Dems Proposal on Tax Avoidance Misses Real Problem
Policy + Politics

Dems Proposal on Tax Avoidance Misses Real Problem

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A group of 14 Democratic senators, led by Sen. Carl Levin (D-MI) on Tuesday introduced a bill that would make it much more difficult for U.S.-based companies to execute a “corporate inversion” by merging with a foreign-based company and declaring that company’s home country the new “domicile” of the combined firm.

Inversions are a perfectly legal, though frequently-criticized, means of reducing taxes – particularly taxes on money earned overseas. In many cases, the company driving the deal will maintain the bulk of its operations, including its functional headquarters in its original country of residence. It will retain some tax liability in its home country, but will be able to steer certain kinds of income to the lower-tax country in which it is domiciled.

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“These transactions are about tax avoidance, plain and simple,” said Levin, who chairs the Senate Permanent Subcommittee on Investigations. “The Treasury is bleeding red ink, and we can’t wait for comprehensive tax reform to stop the bleeding. Our legislation would clamp down on this loophole to prevent corporations from shifting their tax burden onto their competitors and average Americans while Congress is considering comprehensive tax reform.”

Companion legislation was introduced in the House of Representatives on Tuesday by a coalition of Democrats led by Rep. Sander Levin (D-MI), the brother of the main sponsor in the Senate. “Corporate inversions are a growing problem, costing the U.S. tax base billions of dollars and undermining vital domestic investments,” said Rep. Levin, the ranking Democrat on the House Ways and Means Committee. “This egregious practice requires immediate action.”

The “Stop Corporate Inversions Act of 2014”  would bar companies from transferring their domicile after a merger unless more than half of the publicly-held shares in the new entity are held outside the United States.

Sen. Levin admits the bill is merely a temporary solution to a problem that runs much deeper. The U.S. tax code – particularly its corporate income tax provisions—is so old and out-of-date that businesses are increasingly looking for ways around it. Stopping inversions may stem the tide of companies moving offshore temporarily, but the only long-term answer is an overhaul of the tax code.

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Business leaders criticized the legislation for failing to go after the root cause of inversions. “The Levin legislation is wrong in so many ways,” said former Michigan Governor John Engler, now president of the Business Roundtable. “What’s right about it is that it recognizes how bad the current tax code is. What’s wrong about it is that it is that it makes no effort to fix it.”

Recent corporate inversions include Chiquita Brands International, the North Carolina-based company best known for being the largest banana importer in the U.S. The company announced earlier this year that it would purchase Ireland-based fruit importer Fyffes and would change its domicile to Ireland, where the corporate tax rate of 12.5 percent is less than half the U.S. rate of 35 percent.

Drug-make Pfizer’s ongoing effort to purchase U.K.-based AstraZeneca is also being proposed as an inversion that would allow the combined companies to benefit from the lower tax rates in the U.K. It would also allow Pfizer to use an estimated $35 billion in cash is currently has parked overseas to pay for the deal. Pfizer faced a 35 percent tax on that money if it had repatriated it to the U.S.

Chiquita and Pfizer were, respectively, responding to two of the biggest problems with the U.S. tax system: the 35 percent corporate tax rate on domestic earnings, and the treatment of profits earned overseas.

Related: Pfizer Backlash Proves Politicians Don’t Get It

When the current corporate tax rate was implemented in the U.S., it was roughly the average rate for most industrialized countries. Since then, though, countries around the world have slashed their corporate rates, leaving U.S. taxes among the world’s highest. Most have also adopted a territorial taxation system, which means that corporations are only taxed on their domestic earnings.

To be sure, many corporations have devised strategies that allow them to avoid some or all of U.S. taxes, but many still pay at rates twice as high as their competitors overseas, meaning that until the U.S. system is reformed, there will be billions of dollars’ worth of reasons for businesses to continue concocting schemes to avoid paying taxes in the U.S.

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