Allan Sloan of Fortune recently wrote an article best summarized as a tirade at U.S. businesses that have, or are thinking about, inverting.
Inverting is the process whereby a U.S. business merges with a foreign business and moves the new joint business’s headquarters to the foreign country. Inversions have been a hot topic recently because well-known businesses such as Walgreens, Pfizer, and Medtronic have been looking to engage in the process.
Sloan believes these companies are being unpatriotic by abandoning the U.S. They benefit from “our deep financial markets, our democracy and rule of law, our military might, our intellectual and physical infrastructure…[but] hesitate—totally—when it’s time to ante up their fair share of financial support of our system.”
Sloan’s anger is misplaced, however, because he misunderstands why U.S. businesses are inverting. It’s not simply to save money on their U.S. taxes. In fact, they’ll continue paying the same amount of tax on their U.S. income if they invert. Rather, it’s to maintain their competitiveness with their foreign rivals.
The U.S. has the highest corporate tax rate in the developed world, and we are the only country that taxes our businesses on their foreign income. This causes U.S. businesses to pay an extra layer of tax that their foreign competition does not face. This makes certain foreign investments unattractive for U.S. businesses that remain attractive for foreign companies.
As I explained in a recent paper:
Foreign businesses unencumbered by the worldwide U.S. tax system are free to make investments that the U.S. worldwide tax system makes unprofitable for U.S. businesses. In these situations, U.S. businesses decline in standing compared with their foreign competitors because foreign businesses enjoy increased earnings and enhanced global efficiency from making investments that the U.S. worldwide system forces U.S. businesses to forgo.
U.S. businesses are inverting because, if they don’t, their relative profitability will fall as they take a pass on more and more growth opportunities their foreign competitors eagerly chase. If they don’t act to counteract those forces, the viability of their businesses could be in jeopardy.
U.S. businesses will continue looking to invert, or sell themselves outright to foreign competitors (the U.S. tax on foreign income makes it easier for foreign firms to buy U.S. businesses), unless Congress reduces the corporate tax rate and stops taxing the foreign income of U.S. businesses.
Sloan should save his righteous indignation for Washington lawmakers, who have long known about the problem but have failed to act.