What does it mean to be a “patriotic” American? I ask that question because there has been so much hullabaloo in recent weeks about American businesses leaving the U.S. and setting up factories overseas. This week, Treasury Secretary Jack Lew questioned whether these U.S. corporations are putting America first.
“What we need,” Mr. Lew lectured, “is a new sense of American patriotism.”
He said this as the Obama administration announced new rules this week that would financially punish American companies that relocate outside the U.S. in order to save on taxes.
Labor union-backed groups have also denounced American businesses that move offshore to avoid the 35 percent corporate tax as “unpatriotic.” What was once an annoyance of a few companies fleeing is becoming a stampede.
In recent weeks, a flurry of Fortune 100 companies, including medical device company Medtronic, drugmaker Pfizer and now giant retailer Walgreens, have announced plans to leave the U.S. for lower-tax climates like Ireland, where the tax rate is 12.5 percent. Two other major drug companies declared in recent days plans to move out.
Here’s why.
In the U.S. the corporate tax rate is 35 percent – the highest in the industrial world. And one of the country’s highest corporate tax rates is California, which levies an additional 8.84 percent.
So taxes in a place like Dublin, Ireland are one-third as high as they are in Los Angeles or San Diego.
I would make the case that the “unpatriotic” people are not the CEOs who relocate their businesses out of places like California, but the politicians in Washington, D.C. and Sacramento who encourage them to leave.
After all, is it wrong for busineses to try to reduce their tax burden?
CEOs have a fiduciary duty to their shareholders to lower their costs and increase their profits. This may come as a shocker to Washington, but companies are in business to make profits.
For many years, liberals in Washington and Sacramento have argued that tax rates don’t matter and that businesses, workers and investors don’t make economic decisions based on taxes. But the events of recent months and years put the lie to that claim.
Businesses nearly every week of late are announcing relocation decisions based on taxes.
Roughly 50 major companies have moved abroad to lower their corporate tax burden over the last 10 years, and the trend is accelerating. This is a process called “inversion.”
Here’s why the pace of inversion is accelerating: Other nations are cutting their business taxes.
In recent years, Britain, Spain and Japan have chopped their rates way below what is imposed on firms that do business in America. The numbers show that 25 years ago we were below the international average; now we are roughly 15 percentage points above the average because other nations have slashed business taxes.
Instead of fixing this problem, the White House wants to impose a 35 percent tax on U.S. businesses regardless of where they put plants. Jack Lew says these new regulations would “shut down the abuse of our tax system.”
This non-solution might even make the problem of businesses leaving worse.
If American companies are charged the U.S. tax rate no matter where they are located, they won’t be able to compete against German or Chinese or Australian firms that are across the street but paying half the tax.
If two firms in Ireland are producing steel or cars, and one pays the 12.5 percent Ireland tax and the other pays the Irish rate plus 25 percent more, which business will be more profitable and competitive?
The obvious solutions are to cut the U.S. business tax, and for California to cut its rate. The goal should be to get the U.S. rate down at least to the international average of about 25 percent.
Let American companies compete on a level playing field. Right now our corporate tax is a head-start program for everyone we compete against in global markets.
The Obama administration says Washington can’t afford a corporate tax cut, but when American jobs are being outsourced every day, it seems self evident that we can’t afford not to. In this case, cutting tax rates isn’t just good economics, it’s also the patriotic thing to do.
Originally published in the Los Angeles Register.