States vie with feds to punish company moves abroad. But does it work?
State lawmakers are getting into the act of demonizing corporate inversions even though there is not much they can do to stop them. Corporate inversions, in which U.S. companies merge with or are acquired by an overseas business, are a hot topic on the campaign trail and in the halls of Congress. Former Secretary of State Hillary Clinton, Senator Bernie Sanders (I-Vt.) and Democrats on Capitol Hill portray inversions as a nefarious maneuver by corporate executives to take advantage of lower tax rates abroad. But those politicians have misdiagnosed the ailment.
Inversions are not a problem for the United States. They are a symptom of a problem. The root problem is the United States levies the highest statutory corporate tax rate in the developed world and, unlike all other developed nations, imposes double taxes on profits earned abroad. Rather than confront this problem, Clinton, Sanders and others, including Senator Elizabeth Warren (D-Mass.), deride major companies at campaign events.
GOP frontrunner Donald Trump bashes companies for moving their headquarters abroad just as much as Clinton and Sanders. Yet Trump, like Senator Marco Rubio, Ohio Governor John Kasich and other Republican candidates, actually proposes to get at the root problem by cutting corporate tax rates.
Now lawmakers at the state level are joining in on the demagoguery, with legislation that would punish employers for bad federal tax policy. In response to Pfizer’s November announcement that it is buying Allergen and moving its headquarters to Ireland, where the 12.5 percent corporate rate is less than one half of the 35 percent imposed by the United States, the New Jersey Assembly passed legislation that prohibits inverted companies from receiving state contracts or development tax credits.
The New Jersey bill would effectively punish companies for responding to unsound federal tax policy. If the state senate approves the measure, Governor Chris Christie should veto it. It would only make New Jersey, whose business tax climate is already hostile to employers, even less hospitable.
“Corporate inversions take place because of the federal tax code,” said Andrew Musick, director of taxation and economic development at the New Jersey Business and Industry Association, “and have nothing to do with state programs or state contracts. In fact, they have little to no impact on New Jersey’s corporate business-tax collections or the jobs and facilities located in the state.”
New Jersey lawmakers need to realize that companies that do business in the state face a combined federal and state corporate tax rate of 44 percent, compared to the 25 percent, on average, European corporate rate. New Jersey residents already pay the highest property taxes in the country, the sixth-highest income tax rate, the fifth-highest corporate rate and contend with the nation’s second-highest overall tax burden. The last thing New Jersey needs are new laws that make the state even less competitive than it already is.
Legislators in Trenton aren’t the only ones busy hatching a plan that will do nothing to halt corporate inversions. Treasury Secretary Jack Lew issued rules meant to tamp down on inversions – to little effect.
Clinton, the presumptive Democratic nominee for president, has proposed an exit tax, which would require U.S. companies to pay taxes on foreign earnings immediately. Under current law, those earnings aren’t taxed by Uncle Sam until the company repatriates them to the United States.
What’s amazing is that Clinton sees high taxes pushing companies to relocate their headquarters abroad — and her solution is new taxes. It is as if she is effectively telling companies that the beatings will continue until morale improves.
It’s interesting that the same Democratic politicians and pundits who lambasted Mitt Romney for saying that corporations are people, too, on the 2012 campaign trail, now insist that corporations have patriotic or moral duties, as though they are people. What is clear, in any case, is that the burden of corporate taxes is borne by people.
In fact, the Obama administration and federal government recently began acknowledging this.
Until 2013, Congressional Joint Committee on Taxation models assumed that the burden of corporate taxes was borne entirely by the owners of capital (stocks, bonds, mutual funds, IRAs and so on). That changed when the committee announced, in an October 2013 study, that it would begin reporting on the impact corporate taxes have on both capital and labor.
The decision came after the Treasury Department and the Congressional Budget Office made similar adjustments in their models to account for labor’s share of corporate taxes. In fact, it has been during the Obama administration, which has signed into law trillions of dollars in higher taxes, that key nonpartisan fiscal scorekeepers have begun to recognize that corporate taxes are paid for, in part, by workers in the form of lower compensation and reduced opportunities.
If New Jersey state legislators are really interested in stopping inversions, they should contact members of their congressional delegation and urge them to support tax reform that cuts the corporate rate and stops double taxation of U.S. companies’ overseas profits.