News Journal: Corporate profits should be result of ingenuity, not inversions

A number of American corporations are making news, and not in a good way.
They have announced mergers with foreign companies so they can avoid paying U.S. taxes. They are seeking what is called a “tax inversion” and it allows an American corporation to merge with a foreign corporation, move their headquarters overseas, and with some accounting manipulations avoid paying most of their U S taxes.
American corporations are also making unfavorable news in other ways. The European Union is investigating improper tax avoidance by Amazon in Luxembourg, Starbucks in the Netherlands, and Apple in Ireland.
This follows on the heels of an earlier finding by the U.S. Senate Permanent Subcommittee Investigations that Apple, by the use of a technique called the “double Irish” tax loophole, paid Ireland an effective tax of only 2 percent. The same committee had previously reported that Microsoft and Hewlett Packer had used questionable international tax maneuvers to avoid U S taxes.
In many news reports you hear that the United States federal tax rate of 35 percent is the highest in the world. It is an extraordinarily deceptive statement. The fact is that very few corporations pay the top 35 percent rate. In fact, it is fair to say that any corporation that is paying the 35 percent rate should find new accountants
USA Today did a study which “shows that while U.S. companies and investors constantly grumble about corporate tax rates, there are many companies that pay nowhere near the highest rates. This is the rule, not an exception. A 2013 report from the U.S. Government Accountability Office found that profitable U.S. firms filing a Schedule M-3 paid federal taxes of 13 percent of pretax worldwide income. That’s well below the top 35 percent statutory rate.”
In addition they found that ‘In fact 20 of the fortune 500 including GM and Merck paid no Taxes in the second quarter of this year even though they made a profit. But some profitable companies can pay even less than that during time to time. And the second quarter is another good example.”
“The biggest example during the second quarter is drug making giant Merck. The company had a negative effective tax rate during the second quarter of 7.5 percent, meaning it actually got a net tax credit. That’s despite the fact that income before taxes at Merck soared 52 percent to $1.9 billion during the quarter.”
There is no doubt that we need a major reform of our corporate taxes.
The Chairman of the House Ways and Means Committee Dave Camp (R-MI 4thDistrict), after years of work, introduced in February of this year, a tax reform bill which would lower the corporate tax rate to 25 percent by eliminating tax loopholes and deductions. The Ways and Means Committee in the House of Representatives is arguably the most powerful committee in the congress.
Dave Camp is retiring. It is a tradition in the congress to give special consideration to a worthwhile proposal from the chair of a committee who is retiring. Unfortunately, that is not what happened here, and the congress went out of session without the bill ever being considered on the House floor.
The tax inversion controversy brought out a call by the Democrats for a band aid to the tax code to stop all present tax inversion activity. The Republicans and business groups said the only thing that would work is comprehensive reform. Treasury Secretary Lew says the administration will be coming with a proposal.
Americans of all political persuasion know that this is not fair. We need the corporate tax revenue to bring down our deficits. It is clear that many corporate executives are spending their time and efforts trying to figure out how to increase their compensation by tax avoidance deals and stock price manipulations.
The great economic thinker Joseph Schumpeter said that “real corporate profits” came from finding a new product, application of new methods of production or sales of a product, opening a new market, acquiring new sources of raw materials or semi-finished goods, or a new industry structure.
It is time to build on the work of retiring Ways and Means Chair Camp and write a new corporate tax law. Then, American corporations can once again follow Schumpeter’s view, by creating profits the old fashioned way – by earning them.
Read all of former U.S. Sen. Ted Kaufman’s columns at tedkaufman.com.