It's not so simple.

Photographer: Scott Morgan/Bloomberg via Getty Images

Clinton's Plan to Complicate Corporate Taxes

Paula Dwyer writes editorials on economics, finance and politics for Bloomberg View. She was London bureau chief for Businessweek and Washington economics editor for the New York Times, and is a co-author of “Take on the Street: How to Fight for Your Financial Future.”
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To Hillary Clinton, corporations are being unpatriotic when they combine with a smaller foreign company and then move their legal addresses overseas, where taxes are lower. This week she released a plan to stop such tax-avoidance trickery, which has been on the rise in recent years.

Let's be clear: It's no more unpatriotic for companies to try to lower their tax bills than it was for the Clintons to take a deduction for donating used skivvies to a charity, as they did in the 1980s.

Tax Inversion

That doesn't mean the corporate maneuver, known as an inversion, is good for America. It isn't. As Clinton says, mergers should be carried out for business reasons, not to take advantage of tax loopholes. Inversions also erode the tax base needed to maintain roads, rails and ports, support basic research, enforce trade treaties and perform the million other tasks that allow U.S. companies to conduct business across 50 states with little friction.

Clinton, though, has a propensity to address problems with complicated five-point plans involving a mix of legislative and executive actions, when a simple solution -- lowering U.S. corporate taxes to match what the rest of the developed world charges -- would suffice.

First, she would require U.S. shareholders to own half or less of the combined company as a condition for avoiding corporate taxes. The current test allows up to 80 percent ownership by the original U.S. investors. In other words, a U.S. company can't pretend to be a foreign company unless its merger partner is the same size or larger.

Clinton would even try to undo numerous completed inversions by making the 50 percent hurdle retroactive to May 2014.

If that doesn't stop emigrations, she would also require companies to pay an "exit tax" before inverting. This would be an income tax (she hasn't said what the rate would be) applied to overseas earnings that normally are tax-free until brought back to the U.S.

A quick tangent: Deferral from taxation of overseas earnings is the very feature of U.S. tax law that's driving inversions in the first place. Multinational companies refuse to repatriate more than $1 trillion in earnings unless Congress lets them bring the money home at a much lower rate than the existing 35 percent levy. As a result, companies are inverting to get their hands on that cash.

Back to Clinton's plan. She would also ask Congress -- or the U.S. Treasury Department if Congress fails to act -- to crack down on the practice of "earnings stripping." This happens post-inversion, when a U.S. unit borrows heavily from its new foreign parent. The loan is then repaid from operations in the U.S., where interest on debt is tax deductible. The payments go into the coffers of the foreign parent, where profits are taxed at much lower rates, such as Ireland's 12.5 percent. This twofer tax-avoidance strategy is also driving many inversions.

Finally, Clinton would apply the $80 billion or so in new revenue over 10 years, which she claims she'd raise by closing inversion loopholes, to provide tax relief for research, community development and manufacturing. She would also offer tax breaks to companies that bring jobs and production back home.

It's not often that presidential campaigns are fought over obscure corporate-tax issues. Clinton is acting because Donald Trump has politicized corporate inversions, or any attempt by a U.S. company to close plants and send jobs overseas. It may be the only topic that unites Trump and Bernie Sanders. They and Clinton have been especially critical of pharmaceutical giant Pfizer, which recently agreed to a $160 billion merger with Ireland-based Allergan and to take an Irish address.

But Clinton's proposal has its own fault lines, one of which is that she wouldn't fix the biggest underlying defect: The U.S.'s corporate tax is higher than what the 34 advanced countries in the Organization for Economic Cooperation and Development charge. The OECD average is 24 percent. What's more, the U.S. taxes companies on their global income, unlike most other countries, which tax only profits earned within their borders.

It's true that most companies don't pay the 35 percent rate in the end. That's because they have legions of lawyers reading the tax code for deductions, credits and exclusions -- and scouring the globe for havens in which to tuck money away. They are obliged to do so because non-U.S. competitors pay less tax. Why not just even the scales, then, by lowering the U.S. rate to what most countries charge and what most U.S. companies effectively pay -- about 25 percent? 

Clinton surely recognizes this is the best fix. And to her credit, she isn't taking tax reform off the table, just postponing it for later. But as a Democrat fighting for primary votes against the more-liberal Sanders, Clinton can't afford to favor corporate tax cuts.

The U.S. has tried for decades to stop inversions and its earnings-stripping cousin with both legislation and regulations, and every time companies have been able to hopscotch around them. President Barack Obama has asked Congress to adopt some of the very measures Clinton proposes, but the Republican-controlled House and Senate have given them the cold shoulder. No doubt, Clinton's exit tax will get the same treatment.

When something doesn't work, calling for more of the same doesn't seem like a very practical remedy.     

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Paula Dwyer at pdwyer11@bloomberg.net

To contact the editor responsible for this story:
Katy Roberts at kroberts29@bloomberg.net