Editorial Board

Dodging Corporate Taxes Isn't Unpatriotic

U.S. companies seem frantic to renounce their U.S. citizenship and lower their tax bills by acquiring overseas rivals and adopting their domiciles. The fault is Congress's. 
The Netherlands has been a pretty attractive place to U.S. companies.

Another day, another turncoat corporation. U.S. companies seem frantic to renounce their U.S. citizenship and lower their tax bills by acquiring overseas rivals and adopting their domiciles. A dozen companies are exploring such a move; nearly 50 have completed the switch since 2005.

Treasury Secretary Jack Lew calls the dodge, known in the trade as a tax inversion, unpatriotic. He wants lawmakers to crack down, and the complaints in Congress are getting loud. Democrats are advancing legislation to make inversions harder. The House recently approved spending bills that would bar companies from getting federal contracts if they invert.

QuickTake Tax Inversion

Lawmakers may be incensed, yet the fault is theirs. Companies that reincorporate in low-tax countries are rational actors, not traitors. For years, Congress has debated a more business-friendly tax code -- one that lowers the 35 percent top rate (the highest in the industrialized world), closes loopholes and taxes only U.S. profits. For years, unfortunately, debating the issue is all it's done.

Frustrated executives are merely running their businesses in a tax-efficient way -- as they're paid to. They also want to put foreign earnings, estimated at $2 trillion, to better use instead of letting them sit overseas. The U.S., in its wisdom, encourages companies to let profits pile up abroad, because they're taxed only if they are repatriated.

Until the parties can agree on a thorough overhaul, the defections will continue. Temporary patches such as the measure Democratic Senator Carl Levin of Michigan is proposing with his brother, Representative Sander Levin, aren't the answer.

They would require companies to have at least half their shares owned by foreigners to avoid U.S. corporate taxes, up from the current rule of 20 percent. That would only take the pressure off Congress to adopt a broader tax-code revamp. It would also put U.S. companies at a disadvantage to overseas rivals, whose taxes are often far lower.

Granted, most inversions are fakes. Little actually moves abroad -- not the home office location, not the executives, not the employees -- but an address. If that address is in Ireland, the levy falls to 12.5 percent. If it's in the U.K., the rate is 20 percent.

The revenue loss, however, is real: The U.S. would save about $20 billion over 10 years if Congress halted the practice. And that doesn't count foregone taxes from companies that have made the switch.

The U.S. corporate-tax system manages the double blunder of taxing at a high rate while collecting relatively little revenue. And note that inversions aren't the main cause. The 35 percent top rate encourages companies to hire lobbyists to make campaign contributions, curry favor and win loopholes. In short, it fosters corruption.

Once in the law, the loopholes make it even harder to reform the code intelligently: Everyone wants a more streamlined tax system, but no one wants to give up a hard-won deduction.

Republicans claim to want to end corporate welfare. Democrats say they want to close special-interest loopholes. That's great. The way to do both is through comprehensive tax reform.

Representative Dave Camp, the Michigan Republican who chairs the Ways and Means Committee for a few more months, leaves behind a promising blueprint. It would lower corporate taxes to 25 percent and tax only U.S. income (the U.S. is alone among the leading countries in taxing worldwide profits). It would also end many breaks, deductions and loopholes.

Companies would no longer need to defect or hire lobbyists to win special deals. The result would be a simpler, fairer corporate tax system that lets executives get back to running their businesses.