territorial” model used by almost all the rest of the world (with companies paying taxes to the country in which they earn their profits).
Those are precisely the changes that many – probably most – elected officials say they want but can’t bring themselves to enact – especially when they think they can generate votes by calling businesspeople unpatriotic.
Inversion is a roundabout way of producing the same results for overseas earnings as a tax reform. After an inversion, a merged company pays no U.S. taxes on cash that it repatriates. Yes, the Treasury might be deprived of minimal immediate dollars, but Illinois and the rest of America will benefit from a flow of money from abroad – and, over time, corporate tax revenues should rise.
Still, the best solution to our tax mess isn’t inversion. It’s comprehensive reform.
Unfortunately, what Durbin proposes would push reform farther out into the future. He backs a plan that would effectively ban inversions. That approach would have three negative consequences: 1) instead of U.S. companies buying foreign ones, the opposite would occur as foreign firms use their tax advantage to grow bigger; 2) America would be deprived of the benefits of foreign profits being reinvested here by U.S. companies that invert; and 3) the pressure for reform that’s being generated now by inversion would disappear.
If Durbin really wants corporate tax reform, as he says he does, he will use the current rush to inversion as leverage to get Congress to make the changes now that will get America out of the economic doldrums and create millions of jobs.
Hastert represented the 14th district of Illinois for 20 years and served as Speaker of the House of Representatives from 1999 to 2007. He is currently a senior adviser with the law firm of Dickstein Shapiro LLP.