The Simple Solution to Corporate Inversions

August 29, 2014

Inversions have been in the news consistently this summer as multiple companies have looked for legal paths away from the U.S. corporate tax system. Burger King became the latest corporation to add to the list after they announced their planned moved to Canada. The reason: Our corporate tax system is out of date.

The average corporate tax rate across the 34 member Organization for Economic Cooperation and Development has dropped from 47.5 percent in 1981 to 25.3 percent in 2014. Since the late 1980s the U.S. rate has remained stagnant at around 40 percent. Additionally, the U.S. is one of only six OECD countries that still tax income on a worldwide basis (the lack of a territorial system is likely the main driver of inversions).

So what’s the solution? Greg Mankiw has an idea. From the New York Times:

“Perhaps the boldest and best response to corporate inversions is to completely rethink the basis of corporate taxation. The first step is to acknowledge that corporations are more like tax collectors than taxpayers. The burden of the corporate tax is ultimately borne by people — some combination of the companies’ employees, customers and shareholders. After recognizing that corporations are mere conduits, we can focus more directly on the people.

“So here’s a proposal: Let’s repeal the corporate income tax entirely, and scale back the personal income tax as well. We can replace them with a broad-based tax on consumption. The consumption tax could take the form of a value-added tax, which in other countries has proved to be a remarkably efficient way to raise government revenue.”

Many OECD countries have been going this way as they have moved to replace taxes on corporations with taxes on consumption.

This method isn’t without its critics though:

“Some may worry that a flat consumption tax is too easy on the rich or too hard on the poor. But there are ways to address these concerns. One possibility is to maintain a personal income tax for those with especially high incomes. Another is to use some revenue from the consumption tax to fund universal fixed rebates — sometimes called demogrants. Of course, the larger the rebate, the higher the tax rate would need to be.”

The point is: we need to reform the U.S. tax code (both corporate and individual). Not just to stop inversions, but to improve U.S. competitiveness and grow the U.S. economy (and I’m not talking about -2.1 percent growth followed by 4.2 percent, but real, long-term growth). If all sides are willing to come to the table with those goals in mind, then, as Mankiw suggests, there are solutions to be found. Trading the corporate tax for a VAT with a rebate might be one option.

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