Cronyism

Taxes Push Firms Abroad

More and more U.S. companies are moving their corporate headquarters abroad to seek more favorable tax treatment of corporate income, according to recent analysis from the Wall Street Journal. Since 2009, at least 10 publicly traded companies have moved their headquarters abroad.

Firms relocate for a number of reasons, including expanding their operations and geographic reach, but another driving factor is certainly tax rates. The U.S. currently has the highest corporate income tax rate in the world at 39.2 percent, a rate which acts as both a burden for domestic firms and a deterrent for firms considering establishing U.S. operations. Companies and investors are also concerned that Washington will raise taxes yet again next year in an effort to reduce the federal budget deficit.

The Wall Street Journal cites the example of Aon, a risk management provider, which recently relocated its headquarters to the U.K. in April. The company expects to reduce its tax rate, which averaged 28 percent over the past five years, by 5 percentage points – a move that could net the firm an additional $100 million in annual profits. Eaton Corp., a Cleveland-based producer of electrical equipment, moved to Ireland in 2009. The firm expects that the move will to save approximately $160 million per year in taxes.

“We’re able to be more competitive, with a low effective rate,” said Suzanne Spera, director of investor relations at Rowan, a drilling company.  Rowan announced in February that it too plans to move its headquarters to the U.K.

These examples demonstrate the need for serious reform of the U.S. corporate tax code. U.S. companies are put at even more of a disadvantage because their profits earned both domestically and abroad are taxed at the uncompetitive U.S. rate, while most developed countries only tax domestic profits.

In recent years, most major nations have reduced their statutory corporate tax rates. In fact, of the 30 OECD countries, 27 have cut their corporate tax rates since 2000, while the U.S. has bucked the trend and raised its rate.

Analysis from the Cato Institute indicates that following corporate income tax cuts in 19 OECD countries during the 1990s and 2000s, tax revenues increased substantially. The result demonstrates a Laffer Curve effect, where a cut in tax rates leads to increased revenues.

Despite the U.S. failing to keep up with the rest of the OECD, some companies have remained in the United States, but relocated major operations from high tax states to low tax states. For example, Apple recently made the decision to open its newest corporate campus in Austin, Texas rather than in Silicon Valley. This move will add approximately 3,600 new jobs to the Lone Star state, demonstrating the attractiveness of lower taxes and limited government.

Apple’s decision to locate its new campus in Texas is a domestic example of lower corporate taxes and restrained government spending creating an attractive business climate. As ALEC’s Rich States, Poor States study has demonstrated for years, the eight states with the lowest corporate income tax rates have experienced higher rates of growth than the eight states with the highest rates. This evidence, both anecdotal and empirical, suggests that the pursuit of economic growth must be accompanied by lower tax burdens on corporations of all sizes.


In Depth: Cronyism

Cronyism in tax policy stifles innovation, hinders competition and introduces a deep temptation for corruption. The 2014 ALEC Center for State Fiscal Reform study, The Unseen Costs of Tax Cronyism: Favoritism and Foregone Growth, found that in the most recent year in which states published their respective tax expenditure …

+ Cronyism In Depth