Don’t Believe the Crocodile Tears Over High Corporate Tax Rates

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The US corporate tax code is inefficient, distortive, and staggeringly complex. Almost no one defends it on those grounds. But US multinational corporations, who have recently been engaged in a wave of tax inversions, have a different complaint: our tax rates are just flatly too high. They make American corporations uncompetitive compared to their foreign peers, and that’s why they’re being forced to relocate their headquarters to other countries with lower tax rates.

Edward D. Kleinbard, a professor at the Gould School of Law at the University of Southern California and a former chief of staff to the Congressional Joint Committee on Taxation, says this is nonsense. Firms that are entirely (or almost entirely) domestic do indeed pay high corporate taxes. But multinationals don’t. Thanks to the “feast of tax planning opportunities laid out before them on the groaning board of corporate tax expenditures,” they mostly pay effective tax rates that aren’t much different from French or German companies. They are, in fact, perfectly competitive.

So why the recent binge of tax inversions?

The short answer is that the current mania for inversions is driven by U.S. firms’ increasingly desperate need to do something with their $1 trillion in offshore cash, and by a desire to reduce U.S. domestic tax burdens on U.S. domestic operating earnings.

The year 2004 is a good place to start, because that year’s corporate offshore cash tax amnesty (section 965) had a perfectly predictable knock-on effect, which was to convince corporate America that the one-time never to be repeated tax amnesty would inevitably be followed by additional tax amnesties, if only multinationals would opportune their legislators enough. The 2004 law thus created a massive incentive to accumulate as much permanently reinvested earnings in the form of cash as possible.

….The convergence of these two phenomena led to an explosion in stateless income strategies and in the total stockpile of U.S. multinationals’ permanently reinvested earnings. But U.S. multinationals are now hoist by their own petard. The best of the stateless income planners are now drowning in low-taxed overseas cash….It is less than a secret that firms in this position really have no intention at all of “permanently” reinvesting the cash overseas, but instead are counting the days until the money can be used to goose share prices through stock buy backs and dividends.

….The obvious solution from the perspective of the multinationals would have been a second, and then a third and fourth, one-time only repatriation holiday, but there are still hard feelings in Congress surrounding the differences between the representations made to legislators relating to how the cash from the first holiday would be used, and what in fact happened.

Indeed. Back in 2004, multinational corporations swore that if Congress granted them a tax amnesty to repatriate their foreign income into the United States, it would unleash a tsunami of new investment. Needless to say, that never happened. Corporate investment had never been credit-constrained in the first place. Instead, all that lovely cash was used mostly to goose stock prices via buy-backs and increased dividends. It’s no wonder that Congress is unwilling to repeat that fiasco.

Kleinbard’s paper is an interesting one, with a couple of fascinating case studies demolishing the self-serving ways that corporate CEOs try to blame the tax code for things that have nothing to do with it. Andrew Ross Sorkin has more here.

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