Economy

New Clinton Plan Aims To Stop Corporate Tax Inversions, Might Not Go Far Enough

CREDIT: AP Photo/Jose Luis Magana

Democratic presidential candidate Hillary Clinton speaking at the Saban Forum

Democratic presidential candidate Hillary Clinton will lay out a new plan aimed at tamping down on the rising number of American corporations moving their headquarters overseas to lower their tax burdens.

The number of “tax inversion” deals, in which a large American company merges with one in a lower tax country and moves its headquarters to that country, thus only having to comply with its tax rate, has recently been on the rise. More than half of 76 such deals completed over the last three decades have happened in the six years since the beginning of the recession. Many of these companies still keep operations and executives in the U.S., making it a mostly financial shift.

Clinton would levy a new “exit tax” on companies entering into these deals. U.S. companies would be required to pay American taxes on foreign profits that have already been deferred for U.S. taxation. The tax is likely to be coupled with proposals the Obama administration has already put forward. She’ll unveil the plan at a speech in Iowa on Wednesday.

The tax is a new idea that could add even more disincentive to companies contemplating an inversion, said Josh Bivens, research and policy director at the Economic Policy Institute. “The Obama administration proposals are good on tamping down on inversions. I think the exit tax is an extra little benefit that will reduce the incentive even further,” he said. “I tend to be pretty skeptical of tax-based solutions to lots of problems, but these are actually useful tax-based solutions.”

The tax would be part of a larger effort from Clinton to address the fact that companies have stashed about $2 trillion in profits overseas to avoid paying U.S. taxes. The revenue from the new inversion tax would be used to increase manufacturing jobs in this country.

If Clinton is serious about wanting to address that pot of money left overseas, however, Bivens argues that she should go much further. “The tax is good, and it opens up the question of why we let firms defer taxation on profits when they’re earned abroad,” he said. “Inversions are kind of the tip of the iceberg.” Instead, he thinks deferral should be eliminated, levying taxes immediately on foreign profits when they’re earned. “Even U.S.-owned corporations [that haven’t inverted] still continue to not pay taxes on enormous amounts earned at subsidiaries abroad.”

Tax inversions have caught the eye of policymakers from Congress to the White House, but so far policy hasn’t been able to completely reverse the tide. The most recent deal, and also the largest ever to take place, came from drug maker Pfizer, which has said it will merge with Dublin-based Allergan and relocate its executive offices to Ireland to pay that country’s lower corporate tax rate.

But while Pfizer says it has paid about a 24 percent tax rate over the past four years — still below the on-paper American corporate tax rate of 35 percent — it has only actually paid out 6.4 percent of income in taxes thanks to complex accounting measures. In fact, while some contend that the way to stop tax inversions is to lower the U.S. corporate tax rate, very few of these companies were already paying the full 35 percent rate. Some of the largest companies contemplating inversions last year, including Burger King and medical device maker Medtronic, paid an average federal tax rate of 20.3 percent between 2011 and 2013, and overall the largest companies pay a rate of just under 20 percent on average.

Still, these deals cost a fair amount of tax revenue. The country has already missed out on between $30 billion and $90 billion thanks to inversions.

Clinton isn’t the first to put forward ideas for reducing the number of tax inversion deals. Last year, the White House announced that the Treasury Department and Internal Revenue Service would take steps to reduce some of the attractive benefits of completing inversions and make it harder to pull them off in the first place. Democrats in the House and Senate also introduced bills last year to restrict the conditions under which companies can do inversions and limit future tax benefits for them.

Some have pointed to big deals like Pfizer’s latest as a sign that the Obama administration’s efforts haven’t done enough. But Bivens says that blame is misplaced. “I think we do need legislation if we want to get serious about stopping inversions,” he said. “The real culprit for not getting aggressive on inversions is Congress and Republicans in Congress, not the administration.”