Companies protest with their feet.

Love Your Country, Reform Its Tax Code

By Tim Starks for Bloomberg News
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Whichever party is in the majority in the House and Senate after the November elections, the next Congress should make repairing our broken tax code a bipartisan priority.

That fix must be comprehensive; more tinkering won't work. Last month, Treasury Secretary Jack Lew unveiled proposed regulations intended to bring an end to so-called inversions -- which allow a U.S.-based company to change its address to a foreign country to avoid our high tax rates and escape our uncompetitive tax code. Rather than addressing the flaws in our tax system that drive our companies overseas, the new regulations try to hem businesses into an outdated system that includes, at 39 percent for combined federal and state taxes, the highest statutory corporate rate among the developed countries. Worldwide, only the United Arab Emirates and Chad have higher rates.

When companies leave the U.S., they take along jobs and investment, so inversions must end. But Treasury's proposed regulations won't achieve that goal because they offer no remedy for our broken code. Only this week, my home state of Ohio received confirmation of their ineffectiveness. Steris Corp., a health-care products company, based in Mentor, announced that it would merge with U.K.-based Synergy Health and move its corporate home to England. Analysts say the move will lower Steris's effective tax rate to 25 percent and save the company millions of dollars. Burger King and Medtronic also have decided to go through with their inversion deals despite Treasury's announced regulations.

QuickTake Tax Inversion

Worse yet, companies that the regulations would keep at home are becoming foreign takeover targets. One of those, Pennsylvania drugmaker Auxilium Pharmaceuticals, has agreed to be acquired by Endo, which itself relocated its headquarters to Ireland from Pennsylvania last year.

Casting blame or questioning the patriotism of these companies will achieve nothing. Instead, we should use this opportunity to make the U.S. the best place to do business again.

The defects in the tax code that make inversion appealing to U.S. companies are the same as those that make those companies attractive as foreign takeover targets. They are well-documented and fixable:

Not only does the U.S. have the highest corporate tax rate in the developed world, but in contrast to most of its foreign competitors, which use a so-called territorial system, this rate is imposed not only on income companies make at home, but also on income earned around the world. Making matters worse, the U.S. only taxes foreign sales when companies repatriate earnings, providing a strong disincentive for companies to bring money home. As a result, $2 trillion that could be reinvested in the U.S. economy sits in foreign bank accounts or is spent in other countries, creating jobs overseas that should be here.

The good news is that, unlike many problems in Washington, there is bipartisan consensus on a solution: Tax reform. There's also general agreement on how it should be done. We must rid the code of ineffective deductions and loopholes that go only to favored interest groups. The money raised by eliminating those loopholes should be used to get our corporate rate down to at least the global average of 25 percent. We also have to move to a competitive territorial system of international taxation that taxes only income made in the U.S.

There's an example of a country that has successfully applied this approach. In 2010, after the U.K. had endured its own spate of inversions, the government lowered the corporate rate to 21 percent from 28 percent, adopted a territorial system and declared the country "open for business." These reforms stopped inversions, and some companies that had left even came home. It shouldn’t be surprising that that many U.S. companies now are ending up in the U.K.

Given this broad agreement among U.S. policy makers that changing our tax code is urgent and necessary, it was disappointing to hear the Treasury secretary attempt to redefine a central ingredient of any change -- revenue-neutral tax reform -- saying that the traditional, 10-year budget window shouldn't apply. This has important consequences for businesses and workers. Put simply, the administration believes revenue-neutral tax reform outside of the 10-year budget window will require billions in tax increases in the first 10 years after reform legislation is enacted.

Instead of sticking to a bipartisan approach, Secretary Lew suggested a return to the policies of using tax reform as a piggy bank to pay for new spending. But even more distressing, the secretary and President Barack Obama must know that such a proposal would be dead on arrival, no matter which party controls Congress.

If we allow politics to stop us from fixing our broken code, the American worker will suffer. A 2007 Congressional Budget Office study showed that as much as 70 percent of the burden of corporate taxation is passed on to labor in the form of lower wages and benefits. Our labor force is struggling already: Unemployment is still high, and for every net job created under President Obama, almost three people have dropped out of the labor force completely, leaving us with the lowest labor participation rate since the Carter administration.

Tax reform can only happen as a bipartisan effort, not a partisan squabble about tax cuts versus tax increases. We have accomplished that kind of bipartisanship in the past. Leading up to the last large-scale tax reform in 1986, President Ronald Reagan directed the Treasury to provide recommendations for a comprehensive overhaul. President Reagan then submitted 489 pages of specific policy proposals to a Democratic House and a Republican Senate, which hammered out the new code. We need this kind of engagement from the executive branch again if we're going to get tax reform across the finish line.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the editor on this story:
Max Berley at mberley@bloomberg.net