A Corporate Tax Increase Would Bring Back the Inversions

When Congress passed the Tax Cuts and Jobs Act in 2017, one of the most important pro-growth provisions was the corporate tax rate reduction. The lower corporate rate led to increased investment, higher wages, and stronger economic growth. Notably, the
lower corporate rate also succeeded in stopping tax inversions and the loss of American jobs overseas.

For the many lawmakers new to Washington, tax inversions used to be a major problem that both Republicans and Democrats agreed needed to be fixed. In the two decades before the 2017 tax cuts, nearly one hundred U.S. companies moved to foreign countries to avoid the high U.S. corporate tax rate, which was then the highest in the developed world. The results were devastating to many communities across America when a company’s headquarters and operations were moved overseas. Jobs disappeared, home values fell, local stores closed, and tax revenue dropped.

Since the 1980s, most developed countries have reduced their corporate tax rates from an average of 40%. The rate reductions accelerated after a landmark study by OECD economists determined that the corporate tax rate was the “most harmful” to a country’s economy and ability to compete. The study led to many OECD countries lowering their corporate rates even further.

While our competitors reduced their rates, the U.S. had not reduced its corporate rate for 31 years. The U.S. combined federal-state corporate rate was 38.9%, the highest rate in the developed world and significantly higher than the average worldwide corporate rate of 22.9%. This high U.S. rate was a major reason U.S. companies moved to lower rate jurisdictions.

During the Obama administration, the Treasury Department issued a series of rules and regulations to try to stop the wave of companies moving overseas. While inversions slowed, they did not stop until the corporate rate was reduced in 2017. Once the rate was reduced to a competitive rate of 21%, tax inversions disappeared. Since the rate was reduced, not a single tax inversion has occurred.

Despite this success, there are still some Members of Congress proposing to increase the corporate rate, a move tax experts have warned would likely result in a return of tax inversions. The current U.S. combined rate is 25.8%, which is close to the OECD average but still higher than the rate most of our global competitors pay. Even a small rate increase would make tax inversions a viable option for many U.S. companies. A 25% rate, a combined rate of nearly 30%, would make the U.S. rate higher than all but a few OECD countries, increasing the possibility of inversions returning.

So before any Member of Congress proposes to raise the corporate tax rate, they should consider the consequences. Even a small rate increase would very likely encourage a return of tax inversions and the loss of American jobs overseas.