As Companies and Jobs Flee, Politicians Dither

Along with many others I have long been warning that having the world’s highest corporate income tax rate has a host of negative and substantial effects on the economy (see: here, here and here among others). The consequences of this terrible policy choice was highlighted recently when the United States (and also Japan) lost a Fortune 500 company due in large part it seem to high and un-competitive corporate taxes.

U.S. electronics giant Applied Materials and Tokyo Electron merged to create a single company, reincorporating in the Netherlands, and achieving tax advantages by doing so. According to the Tax Foundation, “The U.S. and Japan have the highest statutory corporate tax rates in the developed world, and by most measures the highest effective corporate tax rates as well. In contrast, the Netherlands has a statutory corporate tax rate of 25 percent, compared to 39 percent in the U.S. and 37 percent in Japan.”

According to the NY Times the case of Applied Materials is not a unique one, “From New York to Silicon Valley, more and more large American corporations are reducing their tax bill by buying a foreign company and effectively renouncing their United States citizenship.” They continue:

Last year, the Eaton Corporation, a power management company from Cleveland, acquired Cooper Industries, based in Ireland, for $13 billion, and reincorporated there. The company expects to save $160 million a year as a result of the move.

In July, Omnicom, the large New York advertising group, agreed to merge with Publicis Groupe, its French rival, in a $35 billion deal. The new company will be based in the Netherlands, resulting in savings of about $80 million a year.

Also in July, Perrigo, a pharmaceutical company from Allegan, Mich., said it would acquire Elan, an Irish drug company, for $6.7 billion. Perrigo will also reincorporate in Ireland, bringing its effective tax rate to 17 percent from 30 percent, and saving the company an estimated $150 million a year, much of it in taxes.

Ireland’s 12.5 percent corporate tax rate is a big draw for some companies. Earlier in the year, Actavis, based in Parsippany, N.J., bought Warner Chilcott, a drug maker with headquarters in Dublin, and said it would reincorporate in Ireland, leading to an estimated $150 million in savings over two years.

The recent shift of companies locating overseas because of our anti-growth policies is not a new trend, from 2000-2011 the U.S. lost 46 Global Fortune 500 companies. The only changes to our corporate income tax rate since it was last reformed in 1986 have been the additions of tax credits, deductions and loopholes otherwise known as loopholes. It is time that we simplify the code and significantly reduce the rate to make America more competitive once again.

In this debate we should be reminded that there is a pronounced and real human effect our anti-growth policies have. When U.S. companies move overseas they often take good jobs with them. A Heritage Foundation and Milken Institute study showed that a simplification and reduction in the tax code to 25% could be an additional 500,000-2 million new jobs, plus an additional $2,484 in income for the average family of four.