By Michelle Seiler-Tucker Special for USDR
As the U.S. corporate tax rate sits at the top of the global class, on July 24th, President Obama pushed Congress to draft a new law to shut the tax loophole many American corporations take advantage of when moving their headquarters overseas to cut their federal taxes. This proclamation was made before a gathering of supporters at the Los Angeles Technical College. The president cited indicated companies that use the loophole to lower their tax bills were unpatriotic.
The president continued to chastise theses specific entities by stating, “Even as corporate profits are higher than ever, there’s a small but growing group of big corporations that are fleeing the country to get out of paying taxes.” Central Democrats have presented bills to harness corporate inversions by swelling foreign ownership to 50% or more, if a company chooses this route and keeps management control in the United States. The proposal was included in the president’s budget offered in early spring.
“They’re technically renouncing their U.S. citizenship, they’re declaring their base someplace else even though most of their operations are here. You know some people are calling these companies ‘corporate deserters,’ the president added. The issue is getting a lot of attention as the mid-term elections advance. It is a perfectly legal tax-avoidance strategy, but one that Obama and many Democrats find indefensible. Republicans counter that businesses are justified in taking logical steps to enhance profitability in the wake of high U.S. corporate tax rates and say the government should keep out of the way.
To put the issue into perspective, the U.S. corporate tax rate is the highest in the world. American companies currently face upwards of triple their competitors’ rates overseas. America rates higher than France, Canada, and the Slovak Republic in the tax realm. Contrasting most countries, under the U.S. structure for corporate taxation, American businesses face double the trouble. All income of domestically headquartered businesses is subject to U.S. taxation, including revenue grossed overseas. Businesses can take a “foreign tax credit” for taxes that their foreign components pay to other countries to alleviate dual taxation. At issue are mergers between U.S. corporations and smaller foreign companies that legally allow a U.S. company headquarters to relocate, mainly on paper, to a nation with lower tax rates.
Independent studies have shown what would happen to the U.S. economy if the effective corporate tax rate paid by S&P 500 companies dropped to Switzerland’s average, effective rate of 22.4%. Slashing the corporate tax rate could create 10 million jobs or more over a five-year period as companies bring cash back home. It would also improve the traditionally poor 62.8% labor contribution rate, a level last realized in the recession era of 1978, back up to the 67% level the U.S. had before the financial crash. During those periods, GDP growth averaged over 4% per year, more than double the rate it’s been over the last 12 months.
The conundrum at hand is a tricky situation, as a business owner and author of an award winning and bestselling book, Sell Your Business For More Than It’s Worth, I am always looking for ways to decrease the amount of capital that flows out of mine and my client’s business. As an American, I understand the benefits of confining U.S. companies to their original soil, for the purpose of job creation and the like. Our government must find a balance between lowering the taxes for these businesses and keeping a leash on the corporations eager to take advantage of the system.