by Mitch Kokai
Senior Political Analyst, John Locke Foundation
The Obama Treasury Department is trying to stem a wave of “corporate inversions” with new rules that limit the benefits of the practice. “Inversion” is the term for the practice of restructuring a company under a foreign parent in order to avoid domestic taxes. Did American companies suddenly become more greedy, or did the U.S. tax code become more uncompetitive against the rest of the world?
The experience of Great Britain points to the lesson that fewer “corporate inversions” happen when a country brings its corporate tax levels in line with the rest of the world and ceases the practice of taxing domestic companies on their foreign earnings. Since the 1980s, the UK has lowered its corporate taxes in a series of small steps from 52 percent to 21. Other countries in the Organisation for Economic Development and Cooperation have followed a similar pattern of cuts; the OECD average rate now stands at 25 percent. Companies in the United States, however, now face an average combined federal-state corporate tax rate of 39.1 percent. The UK also switched from a worldwide to territorial taxation system in 2009. William McBride notes that those reforms are working well for Great Britain:
On balance, it appears the reforms have made the UK more attractive as a place to do business, especially international business. Many UK companies that had left or threatened to leave have announced plans to return or stay. Additionally, the UK has become a favorite destination for U.S. corporate inversions, such as the recent Pfizer deal (which fell through), Liberty Global in 2013, Rowan and Aon in 2012, and Ensco in 2009.