There is no question that Monsanto has a controversial reputation.  It is the country’s leading producer of genetically modified seeds, and consequently the largest target for anti-GMO activists.  Now, critics are balking at Monsanto for entirely unrelated reasons: the Missouri-based firm recently announced its plan to buyout a Swiss chemical manufacturer and make the joint move to the United Kingdom.

By acquiring a foreign company and reincorporating overseas, Monsanto has the potential to save over $500 million per year in tax dollars.   This strategy, often referred to as corporate or tax inversion, is more common than you might think.  Since 1983 a total of 76 corporations have sought lower tax rates by moving their headquarters out of the country.  These inversion strategies have also been on the rise: according to the Congressional Research Service, more tax inversions have occurred in the last decade than in the previous 20 years combined.  You may remember last year when Burger King made headlines  after acquiring Canadian-based fast-casual restaurant Tim Hortons.  With that move alone, the burger giant poised itself to save over $300 million in taxes over the next few years.  And before Burger King came a string of pharmaceutical companies who chose to flee from the American tax base in favor of cheaper rates.  This recent trend of corporate tax inversions signals an obvious problem, but significant disagreement exists about how to solve it.

Many on the Left consider Monsanto’s inversion strategy an unfair and un-American tax-dodge.  Democratic Senator Dick Durban responded to the announcement by introducing new legislation aimed at making it more difficult for American companies to acquire foreign firms.  His new initiative, the Stop Corporate Inversions Act of 2015, would prevent Monsanto’s move by mandating that a company pursuing corporate inversion can only take advantage of tax benefits if its U.S. stockholders own at least 50 percent of the new joint firm.   And Durbin is not alone; last year President Obama also used increased government regulation as a means to attack corporate inversions.  However, extending government control and further complicating the tax code has hardly been successful in the past:  a similar act passed in 2004 has done little to prevent the recent spike in corporate inversions.  Although initially successful, inversion activity soon resumed after American businesses employed innovation and creativity to take advantage of exceptions within the law.

So, if government regulation is not the answer, then what is?  A better solution may be found by examining the principal motivation behind these corporate inversions: our corporate tax rate.

The United States has the single highest corporate income tax of the developed world (as shown above).  Compared to the hottest destinations for tax inversion, our rates are astronomical.  Data from the Organization for Economic Cooperation and Development (OECD) show that the current corporate tax rate in the U.S. is 180 percent higher than in Ireland, one of the most popular tax havens for American business.  Furthermore, America’s corporate tax rate of 35 percent is far above the average for all nations in the OECD (23.2 percent).

Unfortunately, there is yet another problem with America’s corporate tax code: it is incredibly outdated. While U.S. companies continue to flee, many of our peer countries are taking steps to attract foreign business.  The graph below shows the trend in corporate tax rates over the past 15 years.  It is apparent that the U.S. has been artificially inflating its corporate tax rate high above that of the other developed nations in the world.  And with all of this knowledge in hand, it is no surprise that American businesses are leading the charge behind corporate inversions.

The only way to keep American businesses at home and to attract foreign firms to our nation is to lower the corporate tax rate.  We need meaningful tax reform to foster economic prosperity and improve America’s competitiveness in the international arena.  Some, like American Action Forum President Douglas Holtz-Eakin, suggest an even more drastic approach: that the U.S. abolish the corporate income tax altogether.   Researchers predict that this would boost our economy by increasing domestic investment, real wages, and GDP.  Either way, our corporate tax rate cannot remain so artificially high.  The current tax code does more than just hurt American business; it robs average Americans of an economy made stronger by foreign investment.

Day 093/365 – Tax Time Phat Cash! by Great beyond is licensed under CC BY-NC-SA 2.0