High U. S. tax rates prompt firms to stash cash abroad

The U. S. corporate tax system is an unholy mess.

This is evident in the piles of cash that U. S. companies hoard overseas, where it is not subject to the punitively high 35% American corporate tax rate. USA TODAY reported Monday that five top tech companies alone — Alphabet, Apple, Cisco Systems, Microsoft and Oracle — collectively held $ 504 billion in cash at the end of last year, 87.5% of which was parked abroad. That money is earning paltry amounts of interest rather than being reinvested in America or given to shareholders as dividends.

The mess is also evident in socalled corporate inversions, a favored ruse whereby a U. S.- based company buys a smaller overseas company and claims its country ( with its lower tax rates) as its new home. This spring, the Treasury Department reworked its rules to thwart a plan by drugmaker Pfizer to purchase Allergan and incorporate in Ireland.

The best way to deal with inversions and other tax- avoidance games is to cut the high corporate tax rates that are prompting corporate leaders to seek relief in gimmicks. Like so much else in Washington, however, efforts to fix corporate taxes are going nowhere fast. Congress is loath to take on a tough issue. And the Obama administration continues to push Band- Aid efforts.

Some of the tax- rate cuts could be paid for simply by getting rid of myriad tax loopholes that pollute the tax code. President Obama has proposed cutting the top rate of 35% to 28% without losing any revenue.

That would be a good start. Even so, the top rate would need to fall to about 20% to be competitive with other nations. Though it might seem out of step with today’s anti- corporate mood, at least two strong cases can be made for doing just that:

For starters, companies complaining about the high U. S. tax rates have a point. If they pay 35% ( plus an average of 5% in state taxes), they are at a distinct disadvantage to companies based in Ireland ( which pay 12.5%) or Great Britain ( 20%). Investment capital will naturally flow to overseas companies that can glean higher after- tax profits than their U. S. counterparts from running similar businesses.

The second reason for cutting the corporate rate is perhaps more compelling and more counterintuitive: The corporate tax is actually one of the most regressive taxes in the U. S. code. Cutting it, and making up the lost revenue with higher marginal rates on upper- income individuals, would be a boon to middle- class families.

The dirty little secret of the corporate income tax is that corporations don’t really pay taxes. They are not living beings that know they are being taxed. Rather, shareholders shoulder the burden in the form of reduced dividends and lower stock valuations.

If a company’s “effective” tax rate ( after deductions and credits) is 27%, that is what shareholders pay. And they pay that whether they own 10 shares or 10 million shares, and whether the shares are in a standard account or in an IRA, 401( k) or a pension fund.

All of this points to a single, simple conclusion. The way to bring home the hundreds of billions of dollars parked abroad, and put an end to inversions, is to fix the corporate tax code.