by Mitch Kokai
Senior Political Analyst, John Locke Foundation
The Obama administration has been raising a stink about so-called “inversions,” cases of American-based companies moving operations to another country with a more favorable tax climate. But Alex Adrianson of the Heritage Foundation’s “Insider Online” highlights an alternative view on the issue.
President Obama says it’s unpatriotic for U.S. companies to merge with foreign corporations in order to avoid U.S. taxes. But actually the practice, known as an “inversion,” is good for the American economy, explains Diana Furchtgott-Roth:
Take a U.S.-based multinational that wants to bring back overseas earnings to expand its factory in Detroit, or build a new factory. Under the current system of taxation, that multinational would have to pay a tax of 35% on the amount it brings back into the country. If it returned $100 million, it would have to pay a tax of $35 million and only $65 million would be available for investment.
That is because U.S.-based multinationals face a federal corporate tax rate of 35% on worldwide income, not just income generated in the United States. State taxes are extra. America is one of only seven Organisation for Economic Cooperation and Development countries that taxes companies on worldwide income, and the others have significantly lower corporate tax rates.
The United States, in fact, charges the highest tax rate in the developed world. The average of OECD countries is 24%. Some countries, such as Ireland, have corporate tax rates that are closer to half that.
If a foreign-based multinational had headquarters in Ireland, and wanted to bring back $100 million to invest in its plant in Detroit, then all the $100 million would be invested. None would go to the Treasury. Residents of Detroit would be better off, and the shareholders of the company would be better off. America would grow because companies generally spend money more effectively than does the government.