Sen. Elizabeth Warren (D., Mass.) must be getting nervous about the chances of tax reform for U.S. businesses. On Wednesday she fired a shot across the bow of any Democrat tempted to consider lowering the highest corporate income-tax rate in the industrialized world. By “any” we mean Sen. Chuck Schumer. The New York Democrat has flirted with the idea of making the U.S. economy more competitive.
Ms. Warren showed up at the National Press Club to pronounce that the idea that American companies are overtaxed is “not true.” In her prepared remarks she said the strategy of “giant corporations” is to “tell a story about high U.S. taxes, demand tax cuts from the U.S. Congress, and threaten to leave the U.S. for good if they don’t get what they want. I say it’s time to call their bluff.”
Call their bluff? Their bluff has been called. They’ve shown their cards. And they’ve moved overseas. So many U.S. companies have been moving out so quickly that last year Treasury Secretary Jack Lew didn’t think he had time even to conduct a formal rule-making to stop them. So Treasury slapped together a quick and dubious reinterpretation of existing tax laws to try to bolt the door ahead of more corporate escapes.
It didn’t work. So-called corporate inversions, in which a U.S. firm buys a foreign company and adopts its overseas address, have continued apace and foreign takeovers of U.S. firms have been booming. That’s not merely because of the nearly 40% combined tax rate for U.S. federal and state corporate income taxation. It’s also because the U.S., like few countries in the world, taxes overseas earnings that have already been taxed by foreign governments if those earnings are returned to the U.S.
On Thursday the hapless Mr. Lew released still another “notice” that attempts to lock companies in the U.S. Perhaps someday a judge will decide if it’s legal. In the meantime, potential merger partners are already plotting ways around it.
Ms. Warren says the problem with the U.S. corporate tax code is “not that taxes are far too high” but that “the revenue generated from corporate taxes is far too low.” She points out that while the U.S. federal rate on corporate income is 35%, the average effective tax rate that U.S. companies actually pay, after various deductions, exemptions and credits, is 20%.
That’s true, though many companies such as retailers do pay close to the 35% rate. If she would be willing to knock out all that complexity in return for a 20% flat rate on business, that would be a great place to start the reform discussion.
More fundamentally, Ms. Warren appears not to understand that the high U.S. statutory corporate tax rate puts American businesses at a disadvantage when companies based elsewhere pay 20%, or even lower. Companies that pay lower rates have more income to pay higher wages, reinvest or return to shareholders.
Ms. Warren also tries to steal a base by claiming that over the years corporations have been paying a smaller and smaller share of federal taxes. This is true, but as Kyle Pomerleau of the Tax Foundation notes, “the underlying reason is not tax avoidance. The reason is that there are fewer corporations. For the past few decades the number of pass-through businesses have greatly increased in number.” These businesses pay through the individual income tax code. Their taxes are no longer counted as corporate tax revenue.
The Massachusetts Senator also says that most of the developed countries in the OECD collect “higher corporate tax revenues as a share of GDP than we do.” Since they all have lower rates, shouldn’t that tell her something?
Ms. Warren gripes about loopholes for giant corporations but a stratospheric tax rate is what draws corporate lobbyists to Washington seeking ways around it. What progressives love is to be the mediators who decide which companies to reward (e.g., alternative energy providers) and which to punish via the tax and regulatory code.
“Right now U.S. companies can pay a lower rate by investing overseas instead of in the U.S.,” said Ms. Warren on Wednesday. That is exactly the problem. And tax reform to make U.S. rates competitive in a simplified system that doesn’t favor the corporations with the best lobbyists is the solution.
But don’t expect Sen. Warren to propose anything like that. It would require moving too much power out of Washington. As the heartthrob of progressives, she expects her remarks to be ideological marching orders to Senate Democrats and Hillary Clinton. In attacking even the chance of reform, she is endorsing corporate inversions and the movement of American jobs and capital overseas.