Big Sucking Sound – GOP Needs to Propose Fix for Companies Fleeing US Shores for “Tax Inversion”

Unemployment continues to come down gradually. The Fed expects no changes in interest rates until 2015 at the earliest. The stock market continues to break new records. So, what's to worry? This must be the recovery we have all been waiting for!

Well, no. The workforce has shrunk to a 35-year low since so many Americans have given up hope to find jobs. The Fed is still printing make believe money, fueling our national debt beyond $17.5 trillion. The stock market is growing but it may also be due for a big correction.

Though the Republicans in Washington have failed to advance economic reforms that would cut spending, reduce taxes, and balance the budget, there is at least one measure they should propose, if for no other reason than to create some actual distance from the misfit Democrats. Such a measure would also reflect a modicum of leadership from the GOP heading into the midterm elections this fall.

A perfect opportunity exists for such a move by trying to reverse a troubling and growing trend among some big corporations. More and more companies are seeking “tax inversion” mergers with foreign-based companies that would enable the US-based firms to re-incorporate in other countries. Such mergers effectively reduce their corporate income tax rate from the 35% threshold in the United States, considered among the highest in the world. This big sucking sound of movement away from our shores represents creative finance for sure – and will likely deliver real shareholder value for some companies.

Case in point, Medtronics is in talks to acquire Covidian. The planned merger is seen as a chance for the medical manufacturer to re-incorporate in Ireland where Covidian is based (after having moved from New Hampshire to Bermuda and then Ireland). Other companies looking at such deals include such iconic American brands as Chiquita and Walgreen's.

Similarly, some companies are looking at the acquisitions of foreign domiciled companies using overseas earnings for the purchase before Congress attempts to repatriate those dollars. Recently, Pfizer attempted such a takeover of AstraZeneca, which would have in effect lowered their corporate tax rate. Such deals can also enable companies to return cash held overseas to their shareholders.

Many companies have reportedly started to move their headquarters from tax havens such as Bermuda into European nations where the US has tax treaties. Legislation in the US would focus on traditional tax havens and may not alter the arrangements with EU countries.

This is the marvel of the unintended consequences of government tax and regulation. The corporate tax rate has been too high for too long, so companies started to re-incorporate in tax havens and drive revenues through foreign-based subsidiaries.

Isn't it ironic that we have a flood of illegal immigrants (read: taxpayer-funded benefits) entering the country while major companies (read: tax base) are considering fleeing our shores?

The federal government, especially in line with the Democrat’s demonization of free-market capitalism since the recession, has long considered penalizing companies for their transgressions of creating earnings overseas and keeping them off US shores so they can’t be taxed at the current US rate. Now that more companies are looking at merger deals for tax inversion purposes, the feds will surely come up with a way to attack them. Watch out Ireland (one of the more business-friendly EU domiciles)!

Not to inject too much logic, here, but in order to reverse this trend in corporate America, we need to lower the US corporate tax rate and incentivize companies to remain American, and possibly create a renaissance in US manufacturing while we are at it.

The cowards in Washington should reduce our corporate tax rate to keep companies based here. While any deal should eliminate tax loopholes and sweetheart deals that companies gain through crony capitalism, we should reduce the corporate tax rate to 15% and see how much economic activity it will attract.

Despite suggestions from Washington that the economy is showing signs of recovery, we are still in a pathetically sluggish period and the longterm outlook for lower spending and reduced taxation is worse. Though Obama economic policies have driven us to this state of no growth, our fearless GOP leaders aren't defining economic issues in big bold ways either. Despite the GOP's limited ability to enact economic reforms, the party can make a stand now that could support its takeover of the Senate this fall, which will create an environment where reform is more viable - plus, it happens to be the right thing to do!

Therefore, the GOP should address the tax inversion exodus of some US-based companies immediately with a broad solution that could ultimately have dramatic economic and political benefits. Just this one act to support real economic reform to keep American companies American is the least we should expect from them. This would be one small step for Republicans, but one giant, symbolic appeal to US businesses.

 

Source: Medical Merger Part of 'Tax Inversion' Wave

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