The ‘Dumb and Dumber’ nature of our corporate tax code

There’s dumb. There’s dumber. Then, there’s how the federal tax code needlessly drives U.S.-headquartered firms into foreign hands. That’s really dumb. 

The damage is extensive and ongoing. Reviewing more than 97,000 cross-border mergers and acquisitions across 68 countries from 2004 to 2016, Ernst & Young (EY) found foreign purchasers spent $510 billion more acquiring U.S. companies and subsidiaries than U.S. companies spent acquiring foreign firms. The U.S. lost thousands of companies.

{mosads}Why the exodus?  According to EY:

“While most developed countries impose little or no additional tax on the active foreign income of multinational companies … the United States imposes a high corporate income tax rate on all worldwide business income, regardless of where it is earned. This gives foreign companies that do not face the same burden a clear advantage in the global market for M&A, allowing them to bid more than US companies for acquisitions.” 

In other words, foreign companies frequently outbid U.S. companies for acquisitions in the U.S. because the foreign-source income of the target company is, after-tax, often more valuable in foreign hands than U.S. hands. It’s simple math. 

Had the U.S. statutory corporate tax rate been 20 percent instead of 35 percent over the period of the study, EY estimates “U.S. companies would have acquired, on net, $1,205 billion in cross-border assets … instead of losing, on net, $510 billion in assets — a net shift of $1,715 billion in assets from foreign countries to the United States …”

Moreover, under a 20-percent corporate tax rate, “The United States would have kept, on net, 4,700 companies.” That’s the equivalent of saving one company every day of the 13 years covered by EY’s analysis.

The bottom line? Over the past decade, as the corporate tax rate differential between the United States and our international competitors has widened, U.S. companies have become increasingly vulnerable to foreign takeover. The threat to U.S.-headquartered companies is not theoretical: It’s a reality.

Our international competitors understand the problem we face. Mieko Nakabayashi, a former member of the Japanese House of Representatives, warns:

“If the United States is to compete and prosper, it must reduce its excessively high corporate tax rate and adopt a modern international tax regime. Congress’ failure to enact these reforms greatly advantages America’s international competitors. How can the U.S. Congress not realize this?” 

Fortunately, congressional Republicans and President Trump have demonstrated a keen understanding of the problem and of what Congress must do to safeguard American companies. As President Trump recently — and rightly —proclaimed:

“We need a tax system that is fair to working families and that encourages companies to stay in America, grow in America, spend in America and hire in America.”

To that end, Trump and congressional Republicans propose to reduce business tax rates and replace our archaic worldwide system for taxing international income with a territorial system similar to those employed by most other countries. Both reforms are vital to removing the competitive tax disadvantage faced by U.S. companies.

Congress is poised to advance tax reform. According to a recent Gallup poll, however, the American people have yet to grasp the importance of these business tax reforms. Sixty-seven percent of those surveyed believe corporations pay too little in taxes.

But tax reform isn’t about cutting corporate taxes. Tax reform is about promoting fairness, simplicity and economic growth. It’s about prosperity. 

To succeed, President Trump and congressional Republicans must listen to the American people and convince them of the rightness of their proposals. 

This is no time to emulate Jeff Daniels’ character in “Dumb and Dumber”: “She gave me a bunch of crap about me not listening to her, or something. I don’t know, I wasn’t really paying attention.” 

James Carter served as the head of tax policy implementation on President Trump’s transition team. Previously, he was a deputy assistant secretary of the Treasury and deputy undersecretary of labor under President George W. Bush.