NCPA - National Center for Policy Analysis

Tax Code Encourages Firms To Leave U.S.

August 2, 2002

How?

  • Companies set up partnerships to escape the double taxation of corporations -- corporate earnings are taxed once at 35 percent, but if the company pays dividends to shareholders those earnings are taxed again at individual tax rates as high as 38.6 percent.
  • Former Joint Economic Committee senior economist Chris Edwards states that "The way companies structure themselves around the world with various tiers of subsidiaries of subsidiaries of subsidiaries and partnerships...is because the tax code drives them to do that to minimize taxation."
  • Moreover, as European countries slash their corporate tax rate, the pressure to engage in this practice will increase.

Another serious problem with the U.S. tax code is that it taxes profits earned abroad. Most countries only tax profits earned within their borders.

  • A U.S. company doing business in Ireland would have to pay 35 percent of its profits to the U.S. government on top of the Irish taxes.
  • But a Dutch company only would have to pay the Irish corporate tax rate of 10 percent, because the Netherlands doesn't tax foreign-source income.

To avoid these taxes, many U.S. companies are reincorporating abroad in offshore low-tax jurisdictions -- a process called inversion. In response, Congress is making legislation to prevent inversions, calling them unpatriotic. However, Daniel Mitchell of the Heritage Foundation notes that these companies still pay U.S. corporate taxes, just only on income earned inside the United States. Moreover, he argues that unless the U.S. moves toward a territorial tax system, inversions are the only way for U.S. companies to remain competitive internationally.

Source: John Berlau, "Tax-Code Trauma," Insight Magazine, July 22, 2002.

 

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