September 20, 2016

More Competitive Tax Rates Could Curb Corporate Inversions

Summary

Thankfully, there is now bipartisan support for reforming the corporate income tax. Addressing the underlying causes of inversions by reforming this tax system would not only stop inversions, it would also trim the burden on corporations, which would in turn help American companies compete better at home and abroad.

Key materials

America’s corporate income tax rate is the highest of all developed nations—almost 15 percent higher than the average, as the chart below shows.

Technological advances have enabled a rapid increase in the volume of transactions crossing national borders. The increase in globalization and a dramatic decrease in the cost of moving capital have made it difficult for national governments to sustain tax rates at 1970s levels.

The ensuing tax competition between countries led to a reduction in tax rates on capital. Corporate tax rates have dropped dramatically in developed countries, from an average of around 48 percent in 1980 to 25 percent today.In the United States, however, the tax rate has barely changed since the 1986 tax reform. At the time, the United States lowered its rate to 39 percent—below the then developed-country average of 44 percent. Since then, other OECD countries have cut their corporate tax rates aggressively, while US tax rates have stayed stubbornly flat. In fact, 31 nations have cut their rates since 2000.

Consequently, US companies have increasingly looked ease their tax burdens with corporate inversions. In such a practice, an American company acquires a foreign company and then relocates its legal headquarters out of the United States for tax purposes, in an effort to remain competitive globally.

Thankfully, there is now bipartisan support for reforming the corporate income tax. Addressing the underlying causes of inversions by reforming this tax system would not only stop inversions, it would also trim the burden on corporations, which would in turn help American companies compete better at home and abroad.