Preventing Corporate Inversions Isn't Congress's Business
August 12, 2002
Congress is set to address corporate "inversions," which result when US corporations reincorporate in a foreign country in order to reduce their taxes -- creating the false impression those jobs and factories are moving abroad. In fact, the only thing that is moving is legal residence for tax purposes. Given U.S. corporate tax rates compared to those of other countries, it's not a surprising decision (see chart).
This goes on inside the U.S. all the time.
- According to the Federation of Tax Administrators, the top corporate tax rate is 12 percent in the state of Iowa.
- However, neighboring Kansas has a rate of just 4 percent -- and no doubt, over the years, there are any number Iowa companies that have reincorporated in Kansas in order to save 8 percent per year in taxes.
- North Dakota has the country's highest personal income tax rate at 12 percent.
- Yet South Dakota has no income tax at all, which may explain why the former's population has been falling, while the latter's has been rising.
But for companies, it's trickier. A company that incorporates in Canada pays taxes only on its operations in Canada. If it has a U.S. subsidiary, it pays U.S. taxes on its profits here, but none to Canada. However, the exact same U.S. company with an identical Canadian subsidiary will pay Canadian taxes plus U.S. taxes on its Canadian operations as well. Thus, the U.S. company will pay more total taxes even if the U.S. and Canada have the same tax rates.
It is this anomaly in U.S. tax law that encourages inversions. Instead of writing new laws to prevent inversions, Congress would be better advised to cut corporate tax rates. The inversion phenomenon should be viewed as a warning that U.S. rates are too high.
Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, August 12, 2002.
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