U.S. Firms Beat Corporate Taxes By Moving Their Headquarters Abroad

Renee Montagne talks to David Wessel of the Brookings Institution about corporate income taxes. Many businesses, analysts and politicians argue the U.S. system is broken.

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RENEE MONTAGNE, HOST:

We're joined now by David Wessel with the Brookings Institution. He's also a contributor to the Wall Street Journal. Good morning.

DAVID WESSEL: Good morning, Renee.

MONTAGNE: Now, American corporations have been complaining about the tax code for decades. Why are we seeing more companies looking at moving overseas now?

WESSEL: Well, first because some companies would save a lot of money by making the move, in part because corporate tax rates elsewhere have been reduced, most recently in Britain, which has cut their tax rate quite a bit. And second because companies and executives tend to move in a pack and this is no longer seen as a startling or risky move in corporate boardrooms. I mean, there's some familiar corporate names - Pfizer, Monsanto, Walgreens the drugstore company - that have been talking about doing these inversions. And a chief financial officer of one company told me recently that her board told her that many public companies think they have a fiduciary responsibility to shareholders to consider a move abroad if it'll cut their tax bill and increase their profits.

MONTAGNE: And as we heard just now, Jack Lew, the Treasury Secretary, wants Congress to do something - what exactly does he have in mind?

WESSEL: Congress thought it had put a stop to this a few years ago when it made it harder for companies just to declare that they were moving their address. But U.S. companies are very clever, they found a way around this by merging with or buying a foreign company, they could legally expatriate themselves, as you will, without making any big changes in their business. So one option is to tighten the law again, make these kind of mergers and acquisitions unattractive to U.S. companies because they'd have to give up control to the foreign firm and that's what Ron Wyden, chairman of the Senate Finance Committee, is proposing in a bill. That'll probably work for a while, indeed the threat of this law has affected some of these deals already but the other option as Jack Lew, the Treasury Secretary, said is to redo the corporate tax code altogether and make it more attractive for companies to want to be in the United States.

MONTAGNE: And David, what are the chances that Congress will do something?

WESSEL: Oh, you sound cynical, Renee.

MONTAGNE: Yeah, well, I sound skeptical.

WESSEL: Well, the best guess on almost anything these days is Congress will talk and fail to agree on a bill. But if Walgreen or some other big prominent brand-name company did move their headquarters oversea, there is a significant chance that Congress would do something. We know that sometimes changes to the tax code come by anecdote and unlike all the other crazy things in the corporate tax code that you need to have to have a CPA degree to understand - this is so jarring and it's so easy to argue, as Jack Lew did, that these companies are being unpatriotic, they enjoyed the benefits of being in the U.S. and stuff. Plus, this does threaten to erode the tax base because despite all we hear about business maneuvering to avoid taxes, the corporate income tax still accounts this year for about 14 percent of all federal revenues or about $450 billion a year so that could get Congress's attention.

MONTAGNE: You know, I'm curious isn't this mini wave of companies moving abroad a symptom of really a bigger problem?

WESSEL: Absolutely. The companies wouldn't be doing this and to be sure, we're talking dozens of companies over the last 20 years - not hundreds. But the companies wouldn't be doing this if the tax code didn't make it easy for them and the tax code didn't create such big incentives for them to cut their taxes by doing it. Basically everybody in Congress, or most people, agree the corporate tax system is broken, it's not well-suited to a globalizing economy with these sprawling multinational corporations. And something should be done to lower the tax rate by getting rid of some deductions and credits and loopholes. But there's no consensus about how to do this and what we're seeing now is the companies simply aren't waiting for Congress. You might call these moves as self-help tax reform and I don't see any chance that Congress will do big tax reform this year but there is a chance that it might happen next year, particularly if the snowball gathers some momentum.

MONTAGNE: David, thanks very much.

WESSEL: You're welcome.

MONTAGNE: David Wessel is director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution and also a contributor to the Wall Street Journal.

STEVE INSKEEP, HOST:

And a regular guest here.

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