Newspaper article Pittsburgh Post-Gazette (Pittsburgh, PA)

The Problem or a Symptom?

Newspaper article Pittsburgh Post-Gazette (Pittsburgh, PA)

The Problem or a Symptom?

Article excerpt

The Obama administration urged lawmakers recently to pass legislation to contain the number of companies reincorporating overseas for tax purposes, commonly referred to as corporate inversion. Mylan Labs, headquartered in Canonsburg, is one of the latest companies to pursue such a strategy.

It is perceived by Washington lawmakers that companies such as Mylan are taking advantage of a quirk in U.S. tax law and cheating the government of much-needed tax revenue. Our intuition is that corporate inversions themselves are not the problem, but a symptom of a broader issue - the need for broad U.S. corporate tax reform.

In 1986, the U.S. passed landmark tax reform that lowered corporate tax rates to the lowest in the industrialized world. This action set off a chain reaction around the world, forcing other countries to adopt similar measures to attract capital. Today, the U.S. has the highest corporate tax rate in the industrialized world (40 percent vs. the global average of 24 percent) and is the only industrialized country that double taxes foreign sources of earnings.

Under the current tax law, a company that earns a profit in another but wants to return capital to the U.S. pays taxes in the host country and then again when the profits are repatriated back to the U.S.

The tax bite is so meaningful that companies are pursuing inversions, which take place when a U.S. company merges with a foreign business in another tax jurisdiction.

Besides U.S. companies reincorporating overseas and the U.S. government losing out on an estimated $20 billion in tax revenue over the next decade, there is a more important long-term impact - deterring domestic investment.

The double taxation of foreign earnings has encouraged companies to hoard an estimated $1.8 to $2 trillion overseas. These are monies that are left overseas for tax purposes, instead of being returned to the U. …

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