Large Companies Continue To Move Overseas

A recent article featured in The Economist discussed how the United

States has gone from a place for corporations to thrive to a financial

burden; here is a recap of that article.

The Economist starts off by talking about how "economic refugees" in

the past have been banging on America's doors, trying to get in.

In the last decade, companies have been begging to leave; in the last

few months, more than a handful of large corporations have begun mergers with foreign partners,

moving their corporations abroad.

They note that corporate taxes are significantly lower in almost any country besides America (most

notably Ireland and Britain).

The response from Jack Lew, the treasury secretary, has been to call

the companies' patriotism into question and is pushing for Congress

to outlaw such transactions.

The Economist, however, discusses how misguided these proposals are -

noting that by cracking down on corporate inversions, the American

government is doing nothing to ease the problem -- a dysfunctional

corporate-tax system.

The Economist calls for a fundamental reform of this system.

The flaws are very evident.

First, the tax rate (which sits at 35 percent) is the highest among the 34 richest countries in the Organization

for Economic Co-Operation and Development; however, the United States is raising less revenue than

the OECD average.

This is due to a plethora of loopholes and tax breaks -

combining for over $150 billion in lost revenue.

The other flaw is that tax levies placed on a company's income are

based on TOTAL income, not just the amount earned in the United States.

Both of these impose a huge impact on the economy.

They discourage investment and impose distortions; a varying tax rate means that some companies

pay close to zero while others are at the full 35 percent.

Over two decades ago, this was almost unheard of in the United

States.

However, others decreased their tax rates for corporations while America

still held on to its high percentage and varying rates.

The Economist proposes a solution -lowering the corporate tax rate,

eliminating tax breaks and moving America from a worldwide system to

a territorial one.

Obama is already on board with some of this; he has proposed a

reform that would cut the rate to 28 percent.

However, this rate still has a worldwide reach.

Dave Camp has asked for the rate to go down to 25 percent and turn into

a territorial system.

While this is progress, both Obama and Camp have tied the subject to

other issues.

Obama wants the tax reform to raise money for public infrastructure.

Republicans, however, want the corporate cuts to be joined with cuts

in personal tax rates.

We'll see where this conversation is headed.

One thing is clear: large companies will continue heading overseas until

the issue is resolved.