Dozens of large corporations have taken advantage of an outrageous loophole that allows them to dodge U.S. taxes when they renounce their U.S. citizenship. In recent months, several more corporations have announced plans to exploit this loophole, which threatens to hollow out the U.S. corporate income tax base. Congress needs to plug this unpatriotic loophole now.
In 2004, Congress passed a law to stop corporations from avoiding U.S. taxes by reincorporating in a foreign country. However, a gaping loophole allows corporations to get around this law by merging with a foreign company.
This is how it works. A U.S. corporation that wants to avoid paying taxes hooks up with a company in a low-tax country and makes sure the foreign company ends up with at least 20% of the stock of the newly merged firm, so the U.S. corporation can legally change its address. This kind of transaction is called a “corporate inversion” because the larger corporation assumes the address of the smaller company it is purchasing, rather than the other way around.
Medical device manufacturer Medtronic deserted America for Ireland last month. Medtronic has about $14 billion squirreled away offshore and would have had to pay between $3.5 billion and $4.2 billion in federal taxes to bring that money home for use at its headquarters in Minnesota. To avoid paying those taxes, Medtronic will spend $43 billion to buy an Irish firm instead.
Similarly, the drug firm Mylan recently stomped on the Stars and Stripes to ditch America for the Netherlands. Then the drug company AbbVie renounced America, and for 30 pieces of silver, it will become Irish.
Walgreen’s, the nation’s largest drugstore chain, recently announced that it may be the next turncoat corporation to dump the Land of the Free so it can dodge more than $4 billion in taxes over five years, despite its reliance on the U.S. government and U.S. taxpayers for a quarter of its revenue—paid for by the Medicare and Medicaid programs.
These turncoat corporations will still park their assets and staff in America. For all intents and purposes, they will still be based in the United States, but they will no longer pay U.S. taxes on their overseas profits. Their ultimate goal is to minimize taxes on their profits earned in the United States, as well, by making it appear their U.S. profits are earned in countries with a zero or low tax rate. They will become freeloaders, and their U.S. competitors, as well as hardworking Americans, will have to pay more in taxes to cover the shirkers’ share.
Apologists for corporate inversions claim the U.S. statutory corporate tax rate of 35% is too high, but these corporations aren’t paying anywhere near that. AbbVie, for instance, paid a 22.6% tax rate last year and, through inversion, hopes to get its rate down to 13% by 2016.
It’s time for Congress to stop this outrageous and unpatriotic behavior. Last week, U.S. Treasury Secretary Jacob Lew urged Congress to close the corporate inversion loophole. The administration estimates that its proposed solution would raise $17 billion over a decade. Imagine the infrastructure investments that amount of money could pay for. Imagine the jobs it could create. Imagine the education and job-training programs it could fund. Imagine the children it could feed. It’s hard to see how diverting $17 billion to reward turncoat freeloaders is anything but a direct assault on working families.
The administration proposes to close this loophole by barring companies that are obviously American from pretending to be foreign. The administration proposal would treat newly merged companies as American if they are majority-owned by shareholders of the original American company, or if they are managed and controlled inside the United States and have substantial business here.
Secretary Lew was right to suggest that Congress should make this fix retroactive to early May 2014, so corporations are on notice that any transactions that take place after that date will not allow them to dodge taxes. Legislation introduced by Sen. Carl Levin (D-Mich.) and Rep. Sandy Levin (D-Mich.) would be retroactive to May 8.
The larger problem is that multinational corporations want to keep dictating our economic policies and dominating our politics, yet they have less and less loyalty to the people who actually live and work in America. They want to keep benefiting from all the things our government does for them that make it possible for them to make profits—our legal system to protect their investments and patents, our education and training system to train their workers, our transportation system to get their products to market, our federally sponsored research, our military—but they want the rest of us to front their share of the bill.
Sixty years ago, corporations paid one-third of federal revenues, yet today they pay only one-tenth. Now they say even that’s too much. Corporate profits are at their highest ever, and wage growth is near its lowest in half a century, but still these corporations are not satisfied. They want more.
They want Congress to cut their income tax rate, even though many of the largest corporations get away with paying little or no taxes for years. They want Congress to eliminate taxes on the factories they ship overseas, even though a different tax loophole already allows them to lower their tax bill when they outsource jobs. And if we don’t give these corporations what they want, a growing number of them are threatening to renounce their U.S. citizenship and shirk their tax responsibilities.
We need to start demanding a little more patriotism from our multinational corporations. We need to end the hundreds of billions of dollars in tax subsidies we give them for offshoring jobs, and in an age of record corporate profits and laid-off public workers, we need to raise more revenue from big corporations. If they want to keep benefiting from everything our great country has to offer, they need to start showing a little more loyalty to the people who live and work in America. And they need to stop threatening to desert the United States and shirk their tax responsibilities unless America gives in to their demands.