EDITORIAL: US tax policy keeps sending companies overseas
Here we go again. A major U.S. company merges with a foreign firm in part to avoid America’s punishing corporate tax code, and the politicians who refuse to reform the code denounce the company for trying to stay competitive. The gullible in the media then dutifully play along. Sigh.
Let’s try to explain one more time why it makes perfect business — and moral — sense for Johnson Controls to merge with Tyco, as it announced Jan. 25 it would do.
Tyco has a U.S. headquarters in New Jersey but is legally domiciled in Cork, Ireland. Johnson Controls will own roughly 56 percent of the combined company and its legal headquarters will move to Cork from Milwaukee, Wisconsin, where it has been based for more than a century.
To simplify for Democratic presidential candidates: The U.S. federal corporate income tax rate is 35 percent. The Irish rate is 12.5 percent. Johnson Controls says the tax savings from its move to Cork will be roughly $150 million a year.
A CEO obliged to act in the best interests of shareholders cannot ignore this competitive reality. The merger means that Johnson Controls will have more money to invest back in the U.S. because the income it earns overseas would not be subject to the U.S. tax rate.
Only if Johnson kept its headquarters in the U.S. would its foreign earnings be double-taxed upon repatriation. If Johnson Controls refuses to do such a deal now, a foreign competitor might end up buying Johnson Controls anyway to achieve the same savings.
As with other such tax “inversions,” there are also non-tax strategic reasons for the merger. The new company will have under one roof much of the equipment and services desired by the owners of large commercial buildings, from air conditioning to fire suppression.
But none of this business logic impresses Hillary Clinton or Bernie Sanders, who helped to write the U.S. tax code as senators but are now competing as presidential candidates to see who can demagogue more ferociously against American employers. Clinton called the merger “outrageous” and Sanders is calling the executives “corporate deserters.”
Neither one wants to reform the tax code to make U.S. tax rates more competitive with the rest of the world. Instead they want to raise the costs of doing business even further. Clinton’s solution is to raise taxes on investors with higher capital-gains taxes, block inversion deals, and apply an “exit tax” to businesses that manage to escape.
Sanders would go further and perform an immediate $620 billion cashectomy on U.S. companies. The Vermonter would tax the money U.S. firms have earned overseas, even though that income has already been taxed in foreign jurisdictions and even if the companies aren’t bringing it into the U.S.
Sanders’ campaign website says that after the big revenue grab in year one, his change would increase federal revenue by perhaps $90 billion a year thereafter. And he would limit future corporate inversions by taxing many inverting companies as if they never left. His revenue goal is a fantasy, because the practical effect would be to encourage many more companies to flee American shores.
Never mind the lost tax revenue, this kind of punishing tax policy is immoral. Multinational corporations with global customers can always relocate to wherever it makes the most business sense.
Their American employees aren’t so lucky because their livelihoods depend on thriving and competitive U.S. companies. If the employees can’t move, or their companies can’t compete, they’re the ones who lose their jobs or don’t get raises. Has the Democratic Party moved so far left that it doesn’t understand even this most basic of business realities?