Shrinking tax reform will shrink US tax base

The ongoing saga of tax reform is reminiscent of the classic 1957 movie “The Incredible Shrinking Man.” After a hapless businessman is exposed to a variety of hazards, he shrinks ever smaller, eventually becoming imperceptible to the naked eye.

The sequel now playing on Capitol Hill is creating great peril for our economy. Earlier this year, there was great enthusiasm in Congress for comprehensive tax reform. But this “comprehensive” reform quickly shrank to the less daunting goal of “business” reform and then an even less ambitious push for “international” reform. Now there’s talk that reform may be limited to just trying to pass a handful of permanent tax extenders.

{mosads}While “The Incredible Shrinking Man” was well received by critics, few are applauding the incredible shrinking tax reform we’re seeing today in Congress. A microscopic version of tax reform would presumably provide some benefit for some companies, but this incremental response ignores what is quickly becoming a dire situation involving American companies moving overseas.

America’s outdated tax code has been overtaken by the global economy, leaving many U.S. companies hamstrung by the highest tax rate of any industrialized nation on earth. This, when combined with our archaic system for taxing international earnings, makes American companies ripe for the picking by foreign corporations. Not surprisingly, foreign corporations have been on a shopping spree; that is why so many American brands are now foreign-owned.

Many in Congress rail against corporate inversions, but they’re missing the bigger picture. The Congressional Research Service reported last year that 47 U.S. companies inverted over the past decade. Meanwhile, literally thousands of U.S. companies were acquired and shipped out of the country during the same period.

A recent analysis by Ernst & Young found that corporate assets totaling $179 billion were bled from the U.S. over the past 10 years because of the foreign acquisition of thousands of American firms. This exodus was largely precipitated by America’s high 35 percent corporate tax rate and worldwide system of taxation.

Further, the same Ernst & Young study determined that if the United States had reduced its top corporate tax rate to 25 percent, the approximate global average among developed nations, “[U.S.] companies would have acquired $590 billion in cross-border assets over the past 10-years [2004-2013] instead of losing $179 billion in assets.” The report also estimates that a 25 percent tax rate would have kept 1,300 companies in the U.S. over the past decade. At the same time, data provider Dealogic reports that foreign takeovers of U.S. companies doubled last year to $275 billion and, at the current rate, will surpass $400 billion this year.

While most countries spent the past decade cutting their corporate tax rates, the U.S. tax rate remains stubbornly high. Because of the growing rate differential between the U.S. and the rest of the world, and because of the America’s worldwide tax system, U.S. companies with foreign operations are increasingly more valuable to foreign buyers than U.S. buyers. Is it surprising that those firms would gravitate into foreign hands?

This hemorrhaging of American companies will not be stopped by microscopic tax reform. Only by removing the additional layer of tax on foreign profits through a territorial tax system and reducing the top corporate tax rate can we stop the bleeding.

Thankfully, there’s hope that tax reform will not shrink to microscopic size. A July 8 report from the Senate Finance Committee’s International Working Group acknowledges the problems America is facing and suggests bipartisan support for moving toward a territorial system and a lower corporate tax rate, among other policies.

This is what our foreign competitors have done and for good reason. As Mieko Nakabayashi, a former member of the Japanese House of Representatives, once said: “With most of the world — Japan included — cutting corporate tax rates and employing territorial tax systems to remain competitive, the [U.S.] must surely know that its hesitancy to do these things is handing the advantage to its international competitors. They will suffer from that hesitancy while we and others outside the [U.S.] will benefit.”

Nakabayashi is correct and the Senate Finance Committee seems to be coming to the same conclusion. Let’s hope Congress looks favorably upon the framework provided by the committee’s International Working Group and is able to solve a problem that, unlike tax reform, is only poised to grow.

Davis is a former U.S. representative from Kentucky and served on the House Ways and Means Committee. Carter was a deputy assistant secretary of the Treasury under President George W. Bush and served on the staff of the Senate Budget Committee.