In Congress one of the hot issues is what, if anything, to do about corporate inversion, an increasingly popular tax avoidance strategy in which a U.S. corporation acquires a foreign company in order to move its headquarters abroad and pay a lower tax rate on its foreign earnings.
Since 2013, at least 14 U.S. corporations have relocated their headquarters abroad, according to Reuters, with 10 making the move this year alone. The most recent example is Burger King, which announced in late August that it would merge with the Canadian chain Tim Hortons and move its headquarters to Canada, which has a lower corporate tax rate than the U.S. does. That month the U.S. fruit company Chiquita Banana decided to move its headquarters to Ireland. The pharmaceutical company AbbVie moved abroad in June, and Pfizer is contemplating leaving behind its U.S. status.
President Barack Obama has noted the hypocrisy inherent in U.S. corporations’ moving abroad. “They’re keeping most of their business inside the United States, but they’re basically renouncing their citizenship ... just to avoid paying their fair share,” he said in a weekly radio address in July. He has since taken action to try to curb future corporate tax dodging by blocking some of the tax-saving maneuvers that companies use in inversion deals. Yet as their response to these moves shows, conservatives think it is a good idea to increase corporate tax benefits and decrease big businesses’ share of the tax burden. The recent tax reform plan from Sens. Mike Lee and Marco Rubio, for example, proposes lowering the corporate tax rate and ending taxation of profits earned from overseas subsidiaries — profits on which corporations already reap hundreds of millions of dollars in tax credits.
Instead of following their lead, we should be recognizing that inversions are only the latest maneuver in a longstanding pattern of corporate offshoring and outsourcing. At a time when corporations are becoming less and less invested in American communities — and less and less willing to accept the responsibilities of being part of American society — we should be limiting the amount of influence that these corporations have in our democratic deliberations.
For decades now, U.S. corporations have been cutting ties with the communities that enabled their success in the first place. The trend began in manufacturing, a sector that has slashed nearly 8 million jobs since 1979. It has since spread as companies have outsourced and offshored an expanding array of jobs. A good example comes from the semiconductor industry. According to the Government Accountability Office, beginning in the 1960s, semiconductor manufacturers began to move assembly plants to Asia. In the 1980s they followed these with wafer foundries and, beginning in the 2000s, design and engineering jobs as well. A survey of over 500 companies by the consulting firm Booz Allen Hamilton affirms this trend, finding “a salient shift toward locating more sophisticated and mission-critical work in countries such as India, China, Hungary, Brazil and the Philippines.”
From 2010 to 2012, three-quarters of the jobs created by the 35 largest U.S. companies from were outside the country, according to The Wall Street Journal. And for the 2000s, the newspaper reports, “U.S. multinational corporations, the big brand-name companies that employ a fifth of all American workers, have been hiring abroad while cutting back at home” — with domestic payrolls reduced by 2.9 million while 2.4 million jobs were established overseas.
The ability of companies to participate in democracy should be predicated on their embracing the responsibilities of citizenship.
As it is, the complaint about high statutory corporate tax rates is a red herring. As the Economic Policy Institute reports, the effective corporate tax rate has stayed at a relatively low 27.7 percent, on par with those of other economically advanced countries. In fact, the effective rate has remained well below the statutory rate since the early 1980s, making corporations’ complaints about their tax rate here seem hyperbolic. The fact remains that almost all the benefits of higher productivity have gone to corporations, and their profits are at an all-time high.
Yet policies set by Congress have enabled this tax avoidance behavior. American corporations are allowed to hold overseas income indefinitely to avoid paying U.S. corporate taxes — a practice known as deferral. As The Wall Street Journal explains, “Many companies use the rule to park overseas earnings in tax-haven countries for years.” The president of the AFL-CIO, Richard Trumka, argues that outlawing the practice “would increase investment, employment and wages in the United States.”
Unfortunately, the cause has never gained real momentum in Washington, especially after the 2010 midterm elections left the legislature in gridlocked. As a result, all the reasons Obama had to move on reforming the tax code in 2009 are still in place.
The latest round of tax inversions is a political opportunity to encourage companies to step up and accept the responsibilities that come with doing business in the U.S. — or at the very least prevent them from playing an outsize role in our democratic process. As corporate culture has grown more and more disconnected from American communities, it has demanded a greater and greater say in the country’s elections. Since 2000, independent expenditures in electoral campaigns have increased over 60-fold, from under $3 million to $186 million today. And an increasing amount of this money has come from avenues opened by the 2010 Supreme Court decision Citizens United, in which it upheld the idea that corporate money should be regarded as speech and thus be covered by First Amendment protections.
Given the long-term shift in corporate loyalties away from being invested in American communities, we should be moving in the opposite direction, taking action against corporations that have such a dominant role in our democracy. The ability to participate in democratic deliberations should be predicated on embracing the responsibilities of citizenship and being invested in the well-being of our communities. When it serves their interests, corporations like to be seen as Main Street institutions, deeply embedded in the fabric of American life. But as the inversion controversy shows, such hometown associations are only skin deep.
Obama and concerned members of Congress are right to demand that corporations doing in business in the U.S. should be made to pay their fare share and abide by the responsibilities that come with that privilege. But more than that, at a time when businesses’ civic investment grows weaker and weaker, we should be examining ways to limit undue corporate influence over our democratic system.