Third Way Perspectives

Subscribe via RSS

Posts Tagged ‘trade’

The U.S. Corporate Tax Code is Bananas

May 22nd, 2014

by

A much-too-high corporate tax is causing companies to flee for Europe.

If any U.S. company seems ripe for moving to an island tax haven, it’s Chiquita. Based in Charlotte, the company’s sale of bananas, grown largely in Central America, accounts for two-thirds of its profits. But Chiquita isn’t bound for the tropics. It’s headed to Ireland, where the climate may be hostile to banana trees, but the cool 12.5 percent corporate tax rate feels just right.

Later this year, Chiquita will merge with Fyffes, an Irish fruit distributor half its size. Usually the larger company buys the smaller one, but not anymore. Entirely because of taxes, a newly formed Irish company will control the merged companies. Chiquita will remain listed in the U.S., but its headquarters will move to Dublin, unlocking access to the favorable Irish tax code.

Chiquita’s move, called corporate “inversion,” isn’t new. It’s an old strategy that U.S. companies have rediscovered. Everyone in Washington — Democrats and Republicans — should be concerned. Though completely legal, new inversions this decade will costs the Treasury nearly $2 billion a year, and they move high-paying corporate jobs overseas, albeit in limited numbers. Inversion happens because our bloated corporate tax code is bad public policy, severely handicapping U.S. businesses relative to their foreign competitors.

Inversion first became popular in the late 1990s when companies like Ingersoll-Rand and Fruit of the Loom reincorporated in Bermuda and the Cayman Islands. Then Washington started playing whack-a-mole, but not doing it very well. IRS rules targeting inversion didn’t work, so in 2004 Congress passed a law making moves to offshore havens more difficult.

The law now requires an American company looking to move its headquarters overseas to use a merger or acquisition with a foreign company at least one-fifth its size. This mostly took the Caymans out of the picture, because only shell companies locate there. But Europe is a more attractive corporate destination than it was 15 years ago. Countries like Ireland, the Netherlands and the UK noticed that in today’s globalized world, a competitive corporate tax code matters more than ever. So they lowered their corporate tax rates and eased taxation of foreign-earned income.

Meanwhile, the U.S. tax code sat rotting on the shelf. Our 35 percent statutory rate is highest among the world’s developed economies. While few companies pay an average rate that high, numerous tax preferences raise compliance costs and skew incentives.

One example is the “lockout effect.” Because some corporate profits are taxed only when returned to the U.S., many U.S.-based multinationals keep piles of cash on the books of their overseas subsidiaries. If it’s not coming home, that cash may be deployed to purchase a foreign company. When the selling company is big enough, the U.S. buyer can invert and avoid even more taxes.

If inversion were limited to bananas, maybe we wouldn’t care. But oil and gas companies, drug companies and others have exported their U.S. headquarters in recent years. Altogether, since 2012, at least 14 U.S. companies have completed or considered inversion deals. This month’s on-again, off-again takeover talk between Pfizer and AstraZeneca is one example. U.S. companies look to inversion not because CEOs wake up one day and feel the pull of the old country, but because they are seeking to maximize profit in the face of foreign competition. The pace is likely to accelerate, because as much as we may decry it, inversion currently makes financial sense.

In response, President Obama proposed in his 2015 budget that Congress raise the inversion foreign ownership threshold to 50 percent. This month, Senator Ron Wyden, D-Ore., and Sen. Carl Levin, D-Mich., are crafting legislation modeled after Obama’s proposal.

These efforts show Congress is taking inversion seriously. But let’s also realize that our uncompetitive code is the root of the problem. Only when Washington fully reforms the corporate tax code will the pressure for companies to leave the U.S. tax system subside.

First, the 35 percent corporate tax rate must come down, at least to President Obama’s proposal of 28 percent and preferably further. The cut can be financed in part by eliminating some outdated tax breaks, but savings elsewhere may also be necessary. Second, the lockout effect has to end. Some foreign-earned income, particularly passive income, should be taxed currently no matter where it’s earned. And income from real business activity abroad should be lured home with a tax rate competitive with those of other developed countries. Third, the tax code needs to be simplified.

A simpler, more competitive corporate code shouldn’t be confused for a giveaway to corporations or the wealthy. Research suggests that if Chiquita were to spend less preparing and paying corporate taxes, its shareholders and its workers share the benefit. Most importantly, so would the broader U.S. economy, which would attract and retain more business and more jobs. It’s bananas for the U.S. to sit back and do nothing as good American companies decamp for Europe

This piece was originally published in U.S. News & World Report

Don’t Waste This Free Trade Opportunity

December 2nd, 2013

by

Within the next 20 years, the Asia Pacific region will need 12,820 new airplanes, valued at $1.9 trillion. Who will build them?

With half of the world’s air traffic growth revolving around the Asia-Pacific region, there are massive opportunities for American manufacturing and middle-class jobs in this one sector alone. But opportunity is not destiny. In the last decade, America’s share of exports to key Asia-Pacific markets fell by 43 percent. Our performance was last among our major trade competitors in the region.

We do not have to idle on the runway, however, as other foreign countries fly by. If we can regain our historical share of these export markets – which are set to approach $10 trillion by the end of this decade – it would add $600 billion to our economy and 3 million jobs by 2020 alone. The first step to seizing this growth opportunity rests with Congress and passage of a tool called Trade Promotion Authority.

Read the rest of this entry »

Trade: Boosting Exports to China

June 11th, 2013

by

Twenty years ago, American businesses flocked to China with vague but ambitious plans to sell its billion consumers everything from toasters to telephones. But in a market that had no meaningful middle class, they found few takers. In the years since, China has successfully tapped into foreign investment and know-how to build a powerful, export-oriented economy—and a rapidly expanding middle class—largely by selling to America’s middle class. Its success has stoked American concerns about trade deficits and the loss of middle-class jobs to low-cost foreign competition.

But China’s ongoing transformation points to a potentially different future: one in which America expands its exports, achieves fairer trade, creates good jobs, and strengthens the middle class—by increasingly selling to China’s burgeoning middle class.

Read the rest of this entry »

3 Key Trade Trends the U.S. Can’t Ignore

May 8th, 2013

by

When America debated the North American Free Trade Agreement in 1993, Groundhog Day – a film about doing the same things over and over – was a box office hit. Since then, our trade debates have often been like Groundhog Day, with trade supporters and critics repeatedly recycling well-worn talking points. But before everyone dusts off old scripts for upcoming debates about trade deals with Asia and Europe, it’s worthwhile to consider what America might learn from more recent trade developments – especially those currently happening outside the United States.

Three trends in global trade highlight why it’s more vital than ever that America continue to play a strong role in writing robust rules for trade.

1. America’s Not the Only Game in Town. As America works to conclude a Trans-Pacific Partnership trade deal and to ramp up new trade talks with the European Union, it’s important to remember that other major economies are also pursuing a bevy of new trade deals.

There are already hundreds of trade agreements in force among groups of countries that don’t include the United States, with many more under negotiation. The EU, for example, is negotiating agreements with Canada, India and Japan. And China, Japan and South Korea have begun talks on a pact that would boost trade among the world’s second-, fourth- and twelfth-largest economies. These three countries – together with 13 regional neighbors – are also negotiating a massive Regional Comprehensive Economic Partnership that would tie together 16 countries with a combined GDP of over $26 trillion.

For the United States, the implications of growing trend are clear – if we don’t continue to engage in developing new norms for global trade, global competitors like China surely will.

Read the rest of this entry »

Bera and Gerwin: Getting ‘LinkedIn’ to Asia

April 10th, 2013

by

By Rep. Ami Bera and Ed Gerwin 

Need a better job? Want a more fulfilling career?

In today’s digital world, social networks such as LinkedIn are vital for professional success. A strong network of friends and colleagues can break down barriers and open doors, and it is often the surest way to find a job, land business and build a career.

In the global economy, networking is critical for countries too. By linking economies and reducing impediments to commerce, trade agreements can boost economic growth, open up business opportunities and support better jobs for workers.

When America networks on trade, we succeed. More than 45 percent of U.S. goods exports go to the 20 countries with which we have trade agreements, including Canada and Mexico, our biggest export partners. And our trade with these partners tends to be more balanced. In recent years, America has had trade surpluses in manufactured goods and services with our trade agreement partners.

But America still has considerable trade networking to do, especially in forging stronger links with the fast-growing economies in East Asia — a region that will add over a billion new middle-class consumers in the next decade and import an estimated $10 trillion in 2020 alone.

Read the rest of this entry »

The Trans-Pacific Partnership: Don’t Forget Canada and Mexico

March 27th, 2013

by

This piece was originally published on GE’s “Idea’s Lab” website.

Japan’s recent announcement that it’s seeking to join the Trans-Pacific Partnership (TPP) trade negotiations has created quite a stir in trade circles.

Adding Japan and its $4 trillion economy to the TPP talks would substantially boost the economic and political importance of any eventual trade deal and create major new export opportunities for the United States and the 10 other TPP countries. But, as Third Way noted in a recent letter to Congressional trade leaders, TPP negotiators also face a huge challenge in assuring that Japan’s strong tradition of shielding its farm, manufacturing, and services sectors doesn’t derail the goal of creating a truly comprehensive, high-standard agreement that broadly opens up Asia-Pacific trade.

Seemingly lost in all the recent buzz about Japan is another important TPP development–the admission of Canada and Mexico to the TPP talks last fall. This less-heralded development is highly significant, particularly for the United States and our producers and workers.

But why? Isn’t the United States already linked to Canada and Mexico under NAFTA? How would the TPP improve things?

Read the rest of this entry »