High U.S. Corporate Tax Rate Chases Away Companies, Jobs and Tax Revenue

In response to Pfizer and many other U.S. companies openly planning to leave the U.S. for taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. reasons, yesterday Senator Levin introduced the Stop Corporate Inversions Act of 2014. Corporate inversions are where a U.S. company buys a smaller foreign company and takes its headquarters for tax purposes. For example, Pfizer is trying to merge with U.K.-based AstraZeneca and claim the U.K. as its new headquarters. The U.K.’s corporate tax rate as of next year will be 21 percent, compared to 39.1 percent in the U.S.

Rather than proposing to lower the corporate tax rate to compete with the U.K. and other developed countries, Senator Levin proposes to make it more costly for U.S. companies to invert. Under current law, U.S. companies are not allowed to invert unless the foreign company owns at least 20 percent of the combined company. Plus, as of an IRS ruling in 2012, the foreign company must have at least 25 percent of the combined company’s employees, assets and sales. Senator Levin proposes to raise the 20 percent ownership threshold to 50 percent, which is the same proposal put forth earlier this year by President Obama and Senator Wyden. In addition, Senator Levin proposes to disallow any inversion where “management and control of the merged company remains in the U.S. and either 25 percent of its employees or sales or assets are located in the U.S.”

Practitioners interviewed by Tax Analysts (subscription required) find the proposal is so broad, open-ended and left up to IRS interpretation that many foreign companies operating in the U.S. could suddenly become subject to U.S. tax on their worldwide earnings. That would cause a whole other category of companies to take flight. Further, the bill only addresses one of many ways companies can reduce their exposure to U.S. corporate tax. For instance, Merck just sold its consumer care business for $14.2 billion to German drug maker Bayer.

Senator Wyden did not co-sponsor the bill, nor did any Republican. The 14 Senators who did co-sponsor it are apparently concerned about the loss of tax revenue from inversions. However, the best way to prevent further losses of corporate tax revenue, and to protect American jobs, is to stop repelling businesses through punitive taxation. Cutting the corporate tax rate to somewhere closer to competitive levels would help immensely. So would acceptance of the international norm of taxing company earnings on a territorial basis, rather than going after profits earned in and taxed by other countries.

Looking at the corporate tax rate, countries with lower tax rates than ours tend to collect more tax revenue. This is true year in and year out. For instance, the table below shows the most recent three years of data on corporate tax rates and revenues in OECD countries. Most countries (28 or 29 out of 34) have corporate tax rates of 30 percent or less. These relatively low-tax countries collect more tax revenue, on average, than does the U.S. Further, the average low-tax country collects more tax revenue than the average high-tax country. The U.S., which now has the highest tax rate in the OECD since Japan cut its rate in mid-2012, is most likely in the self-defeating zone where the corporate tax rate is so high it is actually shrinking tax revenue.

The history of the developed world indicates cutting the U.S. corporate tax rate by 10 points or more would probably pay for itself. Our simulations of corporate rate cuts show even bigger returns in terms of total federal tax revenue, due to growth in jobs and wages. This is the way to preserve the U.S. tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. , and boost the U.S. economy.

Corporate Tax Rates and Revenue in OECD Countries from 2010 to 2012
	Tax Rates	Tax Revenue (% of GDP)
Country	2010	2011	2012	2010	2011	2012
Japan	39.54	39.50	39.54	3.21	3.37	3.43
United States	39.20	39.20	39.13	2.68	2.27	2.59
France	34.43	34.40	34.43	2.14	2.52	2.55
Belgium	33.99	34.00	33.99	2.70	2.90	3.10
Portugal	26.50	28.50	31.50	2.84	3.22	2.79
Germany	30.20	30.20	30.18	1.51	1.75	1.81
Australia	30.00	30.00	30.00	4.75	5.23
Mexico	30.00	30.00	30.00
Spain	30.00	30.00	30.00	1.77	1.82	2.17
Luxembourg	28.59	28.80	28.80	5.74	5.04	5.08
New Zealand	30.00	28.00	28.00	3.85	4.07	4.37
Norway	28.00	28.00	28.00	10.10	10.70	10.39
Italy	27.50	27.50	27.50	2.83	2.71	2.86
Sweden	26.30	26.30	26.30	3.48	3.23	3.03
Canada	29.36	27.60	26.14	3.31	3.13	2.92
Austria	25.00	25.00	25.00	1.93	2.22	2.28
Denmark	25.00	25.00	25.00	2.74	2.77	3.03
Israel	25.00	24.00	25.00	2.91	3.09	2.83
Netherlands	25.50	25.00	25.00	2.17	2.07
Finland	26.00	26.00	24.50	2.55	2.73	2.19
Korea	24.20	24.20	24.20	3.48	4.01	3.99
United Kingdom	28.00	26.00	24.00	3.05	3.08	2.87
Switzerland	21.17	21.20	21.17	2.88	2.95	2.88
Estonia	21.00	21.00	21.00	1.35	1.24	1.45
Chile	17.00	20.00	20.00
Greece	24.00	20.00	20.00	2.40	2.10
Iceland	18.00	20.00	20.00	0.95	1.81	2.11
Slovenia	20.00	20.00	20.00	1.88	1.69	1.26
Turkey	20.00	20.00	20.00	1.90	2.08	2.05
Czech Republic	19.00	19.00	19.00	3.40	3.39	3.56
Hungary	19.00	19.00	19.00	1.23	1.21	1.30
Poland	19.00	19.00	19.00	2.00	2.08
Slovak Republic	19.00	19.00	19.00	2.51	2.41	2.48
Ireland	12.50	12.50	12.50	2.53	2.48	2.58
Average:
High-tax Group (Rate > 30%)	35.47	35.46	34.79	2.45	2.56	2.71
Low-tax Group (Rate = 30% or less)	23.95	23.81	23.50	2.98	3.06	3.08
Low-tax Group ex. Norway*	23.81	23.66	23.34	2.71	2.76	2.73
*Norway is a special case, due to huge oil reserves and taxes on oil reserves.

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