How Uncle Sam chases away US jobs
Photo: AP
The Treasury Department released new rules last week to stop the steady stream of American companies relocating overseas to reduce their tax bills. But instead of fixing the cause of the problem — one of the highest corporate-tax rates in the world — the government is creating new ones by introducing retroactive penalties that undermine the rule of law.
Treasury’s latest rule changes come as New York-based pharmaceutical company Pfizer finalizes negotiations with Ireland-based Allergan for a merger that will headquarter the combined firm in Ireland. Pfizer will join a growing list of companies that have recently moved their headquarters or other operations to Ireland.
Indeed, over the past four years, nearly 100 US companies have moved to or opened new operations in Ireland.
And over the past 20 years, Ireland has attracted more foreign direct investment dollars from America than Brazil, Russia, India and China combined.
Why? One big draw is that Irish firms pay a corporate tax rate of just 12.5 percent, compared to a 35 percent statutory rate in the United States.
That’s not the only reason Ireland attracts American companies — it also offers an educated workforce, flexible labor rules, a strong legal system and proximity to European markets.
But corporate taxes are proving to be an advantage that tips the scale in Ireland’s favor.
Increasingly, US-based companies are at a disadvantage compared to their foreign competitors because they must pay the developed world’s highest corporate-income taxes. Fixing the problem means reducing the tax rate, not building a wall of complex rules to force companies to stay.
But building walls is exactly the approach the government has taken. History has shown time and again that societies that forcibly prevent businesses from leaving don’t have a great track record of promoting economic growth and human flourishing.
The fact that we’re adopting the same policies here should be cause for concern.
Not only do Treasury’s proposed rules not solve the real problem, they compound it by applying penalties retroactively. Companies like Medtronic that relocated legally several months ago may now find that their move puts them on the wrong side of the law.
Even if the Treasury Department is able to get tax revenue from these companies today, it will create legal uncertainty that will make the United States a less-attractive location for new companies in the future.
Besides paying high corporate taxes, entrepreneurs and managers considering whether to invest in the United States will also have to worry about whether the government will penalize them for past behavior that didn’t violate any rules or laws at the time.
Instead of devising ways to prevent companies from leaving an environment that puts them at a competitive disadvantage, we should be instituting policies that make the United States the best
place to start a business.
place to start a business.
Reducing the burden of regulations would be a good start. Federal regulations cost the economy about $2 trillion a year.
We should also reduce our corporate-tax rate so that we don’t punish companies simply for being profitable.
The Treasury Department’s focus on lost tax revenue from tax inversions is largely missing the point. Corporate-tax revenue is only a small part of the benefit provided by companies that create jobs, provide skills training and produce goods that increase consumers’ quality of life.
Businesses need to be able to count on a strong rule of law so they can calculate their costs and potential profits accurately. With uncertainty over how the government will act, companies
can’t decide when, where or how much to invest.
can’t decide when, where or how much to invest.
Can we really blame them for taking their bat and ball and looking for a new field?
Paul Mueller is an assistant professor of economics and Brian Brenberg is an associate professor of business and economics at The King’s College in New York City.
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