High U.S. Tax Rates Force American Companies to Flee Overseas

The largest producer of nitrogen-based fertilizer in the United States, CF Industries, is considering merging with a Dutch competitor and moving its headquarters overseas to avoid the “double taxation” of profits earned by overseas subsidiaries going to the domestic company.

Curtis Dubay, a tax and economic research fellow with The Heritage Foundation, says an increasing number of companies are moving to other countries with friendlier tax climates, a strategy called corporate inversion.

“U.S. businesses are more and more independent and global, and tax inversions will continue until there is tax reform,” Dubay said. “The high tax rate here in the United States has caused a rash of tax inversions, since every other developed country has a lower rate.”

‘Incentive to Invert’

Dubay says U.S.-based multinational businesses will continue to merge with partners overseas until lawmakers address the real problem.

“The high corporate tax rate and worldwide system create the incentive to invert,” Dubay said, referring to the U.S. government’s unusual policy of taxing profits earned by U.S. companies overseas, which are also taxed by the countries in which the profits are earned. Other countries do not tax overseas earnings of companies headquartered within their borders.

“The only way to stop inversions is to lower the business tax rate and move to a territorial system,” Dubay said.

Counterproductive Policies

Richard Ebeling, a professor of economics at The Citadel, says U.S. tax policies achieve the opposite of their stated goals.

“Not only would keeping a lower corporate income tax rate, in general, mean more money in the hands of businesses to reinvest, … but also by eliminating the double taxation, we would see more of these earned profits coming back to the United States, and again see a greater rate of growth,” Ebeling said.

Domestic Disincentives

Ebeling says high corporate tax rates discourage businesses from reinvesting profits into their domestic operations and into the American economy.

“They are left in these foreign countries in financial institutions, because if they bring them back, they will be heavily taxed,” Ebeling said. “That means that there are corporate dividends that could be earned by shareholders. There could have been some repatriated profits invested in their American branches, instead of plowing them into the foreign branches, because there is a negative incentive to bring back as much of their profits as they hypothetically have otherwise.

“So, in a sense, in that way, it has hurt growth and employment in the United States,” Ebeling said.