Be More Like Ireland; Reform The Corporate Tax

Longtime devotees to Bearing Drift will know that I am Irish… well, at least half Irish anyhow, and a big fan of Irish history, culture, commons, etc.  Excellent craic.

Of course, the collapse of the Celtic Tiger during the recent financial crisis was surrounded by undertakers of every sort.  Five years ago, this was the epitaph to Ireland’s rise as a financial center — buried, done, over.

Yet today, the Celtic Tiger is back in a serious way — no small part to a corporate tax rate of 12.5% in an English speaking country (still working on that) right on the doorstep of Europe.  Compared to the 39.1% corporate tax rate here in the United States, it’s no small wonder why the free enterprise diaspora is occurring.

Don’t worry — it gets worse.   American firms are effectively “double taxed” with a tax here at home plus getting taxed abroad.  In short, there is practically zero financial incentive to continue being based in the United States; neither for the 39% tax rate or for the “double penalty” by doing business overseas.

The economic impact to Americans isn’t just felt in the price of goods either.  This is basic Laffer Curve territory for many firms.  By reducing the cost of doing business, businesses have more to invest, return to shareholders, can re-invest in their own products, and effectively stop passing along “the cost of doing business” (read: taxes) to the consumer.  Win-win-win for everyone, right?

The cost of not doing this is to continue with the process of “tax inversions” where American firms merge with overseas firms in order to gain the lower overseas tax rate and dodge the stiff American rate.  From the UK Economist:

The boardroom case for inversions stems from America’s tax exceptionalism. It levies a higher corporate-tax rate than any other rich country—a combined federal-and-state rate of 39%, against an OECD average of 25%. And it spreads its tentacles worldwide, so that profits earned abroad are also subject to American taxes when they are repatriated. To this problem, the tinkering of officials is no answer at all. Making it hard for American firms to invert does precisely nothing to alter the comparative tax advantages of changing domicile; it just makes it more likely that foreign firms will acquire American ones. That, indeed, is precisely what is happening.

That is literally $2.1 trillion in revenue fleeing the 39.1% corporate tax rate, folks.

Of course, the Obama administration has tried to “fix” this problem… by shaming American firms, then offering some hodgepodge of changes (a 28% corporate tax rate) with some poison pills (extending the corporate tax to certain earnings) in the hopes that American firms will simply stay where the grass is green.

…but it’s Ireland.  Shamrocks.  15% corporate tax.

A more sensible solution?  The Economist is recommending a “territorial” system that only taxes firms on money earned within the country.  Seems reasonable — with the additional step of bringing America’s corporate tax rate more in line with the OECD average of 25%.

Sounds like a good first start, and one that would be good for American business as well.  If the Obama administration and Congress are truly rationalizing reform as a plan to restore a sagging national infrastructure, the best way to recruit that sort of interest would be to make it profitable for businesses to stay and utilize the same.

Pushing off by waiting for a perfect plan when a good one will do?  Only exacerbates the problem… not that anyone in Ireland is complaining about it.