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Posts Tagged ‘Territorial Taxation’

Most of us will never be directly impacted by the international provisions of the internal revenue code.

That’s bad news because it presumably means we don’t have a lot of money, but it’s good news because IRS policies regarding “foreign-source income” are a poisonous combination of complexity, harshness, and bullying (this image from the International Tax Blog helps to illustrate that only taxpayers with lots of money can afford the lawyers and accountants needed to navigate this awful part of the internal revenue code).

But the bullying and the burdens aren’t being imposed solely on Americans. The internal revenue code is uniquely unilateral and imperialistic, so we simultaneously hurt U.S. taxpayers and cause discord with other jurisdictions.

Here are some very wise words from a Washington Post column by Professor Andrés Martinez of Arizona State University.

Much of his article focuses on the inversion issue, but I’ve already covered that topic many times. What caught my attention instead is that he does a great job of highlighting the underlying philosophical and design flaws of our tax code. And what he writes on that topic is very much worth sharing.

The Obama administration is not living up to its promise to move the country away from an arrogant, unilateral approach to the world. And it has not embraced a more consensus-driven, multipolar vision that reflects the fact that America is not the sole player in the global sandbox. No, I am not talking here about national security or counter-terrorism policy, but rather the telling issue of how governments think about money — specifically the money they are entitled to, as established by their tax policies. …ours is a country with an outdated tax code — one that reflects the worst go-it-alone, imperialistic, America-first impulses. …the…problem is old-fashioned Yankee imperialism.

What is he talking about? What is this fiscal imperialism?

It’s worldwide taxation, a policy that is grossly inconsistent with good tax policy (for instance, worldwide taxation is abolished under both the flat tax and national sales tax).

He elaborates.

The United States persists in imposing its “worldwide taxation” system, as opposed to the “territorial” model embraced by most of the rest of the world. Under a “territorial” tax system, the sovereign with jurisdiction over the economic activity is entitled to tax it.  If you profit from doing business in France, you owe the French treasury taxes, regardless of whether you are a French, American or Japanese multinational.  Even the United States, conveniently, subscribes to this logical approach when it comes to foreign companies doing business here: Foreign companies pay Washington corporate taxes on the income made by their U.S. operations. But under our worldwide tax system, Uncle Sam also taxes your income as an American citizen (or Apple’s or Coca-Cola’s) anywhere in the world. …Imagine you are a California-based widget manufacturer competing around the world against a Dutch widget manufacturer. You both do very well and compete aggressively in Latin America, and pay taxes on your income there. Trouble is, your Dutch competitor can reinvest those profits back in its home country without paying additional taxes, but you can’t.

Amen.

Indeed, if you watch this video, you’ll see that I also show how the territorial system of the Netherlands is far superior and more pro-competitive than America’s worldwide regime.

And if you like images, this graphic explains how American companies are put at a competitive disadvantage.

Professor Martinez points to the obvious solution.

Instead of attacking companies struggling to compete in the global marketplace, the Obama administration should work with Republicans to move to a territorial tax system.

But, needless to say, the White House wants to move policy in the wrong direction.

Looking specifically at the topic of inversions, the Wall Street Journal eviscerates the Obama Administration’s unilateral effort to penalize American companies that compete overseas.

Here are some of the highlights.

…the Obama Treasury this week rolled out a plan to discourage investment in America. …the practical impact will be to make it harder to make money overseas and then bring it back here. …if the changes work as intended, they will make it more difficult and expensive for companies to reinvest foreign earnings in the U.S. Tell us again how this helps American workers.

The WSJ makes three very powerful points.

First, companies that invert still pay tax on profits earned in America.

…the point is not to ensure that U.S. business profits will continue to be taxed. Such profits will be taxed under any of the inversion deals that have received so much recent attention. The White House goal is to ensure that the U.S. government can tax theforeign profits of U.S. companies, even though this money has already been taxed by the countries in which it was earned, and even though those countries generally don’t tax their own companies on profits earned in the U.S.

Second, there is no dearth of corporate tax revenue.

Mr. Lew may be famously ignorant on matters of finance, but now there’s reason to question his command of basic math. Corporate income tax revenues have roughly doubled since the recession. Such receipts surged in fiscal year 2013 to $274 billion, up from $138 billion in 2009. Even the White House budget office is expecting corporate income tax revenues for fiscal 2014 to rise above $332 billion and to hit $502 billion by 2016.

Third, it’s either laughable or unseemly that companies are being lectured about “fairness” and “patriotism” by a cronyist like Treasury Secretary Lew.

It must be fun for corporate executives to get a moral lecture from a guy who took home an $800,000 salary from a nonprofit university and then pocketed a severance payment when he quit to work on Wall Street, even though school policy says only terminated employees are eligible for severance.

Heck, it’s not just that Lew got sweetheart treatment from an educational institution that gets subsidies from Washington.

The WSJ also should have mentioned that he was an “unpatriotic” tax avoider when he worked on Wall Street.

But I guess rules are only for the little people, not the political elite.

P.S. Amazingly, I actually found a very good joke about worldwide taxation. Maybe not as funny as these IRS jokes, but still reasonably amusing.

P.P.S. Shifting from tax competitiveness to tax principles, I’ve been criticized for being a squish by Laurence Vance of the Mises Institute. He wrote:

Mitchell supports the flat tax is “other than a family-based allowance, it gets rid of all loopholes, deductions, credits, exemptions, exclusions, and preferences, meaning economic activity is taxed equally.” But because “a national sales tax (such as the Fair Tax) is like a flat tax but with a different collection point,” and “the two plans are different sides of the same coin” with no “loopholes,” even though he is “mostly known for being an advocate of the flat tax,” Mitchell has “no objection to speaking in favor of a national sales tax, testifying in favor of a national sales tax, or debating in favor of a national sales tax.” But as I have said before, the flat tax is not flat and the Fair Tax is not fair. …proponents of a free society should work towardexpanding tax deductions, tax credits, tax breaks, tax exemptions, tax exclusions, tax incentives, tax loopholes, tax preferences, tax avoidance schemes, and tax shelters and applying them to as many Americans as possible. These things are not subsidies that have to be “paid for.” They should only be eliminated because the income tax itself has been eliminated. …the goal should be no taxes whatsoever.

In my defense, I largely agree. As I’ve noted here, here, here, and here, I ultimately want to limit the federal government to the powers granted in Article I, Section 8 of the Constitution, in which case we wouldn’t need any broad-based tax.

Though I confess I’ve never argued in favor of “no taxes whatsoever” since I’m not an anarcho-capitalist. So maybe I am a squish. Moreover, Mr. Vance isn’t the first person to accuse me of being insufficiently hardcore.

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I’ve complained over and over again that America’s tax code is a nightmare that undermines competitiveness and retards growth.

Our aggregate fiscal burden may not be as high as it is for many of our foreign competitors, but high tax rates and poor design mean the system is very punitive on a per-dollar-raised basis.

For more information, the Tax Foundation has put together an excellent report measuring international tax competitiveness.

Here’s the methodology.

The Tax Foundation’s International Tax Competitiveness Index (ITCI) measures the degree to which the 34 OECD countries’ tax systems promote competitiveness through low tax burdens on business investment and neutrality through a well-structured tax code. …No longer can a country tax business investment and activity at a high rate without adversely affecting its economic performance. In recent years, many countries have recognized this fact and have moved to reform their tax codes to be more competitive. However, others have failed to do so and are falling behind the global movement. …The competitiveness of a tax code is determined by several factors. The structure and rate of corporate taxes, property taxes, income taxes, cost recovery of business investment, and whether a country has a territorial system are some of the factors that determine whether a country’s tax code is competitive.

And here’s how the United States ranks.

The United States provides a good example of an uncompetitive tax code. …the United States now has the highest corporate income tax rate in the industrialized world. …The United States places 32nd out of the 34 OECD countries on the ITCI. There are three main drivers behind the U.S.’s low score. First, it has the highest corporate income tax rate in the OECD at 39.1 percent. Second, it is one of the only countries in the OECD that does not have a territorial tax system, which would exempt foreign profits earned by domestic corporations from domestic taxation. Finally, the United States loses points for having a relatively high, progressive individual income tax (combined top rate of 46.3 percent) that taxes both dividends and capital gains, albeit at a reduced rate.

Here are the rankings, including scores for the various components.

You have to scroll to the bottom to find the United States. It’s embarrassing that we’re below even Spain and Italy, though I guess it’s good that we managed to edge out Portugal and France.

Looking at the component data, all I can say is that we should be very thankful that politicians haven’t yet figured out how to impose a value-added tax.

I’m also wondering whether it’s better to be ranked 32 out of 34 nations or ranked 94 out of 100 nations?

But rather than focus too much on America’s bad score, let’s look at what some nations are doing right.

Estonia – I’m not surprised that this Baltic nations scores well. Any country that rejects Paul Krugman must be doing something right.

New Zealand – The Kiwis can maintain a decent tax system because they control government spending and limit government coercion.

Switzerland – Fiscal decentralization and sensible citizens are key factors in restraining bad tax policy in Switzerland.

Sweden – The individual income tax is onerous, but Sweden’s penchant for pro-market reform has helped generate good scores in other categories.

Australia – I’m worried the Aussies are drifting in the wrong direction, but any nations that abolishes its death tax deserves a high score.

To close, here’s some of what the editors at the Wall Street Journal opined this morning.

…the inaugural ranking puts the U.S. at 32nd out of 34 industrialized countries in the Organization for Economic Co-operation and Development (OECD). With the developed world’s highest corporate tax rate at over 39% including state levies, plus a rare demand that money earned overseas should be taxed as if it were earned domestically, the U.S. is almost in a class by itself. It ranks just behind Spain and Italy, of all economic humiliations. America did beat Portugal and France, which is currently run by an avowed socialist. …the U.S. would do even worse if it were measured against the world’s roughly 190 countries. The accounting firm KPMG maintains a corporate tax table that includes more than 130 countries and only one has a higher overall corporate tax rate than the U.S. The United Arab Emirates’ 55% rate is an exception, however, because it usually applies only to foreign oil companies.

The WSJ adds a very important point about the liberalizing impact of tax competition.

Liberals argue that U.S. tax rates don’t need to come down because they are already well below the level when Ronald Reagan came into office. But unlike the U.S., the world hasn’t stood still. Reagan’s tax-cutting example ignited a worldwide revolution that has seen waves of corporate tax-rate reductions. The U.S. last reduced the top marginal corporate income tax rate in 1986. But the Tax Foundation reports that other countries have reduced “the OECD average corporate tax rate from 47.5 percent in the early 1980s to around 25 percent today.”

This final excerpt should help explain why I spend a lot of time defending and promoting tax competition.

As bad as the tax system is now, just imagine how bad it would be if politicians didn’t have to worry about jobs and investment escaping.

P.S. If there was a way of measuring tax policies for foreign investors, I suspect the United States would jump a few spots in the rankings.

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One of the worst things about working in Washington is that it’s so easy to get frustrated about the fact-free nature of political debates.

For instance, there’s now a big controversy about companies “re-domiciling” or “inverting” from the United States to lower-tax nations such as Ireland and Switzerland.

This should not be controversial. Unless, of course, you think businesses shouldn’t be allowed to move from California to Texas. Or from New York to Tennessee.

And even if you somehow think taxpayers don’t have the right to legally protect themselves from punitive taxation, there are two very stark facts that should guide the political debate.

First, the United States has the world’s highest corporate tax rate, which undermines job creation and competitiveness in America, regardless of whether there are inversions.

Second, the United States has the most punitive “worldwide” tax system, meaning the IRS gets to tax American-domiciled companies on income that is earned (and already subject to tax) in other nations.

This is why, as I explain in this video, that the politicians who are protesting against inversions are putting demagoguery above jobs.

One of the most important aspects of this debate, though, doesn’t involve the intricacies of corporate taxation. Instead, it’s a broader public finance point about whether it’s good public policy to disadvantage shareholders, workers, and consumers in order to give politicians more money to spend.

In my mind, that’s a no-brainer.

P.S. Kudos to Rand Paul for being one of the few politicians who is willing to publicly defend companies that engage in legal tax planning.

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Last August, I shared a list of companies that “re-domiciled” in other nations so they could escape America’s punitive “worldwide” tax system.

This past April, I augmented that list with some commentary about whether Walgreen’s might become a Swiss-based company.

And in May, I pontificated about Pfizer’s effort to re-domicile in the United Kingdom.

Well, to paraphrase what Ronald Reagan said to Jimmy Carter in the 1980 presidential debate, here we go again.

Here’s the opening few sentences from a report in the Wall Street Journal.

Medtronic Inc.’s agreement on Sunday to buy rival medical-device maker Covidien COV PLC for $42.9 billion is the latest in a wave of recent moves designed—at least in part—to sidestep U.S. corporate taxes. Covidien’s U.S. headquarters are in Mansfield, Mass., where many of its executives are based. But officially it is domiciled in Ireland, which is known for having a relatively low tax rate: The main corporate rate in Ireland is 12.5%. In the U.S., home to Medtronic, the 35% tax rate is among the world’s highest. Such so-called “tax inversion” deals have become increasingly popular, especially among health-care companies, many of which have ample cash abroad that would be taxed should they bring it back to the U.S.

It’s not just Medtronic. Here are some passages from a story by Tax Analysts.

Teva Pharmaceuticals Inc. agreed to buy U.S. pharmaceutical company Labrys Biologics Inc. Teva, an Israeli-headquartered company, had an effective tax rate of 4 percent in 2013. In yet another pharma deal, Swiss company Roche has agreed to acquire U.S. company Genia Technologies Inc. Corporations are also taking other steps to shift valuable assets and businesses out of the U.S. On Tuesday the U.K. company Vodafone announced plans to move its center for product innovation and development from Silicon Valley to the U.K. The move likely means that revenue from intangibles developed in the future by the research and development center would be taxable primarily in the U.K., and not the U.S.

So how should we interpret these moves?

From a logical and ethical perspective, we should applaud companies for protecting shareholders, workers and consumers. If a government is imposing destructive tax laws (and the United States arguably has the world’s worst corporate tax system), then firms have a moral obligation to minimize the damage.

Writing in the Wall Street Journal, an accounting professor from MIT has some wise words on the issue.

Even worse, legislators have responded with proposals that seek to prevent companies from escaping the U.S. tax system. The U.S. corporate statutory tax rate is one of the highest in the world at 35%. In addition, the U.S. has a world-wide tax system under which profits earned abroad face U.S. taxation when brought back to America. The other G-7 countries, however, all have some form of a territorial tax system that imposes little or no tax on repatriated earnings. To compete with foreign-based companies that have lower tax burdens, U.S. corporations have developed do-it-yourself territorial tax strategies. …Some firms have taken the next logical step to stay competitive with foreign-based companies: reincorporating as foreign companies through cross-border mergers.

Unsurprisingly, some politicians are responding with punitive policies. Instead of fixing the flaws in the internal revenue code, they want various forms of financial protectionism in order the stop companies from inversions.

Professor Hanlon is unimpressed.

Threatening corporations with stricter rules and retroactive tax punishments will not attract business and investment to the U.S. The responses by the federal government and U.S. corporations are creating what in managerial accounting we call a death spiral. The government is trying to generate revenue through high corporate taxes, but corporations cannot compete when they have such high tax costs. …The real solution is a tax system that attracts businesses to our shores, and keeps them here. …The U.K. may be a good example: In 2010, after realizing that too many companies were leaving for the greener tax pastures of Ireland, the government’s economic and finance ministry wrote in a report that it wanted to “send out the signal loud and clear, Britain is open for business.” The country made substantive tax-policy changes such as reducing the corporate tax rate and implementing a territorial tax system. Congress and President Obama should make tax reform a priority.

Here’s some info, by the way, about the United Kingdom’s smart moves on corporate taxation.

For more information on territorial taxation, here’s a video I narrated for the Center for Freedom and Prosperity.

And here’s my futile effort to educate the New York Times on the issue.

And if you want some info on the importance of lower corporate taxation, here’s another CF&P video.

P.S. Last February, I shared a hilarious video spoof about some action figures called the “Kronies.” These fake toys symbolize the sleazy insiders that have made DC a racket for well-connected insiders.

Well, the Kronies are back with a new video about the Export Import Bank, which exists to subsidize companies that give lots of contributions to politicians.

I’ve written before about the Export-Import Bank being a perfect (in a bad way) example of corruption in Washington, but if you want to know the details about this crony institution, Veronique de Rugy of the Mercatus Center is a walking encyclopedia on the topic.

By the way, the recently defeated House Majority Leader has been a big supporter of Ex-Im Bank subsidies, and it’s very revealing that Boeing’s share price fell after his defeat. Investors obviously think those handouts are very valuable, and they’re worried that the gravy train may come to an end with Cantor on his way out the door.

Addendum: Some readers have already asked whether it would have been better to say that America’s corporate tax is “sadistic” rather than “masochistic.”

From the perspective of companies (and their shareholders, workers, and consumers), the answer is yes.

But I chose “masochistic” because politicians presumably want to extract the maximum amount of revenue from companies, yet that’s not happening because they’ve set the rate so high and made the system so unfriendly. In other words, they’re hurting themselves. I guess they hate the Laffer Curve even more than they like having more money with which to buy votes.

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I’m beginning to think that people from some nations are smarter and more rational than others.

That may explain, for instance, why voters in Estonia support fiscal restraint while voters in France foolishly think the gravy train can continue forever.

But I’m not making an argument about genetic ability. Instead, what I’m actually starting to wonder is whether some political cultures yield smarter and more rational decisions.

Switzerland is a good example. In a referendum this past weekend, an overwhelming majority of voters rejected a proposal to impose a minimum wage. Here are some excerpts from a BBC report.

Swiss voters have overwhelmingly rejected a proposal to introduce what would have been the highest minimum wage in the world in a referendum. Under the plan, employers would have had to pay workers a minimum 22 Swiss francs (about $25; £15; 18 euros) an hour. …critics argued that it would raise production costs and increase unemployment. The minimum wage proposal was rejected by 76% of voters. Supporters had argued it would “protect equitable pay” but the Swiss Business Federation said it would harm low-paid workers in particular. …unions are angry that Switzerland – one of the richest countries in the world – does not have a minimum pay level while neighbouring France and Germany do.

Every single Swiss Canton voted against the minimum wage.

That means the French-speaking cantons voted no, even though the French-speaking people in France routinely support politicians who favor bad policy.

That means the German-speaking cantons voted no, even though the German-speaking people in Germany routinely support politicians who favor bad policy.

And it means that the Italian-speaking canton voted no, even though the Italian-speaking people in Italy routinely support politicians who favor bad policy.

So why is it that the same people, genetically speaking, make smart decisions in Switzerland and dumb decisions elsewhere?

I don’t have an answer, but here’s some more evidence. As you can see from these passages in a New York Times story, the Swiss have a lot more common sense than their neighbors.

“A fixed salary has never been a good way to fight the problem,” said Johann Schneider-Ammann, the economic minister. “If the initiative had been accepted, it would have led to workplace losses, especially in rural areas where less-qualified people have a harder time finding jobs. The best remedy against poverty is work.” …“Switzerland, especially in popular votes, has never had a tradition of approving state intervention in the labor markets,” said Daniel Kubler, a professor of political science at the University of Zurich. “A majority of Swiss has always thought, and still seems to think, that liberal economic principles are the basis of their model of success.”

Even the non-Swiss in Switzerland are rational. Check out this blurb from a story which appeared before the vote in USA Today.

…some who would be eligible for the higher wage worry that it may do more harm than good. Luisa Almeida is an immigrant from Portugal who works in Switzerland as a housekeeper and nanny. Almeida’s earnings of $3,250 a month are below the proposed minimum wage but still much more than she’d make in Portugal. Since she is not a Swiss citizen, she cannot vote but if she could, “I would vote ‘no’,” she says. “If my employer had to pay me more money, he wouldn’t be able to keep me on and I’d lose the job.”

Heck, I’m wondering if Ms. Almeida would be willing to come to Washington and educate Barack Obama. Minimum Wage BensonShe obviously has enough smarts to figure out the indirect negative impact of government intervention, so her counsel would be very valuable in DC.

But if Ms. Almeida isn’t available, we have another foreigner who already has provided advice on the issue of minimum wages. Here’s Orphe Divougny, originally from Gabon, with a common-sense explanation of why it doesn’t make sense to hurt low-skilled workers.

By the way, this isn’t the first time the Swiss have demonstrated common sense when asked to vote of key economic policy issues.

In 2001, 85 percent of voters approved a plan to cap the growth of government spending.

In 2010, 59 percent of voters rejected an Obama-style class-warfare tax plan.

No wonder there are many reasons why Switzerland ranks above the United States.

P.S. I wrote earlier this month about Pfizer’s potential merger that would allow the company to reduce its onerous tax burden to the IRS by redomiciling in the United Kingdom.

Well, Jeff Jacoby of the Boston Globe has weighed in on the issue and I can’t resist sharing this excerpt.

…the outrage isn’t the wish of an American corporation to lower its tax bill. It is a US tax code so punitive and counterproductive that it can drive a company like Pfizer, which was launched in Brooklyn in 1849, to turn itself into a foreign corporation. The United States has the highest corporate tax rate in the developed world. That puts American companies at a serious competitive disadvantage, since their rivals elsewhere are able to channel more of their profits into new investment, hiring, and productivity. What’s worse, ours is the only country that enforces a system of “worldwide” taxation, which means that American firms have to pay tax to the IRS not only on income earned in the United States but on their foreign earnings as well. Other nations content themselves with “territorial” taxation — they only tax income earned within their national borders. US corporations like Pfizer that have significant earnings overseas are thus taxed on those earnings twice: first by the government of the country where the money was earned, and then by the IRS.

Amen, amen, and amen.

Our tax system imposes a very punitive corporate tax rate.

It then augments the damage with worldwide taxation.

And the system is riddled with onerous rules that cause America to rank a lowly 94th out of 100 nations for business “tax attractiveness.”

In other words, when greedy politicians complain about Pfizer’s possible inversion, it’s a classic case of blaming the victim.

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I’m in favor of free markets.

That means I’m sometimes on the same side as big business, but it also means that I’m often very critical of big business.

That’s because large companies are largely amoral.

Depending on the issue, they may be on the side of the angels, such as when they resist bad government policies such as higher tax rates and increased red tape.

But many of those same companies will then turn around and try to manipulate the system for subsidies, protectionism, and corrupt tax loopholes.

Today, I’m going to defend big business. That’s because we have a controversy about whether a company has the legal and moral right to protect itself from bad tax policy.

We’re dealing specifically with a drugstore chain that has merged with a similar company based in Switzerland, which raises the question of whether the expanded company should be domiciled in the United States or overseas.

Here’s some of what I wrote on this issue for yesterday’s Chicago Tribune.

Should Walgreen move? …Many shareholders want a “corporate inversion” with the company based in Europe, possibly Switzerland. …if the combined company were based in Switzerland and got out from under America’s misguided tax system, the firm’s tax burden would drop, and UBS analysts predict that earnings per share would jump by 75 percent. That’s a plus for shareholders, of course, but also good for employees and consumers.

Folks on the left, though, are fanning the flames of resentment, implying that this would be an example of corporate tax cheating.

But they either don’t know what they’re talking about (a distinct possibility given their unfamiliarity with the private sector) or they’re prevaricating.

Some think this would allow Walgreen to avoid paying tax on American profits to Uncle Sam. This is not true. All companies, whether domiciled in America or elsewhere, pay tax to the IRS on income earned in the U.S. 

The benefit of “inverting” basically revolves around the taxation of income earned in other nations.

But there is a big tax advantage if Walgreen becomes a Swiss company. The U.S. imposes “worldwide taxation,” which means American-based companies not only pay tax on income earned at home but also are subject to tax on income earned overseas. Most other nations, including Switzerland, use “territorial taxation,” which is the common-sense approach of only taxing income earned inside national borders. The bottom line is that Walgreen, if it becomes a Swiss company, no longer would have to pay tax to the IRS on income that is earned in other nations. 

It’s worth noting, by the way, that all major pro-growth tax reforms (such as the flat tax) would replace worldwide taxation with territorial taxation. So Walgreen wouldn’t have any incentive to redomicile in Switzerland if America had the right policy.

And this is why I’ve defended Google and Apple when they’ve been attacked for not coughing up more money to the IRS on their foreign-source income.

But I don’t think this fight is really about the details of corporate tax policy.

Some people think that taxpayers in the economy’s productive sector should be treated as milk cows that exist solely to feed the Washington spending machine.

…ideologues on the left, even the ones who understand that the company would comply with tax laws, are upset that Walgreen is considering this shift. They think companies have a moral obligation to pay more tax than required. This is a bizarre mentality. It assumes not only that we should voluntarily pay extra tax but also that society will be better off if more money is transferred from the productive sector of the economy to politicians.

Needless to say, I have a solution to this controversy.

…the real lesson is that politicians in Washington should lower the corporate tax rate and reform the code so that America no longer is an unfriendly home for multinational firms.

For more information, here’s the video I narrated on “deferral,” which is a policy that mitigates America’s misguided policy of worldwide taxation. And you’ll see (what a surprise) that the Obama Administration wants to make the system even more punitive.

P.S. On this topic, click here is you want to compare good research from the Tax Foundation with sloppy analysis from the New York Times.

P.P.S. Many other companies already have re-domiciled overseas because the internal revenue code is so punitive. The U.S. tax system is so bad that companies even escape to Canada and the United Kingdom!

P.P.P.S. It also would be a good idea to lower America’s anti-competitive corporate tax rate.

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It’s probably not an exaggeration to say that the United States has the world’s worst corporate tax system.

We definitely have the highest corporate tax rate in the developed world, and we may have the highest corporate tax rate in the entire world depending on how one chooses to classify the tax regime in an obscure oil Sheikdom.

But America’s bad policy goes far beyond the rate structure. We also have a very punitive policy of “worldwide taxation” that forces American firms to pay an extra layer of tax when competing for market share in other nations.

And then we have rampant double taxation of both dividends and capital gains, which discourages business investment.

No wonder a couple of German economists ranked America 94 out of 100 nations when measuring the overall treatment of business income.

So if you’re an American company, how do you deal with all this bad policy?

Well, one solution is to engage in a lot of clever tax planning to minimize your taxable income. Though that’s probably not a successful long-term strategy since the Obama Administration is supporting a plan by European politicians to create further disadvantages for American-based companies.

Another option is to somehow turn yourself into a foreign corporation. You won’t be surprised to learn that politicians have imposed punitive anti-expatriation laws to make that difficult, but the crowd in Washington hasn’t figured out how to stop cross-border mergers and acquisitions.

And it seems that’s a very effective way of escaping America’s worldwide tax regime. Let’s look at some excerpts from a story posted by CNBC.

Some of the biggest mergers and acquisitions so far in 2013 have involved so-called “tax inversions” – where a US acquirer shifts overseas, to Europe in particular, to pay a lower rate.

The article then lists a bunch of examples. Here’s Example #1.

Michigan-based pharmaceuticals group Perrigo has said its acquisition of Irish biotech company Elan will lead to re-domiciling in Ireland, where it has given guidance it expects to pay about 17 per cent in tax, rather than an estimated 30 per cent rate it was paying in the US. Deutsche Bank estimates Perrigo will achieve tax savings of $118m a year as a result.

And Example #2.

New Jersey-based Actavis’s acquisition of Warner Chilcott in May – will also result in a move to Ireland, where Actavis’s tax rate will fall to about 17 per cent from an effective rate of 28 per cent tax, and enable it to save an estimated $150m over the next two years.

Then Example #3.

US advertising company Omnicom has said its $35bn merger with Publicis will result in the combined group’s headquarters being located in the Netherlands, saving about $80m in US tax a year.

Last but not least, Example #4.

Liberty Global’s $23bn acquisition of Virgin Media will allow the US cable group to relocate to the UK, and pay its lower 21 per cent tax rate of corporation tax.

And we can expect more of these inversions in the future.

M&A advisers say the number of companies seeking to re-domicile outside the US after a takeover is rising. …Increased use of tax inversion has coincided with an intensifying political debate on US tax – with Democrats, Republicans and the White House agreeing that the current code, which imposes a top rate of 35 per cent but offers a plethora of tax breaks, is in need of reform.

I’ll close with a very important point.

It’s not true that the current code has a “plethora of tax breaks.” Or, to be more specific, there are lots of tax breaks, but the ones that involve lots of money are part of the personal income tax, such as the state and local tax deduction, the mortgage interest deduction, the charitable contributions deduction, the muni-bond exemption, and the fringe benefits exclusion.

There are some corrupt loopholes in the corporate income tax, to be sure, such as the ethanol credit for Big Ag and housing credits for politically well-connected developers. But if you look at the Joint Committee on Taxation’s list of so-called tax expenditures and correct for their flawed definition of income, it turns out that there’s not much room to finance a lower tax rate by getting rid of unjustified tax breaks.

So does this mean there’s no way of fixing the problems that cause tax inversions?

If lawmakers put themselves in the straitjacket of “static scoring” as practiced by the Joint Committee on Taxation, then a solution is very unlikely.

But if they choose to look at the evidence, they’ll see that there are big Laffer-Curve effects from better tax policy. A study from the American Enterprise Institute found that the revenue-maximizing corporate tax rate is about 25 percent while more recent research from the Tax Foundation puts the revenue-maximizing tax rate for companies closer to 15 percent.

I should hasten to add that the tax code shouldn’t be designed to maximize revenues. But when tax rates are punitively high, even a cranky libertarian like me won’t get too agitated if politicians wind up with more money as a result of lowering tax rates.

You might think that’s a win-win situation. Folks on the right support lower tax rates to get more growth and folks on the left support the same policy to raise more tax revenue.

But there’s at least one person on Washington who wants high tax rates even if they don’t raise additional revenue.

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