High corporate taxes cause Inversions
A huge political talking point used by both sides of the aisle in recent years is corporate inversions. Corporate inversion (also known as corporate tax inversions) occur when a company relocates its headquarters into a country that has dramatically lower tax rates than the companies country of origin. The companies that do this generally are competing in the global market. Being headquartered in a country with a much higher tax rate gives companies a serious disadvantage in the market. If the US is serious about reducing the amount of corporations going to other countries then something needs to be done about the corporate tax rate.
I know what some people will say: “but corporations aren’t paying their fair share”. KMPG has provided a nice table showing the corporate tax rates between 2006 and 2014 of 134 countries and average rates for regions. In this table the United States has the second highest corporate tax rate with 40%. The only country higher is the United Arab Emirates (UAE); but it should be noted the 55% tax rate in the UAE only applies to Oil Companies. Ireland is a country many US companies have chosen when deciding to go overseas. In Ireland the corporate tax rate is 12.5%. That is a huge drop from 40% that US headquartered companies must be crippled with.
Looking at this chart comparing the United States corporate income tax rates to other regions shows how disadvantaged our businesses are in the global market. Even in North America the US is at a disadvantage. Canada has a corporate tax rate of 26.5% and Mexico has a corporate tax rate of 30%. In the global market the US can’t even be competitive with its two neighbors.
Another talking point brought up often is “all of these corporations get special tax breaks, so they really aren’t paying their fair share”. I would agree with that statement. Personally I would rather get rid of all corporate taxes… but since that isn’t likely to happen anytime soon I think the corporate tax should be flattened. The current corporate income tax system in the US is nothing but income redistribution done at the corporate level. Republican and Democrat politicians have worked for decades to get special tax deductions and tax credits for their favored businesses or industries. That has made it hard for small businesses, which are disadvantaged with paying the full 40% while their large competitors have bought tax breaks in DC. The same disadvantage that US companies have on the global level is shared by corporations within the US if they are not connected to DC politicians.
If the US is serious about ending corporate inversion the current tax rates must be lowered. Unfortunately that isn’t likely to happen any time soon. Too many people think corporations aren’t taxed enough and too many politicians have been bought by big business to provide special tax breaks. In such an environment it is unlikely anyone will look at the obvious answer: cut corporate taxes to a flat rate with no special deductions.