It's Time to Make U.S. Businesses More Competitive

The American taxpayer is going to take a $19.5 billion bath over the next ten years because of companies incorporating overseas. That figure comes from Congress’s joint committee on taxation, which has studied these “tax inversions.”

The latest big inversion involves Pfizer, born in Brooklyn 166 years ago but now headed to Dublin via a merger with Allergan that will create the world’s biggest drug company. “(Inversions) started in the early '80s when some smart tax lawyers figured out that they could do this,” Steve Wessel said on NPR’s “Morning Edition” in November. “Since then, about 50 U.S. companies have reincorporated abroad in an inversion—20 since 2012.” Wessel is a long-time Wall Street Journal reporter and is associated with the Brookings Institution.

Ireland is particularly popular, he explained, because its tax rate is 12.5 percent, compared to our 35 percent rate, the highest in the industrialized world. The U.K. is also popular, thanks to a recent cut to 20 percent. Canada drew Burger King across the border in 2014 via the chain’s purchase of Tim Hortons. (Burger King said that the transaction “was driven by growth, not tax rates.”)

Ian Read, Pfizer’s Scottish chief executive, told the Journal that this nation’s high tax rates meant Pfizer was competing “with one hand tied behind our back.” He said he had tried and failed to lobby for tax reform in Washington.

To curb these deals, the Treasury Department issued new rules. But there are ways for companies to bypass these rules, as the structure of the Pfizer-Allergan merger demonstrated, New York Times columnist Andrew Ross Sorkin wrote December 1. He explained that the combination is not technically structured as an inversion, though it achieves the same goal of securing a lower tax rate overseas.

“Our actions can only slow the pace of these transactions,” Treasury Secretary Jacob J. Lew said in November. “Only legislation can decisively stop them.”

It sounds like Congress needs to find a path to tax reform.

We have an idea. We suggest that Congress, as part of comprehensive tax reform, enact a revenue-neutral carbon fee, with half the proceeds used to reduce our corporate tax rate to 25 percent. To find out if this creative compromise had potential, we met individually with 175 senators and House members, or their aides. These conversations indicated that there is strong bipartisan receptiveness to this centrist idea, provided businesses and local opinion leaders speak out in support.

The fee could start at $35 or so per ton, perhaps doubling over ten years. It should be levied at the mine mouth or oil and gas collection point--2,500 locations where carbon fuels are already measured for other purposes. A $35-per-ton levy equates to about 32 cents per gallon of gasoline. To offset these slightly higher energy costs, half of the fee’s proceeds could be refunded to low- and middle-income consumers, making them whole or better off.

Since climate change is global, the solution must be, as well. The law should establish a World Trade Organization-compliant border tax adjustment on energy-intensive imports to make it in the self-interest of our trading partners to impose a like fee rather than have their exporters pay it to us at our border. Exporters to countries not charging for carbon should receive a credit.

This free-market approach would create jobs, increase the rate of GDP growth, and allow energy generators and businesses the certainty needed to make sound business expansion decisions. It also could create momentum for more comprehensive tax reform. It would drive far greater emission reductions than the president’s Clean Power Plan.

Such benefits explain the growing enthusiasm about carbon fees. Economists overwhelmingly support this approach, mainly because of its efficiency. Other backers include the heads of the World Bank and International Monetary Fund, ExxonMobil’s CEO, the new chairman of the Intergovernmental Panel on Climate Change, and former U.S. Treasury Secretaries George Schulz and Lawrence Summers. A significant percentage of those at the Paris conference shared their enthusiasm. “The business message in Paris is clear: A carbon fee, used to finance a corporate tax rate cut, makes good sense,” reported Bill Eacho, our co-founder, from COP21.

They know that carbon fees can work. British Columbia has had one since 2008. It has reduced fossil fuel consumption by 16 percent, while use in the rest of that country has risen by 3 percent. Meantime, British Columbia’s GDP growth has outperformed Canada’s.

You probably can’t find an American politician who will praise our tax code. Our elected representatives should improve the code, and an improvement that simultaneously fights climate change and increases economic growth would be even better.