Last week, the Obama administration unveiled its new plan to discourage corporate tax inversions by making it much more difficult for corporations to access their overseas cash without having it taxed at U.S. rates, which is about 35%. Over the last several months, the Obama administration has frequently referred to these tax inversions as “unpatriotic” because corporations are not paying their fair share – in fact, the Obama administration has gone as far as saying that these corporations are renouncing their American citizenship because they want to maximize their bottom lines in an effort to please stockholders. Does this really sound unpatriotic?
When the issue of tax inversions is mentioned, people tend to forget that virtually anyone can be a stockholder in a public company. As long as you have a bank account and an income, you can purchase ownership claims to virtually any public corporation in the world. Your parents, your grandparents, your siblings, and even people walking down the street could all have partial ownership of any public corporation. In fact, according to the Investment Company Institute, over half of American households own stock in at least one American company as of 2008. Given this statistic, it seems unpatriotic for corporations to pay about 35% of their earnings before taxes to the government, especially since, according to the Heritage Foundation, government spending is much less efficient than the research groundbreaking products. For example, imagine if Johnson & Johnson’s earnings before taxes were $1 billion last fiscal year and if, after paying all of its taxes, the company is left with $600 million. According to Forbes, it costs roughly $5 billion to research and develop a new drug. If Johnson & Johnson were taxed at 0%, Johnson & Johnson could develop a drug in approximately five years, but instead, since it pays about $400 million of this $1 billion in taxes, it would take Johnson & Johnson a little over eight years to research and develop a new drug. Now, imagine that this drug is a cure for heart disease. According to the Center for Disease Control and Prevention, approximately 380,000 people die annually from heart disease. Assuming that this stays constant and that research and development expenditures are directly proportional to drug success rates and the timeliness of the development of these new drugs, is the $400 million that Johnson & Johnson paid in taxes worth over one million lives? If you don’t think so, does it at least sound patriotic?
According to the Tax Foundation, an independent tax policy research organization, worldwide corporate tax rates have steadily declined since the early 2000s, but the U.S. corporate tax rate has stayed constant at about 3%. According to Goldman Sachs, there have been over twenty times as many inversion transactions in 2014 than there have been in any other fiscal year since 1983. While this recent phenomenon can be attributed to many other variables, such as the Federal Reserve’s artificially low interest rates, we can clearly see that many American companies are noticing that worldwide corporate tax rates are decreasing while the U.S. corporate tax rate is not. Can we honestly blame these corporations for trying to generate the best outcomes for their owners, who, again, could be virtually anyone? And, if you still think that executives of these corporations that engage in tax inversions are still acting unpatriotically, imagine if you were an executive at one of these American companies. If you noticed that Ireland has its corporate tax rate set at about 12.5%, which is about a third of the U.S. corporate tax rate, would you not even be tempted to look at reincorporating in Ireland to please your stockholders solely in the name of acting patriotically?
Even though President Obama has stated that he wants to lower the U.S. corporate tax rate to 28%, it is still not enough. With ten countries having a 0% corporate tax rate and another twenty countries having a corporate tax rate set at under 15 percent, the U.S. needs to lower its corporate tax rate in an effort to remain attractive to both domestic and foreign corporations. Instead of trying to trap American corporations by limiting their freedom to access overseas cash, President Obama should begin to focus on pushing Congress to reform the current tax code in such a way that promotes American prosperity and encourages corporations to create more domestic jobs.
Mavrelis is a member of
the class of 2017.