I’m often asked about whether I accept guest posts. I do. Once per year. And it’s that time of year!
Earlier this year, I announced my annual call for guest posts where I offered readers the chance to answer one of six tax-related questions. I chose, out of all of the submissions, thoughtful posts that represented a mix of viewpoints on each of the issues. That mix means that there might be opinions that differ from yours – and that’s okay. Feel free to chime in with your own thoughts as a comment. Remember, however, that the normal terms and conditions for Forbes apply to comments: additionally, I have my own rules (they can be summed up in two words: play nice).
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By Elaine Kamarck
For most Democrats, there aren’t a lot of opportunities for agreement with House Budget Committee Chairman, Congressman Paul Ryan. In fact, I was surprised as anyone to find myself nodding along when he said this on CNBC on August 20:
“The answer to the inversion craze is fundamental corporate tax reform, tax reform itself. Which is lower our tax rates, and get off the crazy world wide tax system that is basically shooting ourselves in the foot.”
He’s right. Inversions are the “canary in the coal mine” that will be followed, almost certainly, by the acquisition of U.S. firms by foreign ones and the flow of American jobs overseas. This “craze,” as Congressman Ryan put it, poses a threat to our economic recovery, and contrary to our experience in years past, companies today are very open about why they’re pursuing inversions: our world-leading corporate tax rate.
The latest inversion – where an American company buys or merges with a foreign company to ease their tax burden – is none other than classic American eatery Burger King, which reportedly intends to buy Canadian chain Tim Horton’s. This move would bring Burger King’s corporate tax burden down from America’s super-sized 39.1 percent to Canada’s 26.5 percent – and importantly, mean their headquarters, and corresponding jobs, would move north.
In the three decades since America last reformed its tax code, our system has only become increasingly complex, riddled with exceptions and loopholes, and more and more unfair. In 1986, a now-legendary bipartisan agreement led to tax reform and a lower corporate rate. Since then, other countries have been aggressively lowering their rates, quickly eroding America’s once enviable competitive edge. As a result of our stagnation, these days American companies have three basic options: navigate a dizzying and growing tax code and pay a world-leading tax rate; use an army of lawyers to circumvent the system and find loopholes for a lower rate; or now – inversions.
Our highest-in-the-world corporate rate means that American companies, on average, pay 40 cents on each extra dollar earned. In Europe, the average rate is 20 cents; in Asia 22 cents – or half of what companies in America pay. That doesn’t mean American countries should be moving overseas to get out of paying American tax rates, but it does give us a sense of why they might want to. More importantly, it should give Washington some motivation to act.
The system is not working for anyone right now, except our foreign competitors. The longer we wait to act, the harder it will be to keep American companies, and the jobs that come with them, on our shores.
That’s why Paul Ryan is right. And he isn’t alone.
Vice President Biden’s former chief economist Jared Bernstein, using Burger King as an example, says recent tax inversions “provide such a clear example of the sort of loopholes that plague our corporate code.”
The solution to tax inversions is tax reform that makes our system fairer, simpler and lowers our corporate tax rate.
Companies want to do business here in America. Taking steps to make that easier would solve the inversion craze in its tracks. In addition, tax reform would bring a host of other sorely-needed economic benefits for the United States including, according to some estimates, increased GDP and wages.
Until we reform our system, a growing number of U.S. businesses are going to follow Burger King, Pfizer and others, who, in the absence of action from Washington, are taking matters into their own hands to reduce their tax burdens. Our out-of-date code has had a real-life effect on our economy and it has taken the inversion craze to get our lawmakers to take note.
Fortunately, there is some bipartisan agreement. President Obama, Speaker Boehner and the leaders of the tax writing committees in the House and Senate all acknowledge the problems we face, and importantly, mostly agree on the solutions we need. Yes, the growing alarm of inversions is not lost on our leaders, but now we need action.
Tax reform is more than just a stop-gap, Band-Aid solution. To borrow a line from another fast food chain, by tackling the code and the rate, we can keep American companies from making a run for the border.
Dr. Elaine C. Kamarck is co-chair of the RATE Coalition. Learn more about the RATE Coalition here