Top Tax Expert: Companies Moving Abroad to Please Shareholders

By Lawler, Joseph | Examiner (Washington, D.C.), The, August 22, 2014 | Go to article overview

Top Tax Expert: Companies Moving Abroad to Please Shareholders


Lawler, Joseph, Examiner (Washington, D.C.), The


Companies aren't fleeing the United States because of a lack of tax competitiveness, a top tax expert says. They're leaving to use the trillions of dollars in cash they hold abroad to boost their stock prices.

That argument by Ed Kleinbard, former chief of staff of the Joint Committee on Taxation, bolsters the case for Congress to move quickly on legislation favored by the White House and Democrats to stop so-called corporate "inversions," in which a U.S. company buys a firm in a low-tax country and then makes that country the new parent company's headquarters.

Congressional Republicans generally have resisted those measures on the grounds that the underlying problem can be solved only with comprehensive reform that would lower the 35 percent corporate tax rate to make it more competitive internationally. But Kleinbard told the Washington Examiner that the idea that the United States lacks competitiveness is a "false narrative" and is no excuse for holding off on smaller, near-term measures to prevent inversions.

While legislation stalls in Congress, the Treasury Department is expected in the coming weeks to take executive action to restrict the tax maneuvers.

Kleinbard, now a law professor at the University of Southern California, argues in a new paper that "the current mania for inversions is driven by U.S. firms' increasingly desperate need to do something with their $1 trillion in offshore cash," and that U.S. competitiveness has nothing to do with it.

Kleinbard isn't trying to defend the U.S. corporate tax code, he tells the Washington Examiner, but he believes that the "only thing that it's innocent of is making U.S. firms noncompetitive."

The United States has a worldwide corporate tax system, meaning that the government taxes companies' foreign earnings at the U.S. corporate tax rate of 35 percent, the highest in the Organization of Economic Cooperation and Development. As a result, U.S. corporations are now holding roughly $2 trillion in profits overseas to avoid paying U.S. taxes, which are due only when the money is brought back to the United States.

Some businesses seeking inversions have said that the U.S. system puts them at a disadvantage to competitors based in low-tax countries that have territorial systems, in which foreign earnings are not taxed or are taxed lightly.

That claim is misleading, Kleinbard argues, because the biggest multinational corporations have the tax avoidance know-how to repatriate foreign profits without paying taxes. He notes that U.S. corporations actually pay low effective tax rates -- just 13 percent for profitable businesses, according to the Government Accountability Office.

Instead, the real reason they seek inversions is that they are "counting the days until the money can be used to goose share prices through stock buybacks and dividends," he writes. In other words, companies want inversions not to invest and expand actual business, but to please shareholders. …

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