Much drama in Congress on the “big, beautiful tax bill:” What will happen to Medicaid? To SALT? To green energy spending?
However, as with the famous Sherlock Holmes story, what’s not being debated in Congress is also interesting. Namely, the U.S. corporate tax rate.
Just a decade ago, the corporate rate was high drama. Why? Because the rate was 35 percent, it was so high, relative to other countries, that American companies routinely “inverted.” Yes, sounds weird—and it was.
In a corporate inversion, an American corporation would sell itself to a foreign corporation based in a lower-tax country. So the new combined corporation would pay tax at the lower foreign rate. Overall, dozens of companies, with a total valuation in the trillions, inverted out of the U.S.
Critics said it was unpatriotic of corporations to do this, while defenders said the U.S. government was stupid to set the tax rate so high. They argued that the status quo itself was unpatriotic, as overtaxed American firms were hobbled as they tried to compete with lower-taxed international rivals.
Perhaps the biggest single foreign winner was Ireland, which had (and still has) a corporate rate of 12.5 percent. Many big American companies—including Eaton, Johnson Controls, and Medtronic—inverted to Ireland, thereby cutting their tax bill by two-thirds. And tax revenues to the U.S. from these companies, of course, fell to nothing.
Yet then the tax-inversion issue went away. Why? Because in 2017, Congress enacted, and President Donald Trump signed, the Tax Cuts and Jobs Act (TCJA). Its lead provision: A bold cut in the U.S. corporate rate, down to 21 percent. Instantly, corporate inversions disappeared—with the U.S. rate now low, inverting wasn’t worth the hassle.
Unlike some provisions of the TCJA, the corporate-rate cut is permanent in statute, so there’s no drama this year about its retention. With apologies to Detective Holmes, that’s why the hound of this particular policy isn’t barking.
Yet maybe there should be barking, because, after all, it’s a dynamic world. If America grows complacent on competitive economic policy, our prosperity is at risk.
According to the Tax Foundation, the worldwide average corporate tax rate is 25.67 percent. That’s higher than the post-TCJA rate of 21 percent, and yet if American states’ corporate taxes are included, the picture is different. A total of 44 states impose their own corporate tax, and of these, the median rate, the Tax Foundation calculates, is 6.5 percent. So, for almost all of the U.S., the combined rate, federal and state, is 27.5.
Meanwhile, the Tax Foundation also finds that the median corporate tax rate of the European Union is 21.27 percent. The median rate in Asia is even lower: 19.74 percent. Indeed, in parts of China, our fiercest competitor, it’s a mere 12 percent—less than half of the U.S. total.
So now we’re starting to see a competitive gap that really is worth barking about. If present trends continue, American companies could once again find themselves in the situation they were in a decade ago, pre-TCJA, when inversion was oftentimes the best of bad options.
The Tax Cut Victory Alliance, which I co-chair, alongside Steve Moore of Unleash Prosperity, argues that Congress should lower the corporate rate to 15 percent. Donald Trump has said more than once that he supports a 15 percent rate, even if, admittedly, it’s not a topic getting headlines in the current tax-bill drama.
Yet the economic facts and data argue strongly that it’s in America’s interest to have a more internationally competitive tax system. So we are optimistic that growth-minded leaders will take steps to remedy the rate.
Returning to the bad old days of inversion is a terrible prospect. We never want to sit through that horror show again.
