Walk into a pre-school classroom in America today and Erika Christakis says it’s likely you’ll see some familiar décor: alphabet charts, bar graphs, calendars, and schedules. It’s all part, says the expert in early child education, of a nationwide drive to make sure kids are ready for school at a younger and younger age.
A growing number of American companies are re-incorporating overseas for lower tax rates. But critics say it’s a loophole that ends up costing taxpayers. Join us for debate over IRS rules for U.S. companies.
- Chris Edwards economist and editor of DownsizingGovernment.org, Cato Institute.
- Edward Kleinbard professor of law, University of Southern California Gould School of Law; author of the forthcoming book: "We Are Better Than This: How Government Should Spend Our Money" (October 2014)
- John McKinnon staff reporter, The Wall Street Journal
- Rep. Sander Levin Democratic U.S. congressman, representing Michigan's 9th District; he's the ranking member of the House Ways and Means Committee.
MS. DIANE REHMThanks for joining us. I'm Diane Rehm. In a corporate inversion, a U.S. company buys a foreign firm and relocates its headquarters abroad where tax rates are much lower. Nine of these inversions have occurred this year, including medical device giant Medtronic and Chiquita Brands. Now Walgreens is considering a deal that would headquarter the company in Switzerland.
MS. DIANE REHMDefenders of inversion say companies need to do these deals to be competitive in global markets. Critics say it's a loophole costing the U.S. Treasury billions. Joining me to talk about rising corporate inversions and how lawmakers are responding, John McKinnon of The Wall Street Journal and Chris Edwards of the Cato Institute.
MS. DIANE REHMJoining us from Pasadena, Calif., Edward Kleinbard of the University of Southern California School of Law. I hope you'll join in the discussion. Give us a call at 800-433-88550. Send us an email to firstname.lastname@example.org. Follow us on Facebook or Twitter. And welcome to all of you.
MR. CHRIS EDWARDSThanks for having us, Diane.
MR. JOHN MCKINNONThanks.
MR. EDWARD KLEINBARDThank you.
REHMGood to have you with us. John McKinnon, explain just what goes on in one of these inversions. How does a company decide this is what we need to do?
MCKINNONWell, as you mentioned, companies are moving their residency for tax purposes to some other country, such as Ireland or the United Kingdom, where they perceive the rates to be more favorable and the rules to be friendlier. And so they are doing this, as you mentioned, by merging with typically a smaller company, and then they reincorporate the merged company in the tax-friendly locale.
REHMAnd, Ed Kleinbard, this is totally legal, is it not?
KLEINBARDIt is. The issues here are not ones of legality. The issues are ones of policy.
REHMWhen you say policy, what do you mean?
KLEINBARDWell, what I mean is -- the question is, what should the Congress of the United States do by way of addressing the underlying reasons for the inversion transactions? We know that they're about lower tax rates. But the question is, in what sense is that true? And it turns out that inversions are largely driven by efforts to redeploy the huge stashes of offshore cash that U.S. firms now hold and to engage in a kind of a self-help to reduce U.S. tax burdens by stripping income out of the United States.
REHMAnd, Chris Edwards, how do you see it?
EDWARDSI agree with your other guest. I mean, the fundamental problem here is that the U.S. corporate tax rate now at above 40 percent is the highest in the world. The average rate in the European Union now is only 21 percent. So all our major trading partners, Britain, Canada, have slashed their corporate tax rates. Globalization is a reality, and U.S. policy makers have to wrap their brains around it. And rather than think about all kinds of Band-Aids to put on our system, we need to do, in my view, what other countries have done, which is to slash our corporate tax rate to -- from, say, 40 down to around 20 percent.
EDWARDSThe -- some of the efforts in Congress to put Band-Aids on the inversions won't have a -- it's not going to benefit U.S. workers or U.S. businesses because, for example, it won't stop the other trend of foreign companies taking over U.S. companies. Even if Congress stopped inversions, we'd still have German and French and Canadian companies taking over U.S. companies, driven by those same tax reasons, that you can lower taxation on U.S. companies if it's owned by a foreign parent.
REHMHmm. Ed Kleinbard, do you agree that most corporations in this country pay 35 to 40 percent in taxes?
KLEINBARDNo, absolutely not. That's the statutory rate. That is not the economic effective rate of that company's pay after taking into account all of the tax subsidies that Congress gives. We have a messed up corporate tax system. It's filled -- on the one hand, we have a high tax rate. On the other, we have all sorts of incentives, rebates, subsidies, and loopholes. The result is a very distorted system. There's no question about that. But inversions is a somewhat narrower topic. When we talk about inversions and we compare European rates to U.S. rates, we have to be very careful.
KLEINBARDAre we talking about whether the United States of America is a healthy environment in which to invest? Or are we talking about the so-called international competitiveness of U.S. firms? The U.S. domestic companies doing business just in the United States of America are the ones most adversely affected by the high rates and distorted subsidies. Internationally -- first of all, there are virtually no state taxes imposed on the international operations of U.S. firms.
KLEINBARDJust take that right off the table. Then in turn, U.S. firms have been -- are the great world leaders in tax avoidance technologies through what I call their stateless income tax planning. And the result is that internationally the U.S. multinationals face a very attractive tax environment. So inversions is a different question from a fundamental reform. What the inversions have demonstrated is the need to deal with the more specific problems.
REHMAll right. I want our listeners to hear what President Obama had to say about this issue.
PRESIDENT BARACK OBAMANow, here's the problem is this loophole they're using in our tax laws is actually legal. It's so simple and so lucrative, one corporate attorney said, it's almost like the Holy Grail of tax avoidance schemes. My attitude is, I don't care if it's legal. It's wrong.
REHMJohn McKinnon, do you want to comment on this?
MCKINNONWell, I think the president's making a fair point. It looks very wrong to most Americans who are not able to move their residency to Ireland or the United Kingdom and avoid paying U.S. tax. But it's also wrong from the standpoint that the U.S. really is kind of out of step with the rest of the world. It has a system that is global in reach, unlike other countries where they only tax profits essentially within the borders of that country.
MCKINNONBut as a sort of a way to make up for that, the United States says, well, OK, we won't tax your foreign income until you bring it back to the United States. Well, that created this enormous perverse incentive for companies to stash all that money offshore. So it's building up there for decades now. And, you know, it's now about a trillion dollars. It's an enormous amount of money and, you know, could be put to a lot of good use in the United States but is -- because of these limits, it doesn't get used much in the United States.
REHMNow, this process of inversion is speeding up, is it not?
MCKINNONYes. It definitely is. There have been maybe 75 of these in the last 20 years, and most of them have occurred in the last 10 years, which is a little ironic because Congress passed the last law to try to limit inversions 10 years ago. And it turns out that since then, they've kind of speeded up.
REHMWell, how can that be?
MCKINNONWell, Congress closed the big door. Congress said, you can't just flip yourself into Bermuda or Ireland. You have to go through one of these little doors. And the little doors involve mostly these mergers that we've been talking about. So now a company has to go find a merger partner in Ireland or the U.K., and then it can flip itself into Ireland or the U.K.
REHMChris Edwards, what about the money that the U.S. tax system is losing by virtue of these inversions?
EDWARDSI think we lose money. Our tax base is being eroded because of our high rate. I mean, to go back to something that Edward mentioned, it's true that many corporations pay a lower sort of effective rate than the higher legal rate. But it is the higher legal rate that drives the avoidance, not just inversions. It drives companies to avoid -- to push their profits offshore for many reasons. So I think it is the legal and statutory rate that is key here.
EDWARDSMany other countries have slashed their corporate tax rates. I mean, the average rate in the OECD countries has fallen from around 45 percent in the '80s to only about 24 percent today, a huge slash. So have OECD countries lost money? No. I was just looking at the data today. OECD countries, Germany, France, the rest, they raise more in corporate tax revenues as a shared...
EDWARDSBecause they cheat less. They invest more, and they cheat less. And you can look at the data for OECD countries. You can look at data for Canada. They only have a 15 percent federal rate now. They raise as much as we do with our system that has a 35 percent rate. And Canada actually raises as much as they did two decades ago when they had a much higher rate. So we all want less cheating and less avoidance. It's good for nothing. It doesn't add to GDP. But I think the way to do that is you lower the rate.
REHMBut, you know, some people in the audience, knowing about corporate profits today, might say they're going abroad because they want to make even more profits and pay lower taxes.
EDWARDSI think profits are a good thing. And the basic competitiveness problem is this, if you have a U.S. company that wants to compete in China and sell their product in China, they'll set up a subsidiary in China. They are competing against subsidiaries in China that are owned, say, by British and French companies, and they are at a tax disadvantage which ultimately hurts U.S. workers, in my view.
REHMChris Edwards, he's an economist and editor of DownsizingGoverment.org at the Cato Institute. We'll take a short break, you calls, your comments when we come back.
REHMAnd here's our first email from Rick, in Fort Worth, Texas. He says, "I wrote to Walgreens that if they follow through with their inversion plan I will no longer buy anything, including prescriptions from Walgreens." And we've got several others who say, "Inversion? Call it what it is, evasion, or better yet, treason."
REHMAnd a tweet, Brett says, "Corporate tax inversion is tax evasion and it is un-American." And our last tweet, "Media need to make public corporate inversions so U.S. consumers can boycott those companies." Not too many happy people with inversions. What do you think about that, Ed Kleinbard?
MR. ED KLEINBARDWell, I think there's good reason to be very frustrated. But -- and to be clear, I believe that Congress needs to address inversion specifically, and needs to do so immediately. No one disagrees that we need long-term corporate tax reform. But we need to do something about inversions now. Having said that, I actually don't find it very helpful, frankly, to use terms like treason.
MR. ED KLEINBARDI mean, you know, you don't blame -- if you leave your meat out on the counter, you don't blame the maggots for spoiling it. You know, you blame your spouse for failing to put it back in the refrigerator. And the same is true here. This is -- corporations do what they do, which is try to make money. There is a moral failing here, but the moral failing is the Congress of the United States not putting the necessary work into addressing inversion transactions now.
REHMDo you agree with that, John McKinnon?
MCKINNONI do. I mean, I think that this debate has been going on for more -- well over a decade now. And it's, I think, one big reason why you're seeing this uptick in inversions now is that a lot of companies are just figuring Congress isn't going to get this done any time soon. And so they're moving.
REHMThey're not going to take any action against inversions, as Ed is suggesting, they do. Nor are they going to take any action against corporate tax rates.
MCKINNONRight. I think they're stuck on both counts. I think they're stuck on the short-term fix, you know, changing the laws to make inversions even harder. And they're also stuck on tax reform. So corporations are kind of voting with their corporate fee.
REHMAll right. And joining us now from Martha's Vineyard is Congressman Sander Levin. He represents Michigan's 9th District. He's the ranking member of the House Ways and Means Committee. Welcome back to "The Diane Rehm Show," Congressman.
REP. SANDER LEVINGlad to be here. Taking a little time out from a vacation. Thanks so much.
REHMThank you. What are you so concerned about these corporate inversions? After all, they are legal and companies do have a right to lower their costs as much as possible to maintain their competitiveness.
LEVINBecause there's a run to the bank. As you mentioned earlier, the number of inversions has been increasing exponentially. And Congress should take action. And I was just reading -- John McKinnon is on the line -- Wall Street Journal article about "Overseas Tax Deals Draw Bets By Funds." The hedge funds are scouting, as indicated in the article, for U.S. companies to essentially invert, to change their address, their domicile, which, as mentioned earlier by Ed Kleinbard, can't be done by the average taxpayer.
LEVINAnd so there is this race. And I was reading a New York Times statement by a banker who said, "This is going to be -- sound cynical, but as much as I may hate these deals and the ramifications for our country, if I don't do the deal my competitor across the street will be happy to do so. That's why Congress has to act.
REHMAnd tell me about the bill you and your brother introduced back in May. Your brother, Senator Carl Levin. And what's happened to that bill?
LEVINWell, we introduced it because I think it would at least temporarily stop this flow. And essentially what it would do would be to raise the amount of ownership required by the overseas company to 50 percent, which would mean that there would have to be a major, major motive and reason to do this, other than tax avoidance. And that's really what this is. Our tax rate is too high. We need to reform our tax laws, but we need to really address this immediate problem.
LEVINAnd both bills would essentially set a date in May so that any of the inversions after that would be caught by this bill, even though it wasn't enacted right away. But we need to act.
REHMSo you're saying it would be retroactive?
LEVINNot really -- that's one way to describe it. I wouldn't use that word. The effective date would be such -- in 2004 and before that when the inversion issue was taken up, so many of the bills had an effective date so that essentially companies could not race to get there before the law became effective. It's really an effective date.
LEVINThey're given fair notice, the companies -- when we introduced the bill, we put the date in because we were giving fair notice to all the companies, to the hedge funds, to the banks. I was looking at The New York Times, what the banks have done, how much money they've made. Goldman Sachs, (word?) imputed fees, 200 million, JPMorgan is 185, Morgan Stanley almost 100 million.
LEVINSo essentially what you do is have hedge funds in banks who are out there looking for customers, essentially to move their address to avoid taxation. And that -- it's not a matter of treason. No one should say that, but it's unfair. It's unfair and the typical citizen can't begin to do that. And we should stop it now as we go about long-range tax reform.
REHMAnd indeed, however, New York Times -- according to the New York Times, your bill has failed to gain traction. So what are the chances you'll even get a vote on this bill when Congress returns in the fall?
LEVINI hope it will. I think it's gaining more traction because more and more of these deals are being floated. And Senator Hatch, on the Republican side in the Senate, indicated some interest. So I think the more holes that need to be plugged, the dike has just huge holes in it that companies, that hedge funds and banks are taking advantage of. I think the pressure on the Congress will grow because, again, the typical citizen can't begin to do this.
LEVINAnd they say why should corporations do this primarily for tax-avoiding purposes.
REHMAnd one final question, do you believe, as Chris Edwards apparently does, that the U.S. corporate tax rate should be lower than the current 35 percent? Would any rate cut be acceptable in your mind?
LEVINThe answer's yes. But it has to be done -- the joint task committee told us that even if you eliminated all of the provisions that help manufacturing in this country, you would only get down to 28 percent. So it isn't easily done. The answer is yes, it should be done. But let me also, as we finish on this point, make this point.
LEVINEven if you lowered it to 28 or 25 percent, you would still need to look at the issue of inversion because some of the inversions change addresses to places like Ireland that have a 10 percent rate. So this issue of shifting for the purpose of tax avoidance, really it's a sham more than anything else. That's going to have to be addressed regardless of what the rate is.
REHMI said one more question, but I have even one more. Recently, JPMorgan Chase CEO Jamie Dimon said, "Well, consumers can go shop at Walmart for the cheapest goods. Why can't U.S. corporations do the same thing and shop for low prices?" How do you respond?
LEVINBecause essentially they're doing something that isn't real. They're changing their address, they're changing their domicile in order to lower the tax rate. So, sure, we should look for goods -- by the way, I think we need to be careful and try to remember the importance of making goods in America -- but that's a totally different thing. The person who goes in is looking for a good, as the best price.
LEVINWhat the corporations are doing is going through a merger, essentially, more than for any other reason, to avoid paying taxes. And when the customer goes into Walmarts, they pay sales tax.
LEVINIt isn't avoidance of taxes.
LEVINThis is an avoidance of taxes, almost purely and simply and usually both purely and simply.
REHMCongressman Sander Levin. He represents Michigan's 9th District. Thank you for joining us and enjoy your vacation on Martha's Vineyard.
LEVINThank you. Just a week or so, but we're -- we'll enjoy it. The weather turned better.
REHMGood for you. Thanks, again. Bye, bye. And, Chris Edwards, what do you make of what the Congressman has said?
EDWARDSWell, he says that inversions are unfair. And I'm wondering unfair to who. The best thing we would all agree is a major corporate tax reform where we close loopholes and lower the rate. We all agree.
REHMAnd he agrees.
EDWARDSAnd -- but this -- the next best thing, if Congress is going to sit on his hand and not move ahead, then inversions -- I don't think they hurt U.S. workers. I -- and they don't help U.S. businesses. We want U.S. companies to succeed and sell their products on world markets. And by eliminating an extra layer of tax the United States puts on companies, inversions are actually helping U.S. companies, which should help U.S. workers.
KLEINBARDYou know, this really isn't about U.S. business competitiveness in world markets. Walgreens has essentially no business today on world markets. The reason Walgreens is interested in an inversion transaction is because they want to simply give themselves a discount on the U.S. tax rate that they pay on their domestic earnings. That's what it's all about.
KLEINBARDIt's, as Congressman Levin was suggesting, it's about creating internal mechanisms that simply create artificial deductions in the United States and income in low-tax jurisdictions. It has nothing to do with business.
REHMEd Kleinbard, he's professor of law at the University of Southern California. And you're listening to "The Diane Rehm Show." John McKinnon, how aware do you think American consumers are becoming of these so-called conversions and rising up, as some of our listeners have already indicated?
MCKINNONI have not seen any polling to say whether Americans are increasingly concerned about this, but I think just the tenor of the email traffic that we've gotten so far shows that they don't react particularly well to this. And I know from talking to corporate executives over the years, that they're very worried about the prospect that there will be a consumer backlash against companies that do these kinds of transactions.
MCKINNONAnd I think that's why you have not seen too many retail companies do it so far. The Walgreens example will be an interesting one. I think there's an internal debate within that company about whether to do a transaction just for this reason. And it's interesting that Chiquita did one, but -- within the last year or so. They claim that it doesn't have much tax benefit, if any, for them. But I think consumer backlash and taxpayer backlash is a big, big concern for companies.
REHMHow can they -- how come Chiquita says it didn't gain very much?
MCKINNONWell, Chiquita says they weren't paying very much U.S. tax already. So I think that it may -- I'm not really sure about all the details and why. But…
REHMAll right. Okay. Let's go to Ted, in Greensboro, Va. (sic) Hi, you're on the air.
TEDI run a small manufacture, with about 100 employees. We're a C corp. And last year we paid 41 percent between state and federal tax. I read the news and I read companies like GE or others that pay a substantially lower tax than we do. But our biggest concern is, because of the tax we pay, that's where we get our money to invest, to put new equipment in, to hire additional people. And that just slows my company's growth. I think what needs to be done is deductions taken away, and reduce the tax, in fact, so it's moot point when it comes to inversion. And I'll listen to your comments. Thank you.
REHMAll right. Thank for calling. Chris?
EDWARDSYeah, I think he's raising the issue that as a small C corporation or a corporation that pays corporate tax, he's at a disadvantage to the big guys. And I think he's probably right. It is the big multinationals that can shift their profits. And that's a reality of globalization, far beyond the inversion debate. There are many, many ways that big multinationals shift their profits abroad.
EDWARDSWe've tried, over three decades now, to throw regulation after regulation on companies to stop this, but it hasn't succeeded because the rate difference between us and foreign countries is so big now corporations are going to find new loopholes and loopholes. And they'll keep doing it until we lower our rate.
KLEINBARDYou know, I agree emphatically with the caller's point. It's U.S. domestic-centric corporations that are bearing the brunt here of the high U.S. corporate tax rate. It's not, however -- and I agree with much of what Chris Edwards just said. But it's not about globalization. It's about artificial tax structures that multinationals -- and Chris Edwards is absolutely right. Multinationals are uniquely positioned to take advantage of. But the answer, again, is that we can, in fact, do better.
KLEINBARDCongress hasn't put very much energy at all into addressing any of the obvious defects in the corporate tax law. Having nothing to do with the rate, but just the defects, the loopholes, the easy ways in which companies generate stateless income.
REHMAnd on that note let me just mention that Ed Kleinbard, professor of law at UCLA, has a forthcoming book. It's titled, "We Are Better Than This: How Government Should Spend Our Money." Short break here. We'll be right back.
REHMAnd as we talk about inversions, Janie in Durham, N.C. writes, "I am weary and confused by the endless discussion blaming corporations and not the originators of the idiotic loopholes and tax code, the Congress." Ed Kleinbard, would you agree with that?
KLEINBARDYou know, I really do. I think that corporations have a straightforward role in our society. And that role is not in effect to write the rules by which they assess tax against themselves. That the job of Congress. Corporations have an obligation to be -- to play fairly within those rules. But there's no question here of legality. The question is that the rules themselves are broken.
KLEINBARDI think where Chris Edwards and I disagree is that I think there are immediate steps that need to be taken to curb inversion transactions because they have nothing to do with globalization or international competitiveness. They have to do with self help remedies to simply give firms discounts from the intended tax rate. But that's Congress's job. So I agree absolutely.
REHMAll right. Okay. Let's go to Ruth in San Antonio, Texas. You're on the air.
RUTHHi, Diane. Thank you for taking my call.
RUTHI've been listening and I'm of an age where I grew up in the '60s and corporations were a big part of the community. They invested in the community and the community invested in them. Now corporations come into a state. They want ten years of no taxes. These corporations are going to take their tax money oversees but the facilities that they have here are still going to use the infrastructure. They're just not going to pay to keep it up.
RUTHThe ordinary taxpayer subsidizes corporations both, you know, whether they're based here or abroad. All those profits, they're not being used to increase people's wages. Instead ordinary tax individuals like myself, we subsidize -- and I don't resent that because I think a community has an obligation to help one another. And...
REHMAll right. And, John McKinnon, can you talk about that culture and how it's changed over the past few decades?
MCKINNONSure. The United States has become, you know, one of many economic powers out there that are competing for businesses and jobs. And states within the United Stated are also competing more for businesses and jobs. So, you know, conservatives would say tax competition is really a healthy thing. And it's going to make the economy more efficient. And in the end it's going to lead to prosperity for all.
MCKINNONI think that, you know, you see a lot of people complain about that because it produces, you know, dislocation. It produces in some cases, I think, higher taxes for individuals because corporations are shedding some of their tax burden in the process of this competition, so some of the burden gets shifted elsewhere. So I think the caller's right.
KLEINBARDYeah -- no. I think that the culture has changed a bit. I think that here Chris Edwards is right, that globalization has forced corporations to have sharper elbows. And there is an ethical issue which is a little bit different than that which we've talked about at the federal level, which is the ease with which corporations are able, through lobbying, through threats to get special concessions from state and local governments so that the tax burdens fall disproportionately on the rest of the productive factors of society.
EDWARDSThe caller touched on the idea that corporations benefit from an infrastructure, thus they should carry their freight inner taxes in which I agree with. And the treasury secretary said something the other day, which I think that was a fallacy. He said essentially that, you know, the United States is the best place to do business in the world. We've got great universities, great R and D, great skilled workforce, et cetera.
EDWARDSThe issue is though that dozens of other high-income countries around the world now have great skilled work force, have great universities, do great R and D. Germany, Australia, Canada, Britain, all these countries have all the basic infrastructure, often even better than ours. That's what we're competing against.
EDWARDSSo, you know, we need to not be on the defense here. We need to go on the offense. We need to have the most inviting climate, in my view, for companies to build plants here that hire workers.
REHMHere's an email from George in Pensacola, Fla. "Does inversion enhance return on investments?" He goes on to say, "I would prefer corporate companies coming to investors rather than to the government," Chris.
EDWARDSYeah, I don't -- I agree with that. I don't think that inversions don't hurt workers. I think they actually benefit workers because if you, say, slice the tax rate on a pharmaceutical -- U.S. pharmaceutical company, makes them more competitive against a Swiss or a Burgess pharmaceutical company, that will ultimately benefit U.S. workers. Because they'll be more -- they'll have broader global sales and that'll benefit U.S. workers.
REHMWhat about that, John McKinnon?
MCKINNONWell, I think that one reason for doing these inversions for a lot of these companies is to enhance the return to shareholders. I think that one thing they're doing is going overseas to get to the money that they parked overseas, which they can't get to when they're here. And through, you know, various accounting maneuvers, they're going to pay some of that money back to shareholders in the United States.
REHMShareholders but not necessarily employees.
MCKINNONI think that that's something they also can do and I think they would say they can do more...
REHMCan do but do they do?
MCKINNONWell, put this way. The experience of Japan, to me, is interesting because they went through almost the same debate about, you know, eight or ten years ago that we're going through now. Their concern back then was that they have a -- had a system that's very similar to ours now. They noticed that Japanese companies were not bringing a lot of money back to Japan to invest. And so they went through a process of corporate tax reform to try to encourage Japanese companies to bring more of their money back home. And they -- I believe that it's worked to some degree.
KLEINBARDWell, you know, there are two reasons for inversions and we keep forgetting that. There are only two reasons to explain the current phenomenon. One is the Walgreens type fact pattern where you want to simply give yourself a discount from the current U.S. tax rate on your U.S. domestic income. And you do that by creating a new foreign parent company and paying interest expense and other devices to strip income out of the United States.
KLEINBARDBut the other motivation, which is probably the larger in terms of numbers of companies, is that firms today have a trillion dollars of offshore cash that they've accumulated on which they've paid virtually very -- single digit tax rates around the world. What is it they want to do with that money? They want to use that money to pay to shareholders to goose their stock price. And we know this for a fact because in 2004 we had a tax holiday -- a one-time tax holiday on the then stockpile of offshore cash. And the only thing that changed net in the economy was stock buybacks and dividends.
KLEINBARDSo what is -- what the motivation here is not invest in America, have more employees. We know what the motivation is. The motivation is to goose stock price through stock buybacks and dividends. I don't disagree that ultimately the money is more efficiently used by shareholders than sitting in U.S. bank deposits in a Bermuda company. But the fact is the money was accumulated under the premise that U.S. corporate tax would be paid on that money when it came back. Inversions give people, for technical reasons, a way to get the money back into the hands of U.S. shareholders while skipping over that U.S. corporate tax obligation.
EDWARDSWe all agree that there is a lot of cash parked abroad, a trillion dollars. And you asked earlier, Diane, you know, why are inversions happening now so much? Partly it's because other countries keep cutting their corporate tax rates. I mean, Britain recently cut their rate down to just 21 percent. The lower foreign rates get the less incentive U.S. companies have to bring money back to the United States because of the weird way our corporate tax system works. So this is only going to get worse if nothing changes, as other countries continue to cut their rates.
REHMHere's an email from Ken in Durham, N.C. He says, "I understand the incentive to lower taxes but as the Reagan tax cuts clearly showed, even when the tax rates were cut as much as 60 percent, if the companies were not managed right it still didn't make a difference. So now we're urged to cut corporate taxes another 20 percent and hope for the best? What about cutting taxes but attaching job creation requirements to those cuts rather than like the tax cuts which let business pull away that extra money," Ed Kleinbard?
KLEINBARDIt's an intuitively appealing idea but it's a dangerous one at two levels. First, it's very difficult, as a technical matter, to draft legislation to accomplish that purpose. If you just try to tote up new employees, you encourage firms to discharge old employees. If you try to count net growth, you encourage firms to do acquisitions domestically just to bulk up their payroll. And you distort firms' decisions between whether they want to invest in machinery or hire more clinically...
REHMSo what is your solution here now?
KLEINBARDMy solution here and now is a very simple patch to stop inversion transactions in their tracks, which Senator and Congressman Levin's bill is a key part and follow on with fundamental corporate tax reform, lower rate. And Chris Edwards and I agree, the rate's got to be in the mid-20s. That's plenty low enough. The U.S. has lots of other competitive advantages, fewer loopholes. And contrary to what many people would suggest, worldwide tax consolidation.
KLEINBARDThe way you stop this game is by taking away any incentive to strip income to low tax jurisdictions. Worldwide consolidation is how we see companies from a financial accounting point of view. We see the entire worldwide operations. And the rate is reasonably low that works for tax purposes too.
REHMAnd you're listening to "The Diane Rehm Show." John McKinnon, we talked to Congressman Levin. How likely do you think a halt in this inversion process is likely to be?
MCKINNONI'd have to say I think it's pretty unlikely at this point anytime soon, and for a couple of reasons. One is purely policy. I think that there's a sort of reasoned disagreement over the approach that he's taking. He wants essentially to require companies to have a real change in ownership and a real change in management to qualify for an inversion to move. And the problem with that, according to some Republicans is you would actually be encouraging companies to move their jobs overseas as well as their tax domicile. So you would just be losing more.
MCKINNONThere's a political reason why I think it won't happen either, which is I think Republicans are kind of sitting on their hands waiting to see what happens in the election. And if...
REHMAnd Chris, what do you think is going to happen as far as lower tax rates overall?
EDWARDSWell, hopefully the current inversion thing will push and prod Congress to do actually major tax reform like we all agree with. If Congress just does a Band-Aid to close up this avoidance technique, new ones will arise like they have been for decades now. And it's going to -- we're going to get more and more avoidance the lower foreign corporate tax rates go. There's -- globalization is getting more intense all the time, not less intense.
REHMHow likely do you think that Congress, after the 2014 election, will take up corporate tax rates?
EDWARDSI think the White House is the problem now. I think corporate tax reform is -- would be a fabulous feature for President Obama to take up and run with. He hasn't though. He's shown very little interest. And I think it's really sad because frankly he could've sort of politically triangulated here and got a lot of business support for doing a corporate tax reform. But he hasn't so unfortunately I think this waits until 2017.
KLEINBARDBusiness is split on corporate tax reform. Let's be very clear. What domestic-oriented firms want and what the big multinationals want is quite different. So one of the key problems is that the business community is not, in fact, speaking with one voice. If the business community spoke with one voice, along the lines that I think we all on this show would agree with, rates in the mid-20's, fewer loopholes, etcetera and including in that addressing the problem that we have no anti-abuse rules today in respect of shifting income to low tax foreign jurisdictions, the stateless income phenomenon. If we had -- if the business community were 100 percent behind that, it would be a lot easier for the administration to be behind that.
REHMDo you agree that the business community itself is split, John McKinnon?
MCKINNONOh, there's no doubt about that. And you can see it in the various coalitions that have formed. There's a coalition that just wants a lower rate. There's a coalition that kind of wants a lower rate. But what they really want is some change to a so-called territorial system where the U.S. would be like the rest of the world and allow companies to bring their profits back to the United States whenever they wanted to. What they really want is the money they've got overseas. And, you know, there's other groups in between but there's a very clear split.
REHMSo where is this going? Nowhere for now?
MCKINNONI'm afraid that that's right. And I -- this is -- you know, usually in Washington you think, oh I can figure this out. I can see where this is going. But with this one I just don't know. I can't see where it's going.
REHMJohn McKinnon of the Wall Street Journal, Chris Edwards of the Cato Institute, Ed Kleinbard of UCLA Law School and author of a forthcoming book "We Are Better Than This: How Government Should Spend Our Money." Thank you all. And thanks for listening all. I'm Diane Rehm.
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