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October 5, 2017

Patriotism for Business Is Investing, Not Paying Taxes

 

It’s no wonder that U.S. companies took steps to protect themselves from paying exorbitant taxes during the Obama years. The U.S. has the developed world’s highest corporate tax rate and the Obama administration wanted even more.

Many U.S. companies left overseas profits stranded in foreign subsidiaries, where they had already been taxed but would have been subject to even more taxation in the U.S. Others transferred key income-generating assets, such as patents, to entities in Ireland and elsewhere in order to reduce taxes. Still others went all-in and actually reincorporated in other countries (through so-called corporate inversions) to take advantage of lower taxes in Canada, the UK, France and Switzerland.

While these moves were both financially rational and legal, politicians reacted predictably. President Obama called inversions “a lack of economic patriotism.” Such accusations suggested that the highest good for a U.S. company was to pay as much in taxes as possible.

The idea that the highest good for a businesses is to pay taxes is also the reason for the alternative minimum tax (AMT), which is designed to ensure that companies with particularly high expenses and investments in a given year still pay taxes at a high rate.

But the assumption that the highest good for a business is to pay taxes is wrong and harmful to the economy. The highest good—the most patriotic thing a business can do—is to invest, not to pay taxes.

Investment drives the economy. Investment in new buildings, new equipment and new technologies means businesses expand, hire more workers, and teach workers new skills. Companies that invest are the heroes of our economy, so our tax policy should be designed to encourage maximum business investment, not maximum tax payment. Paying taxes is not patriotic—investing is.

Fortunately, when businesses are investing and growing the economy, tax revenues also grow, as the 1960s and 1980s demonstrate.

The proposed tax reform framework lowers the corporate rate, eliminates the AMT and allows immediate expensing precisely because we want to encourage investment. And if a business were to invest so much that it paid little or no tax in a given year, that’s a good thing. We don’t want to discourage such investment with an alternative minimum tax.

A much lower corporate rate will also encourage companies to invest—and perhaps even relocate—in the U.S.

So when you hear the media claim that “Under the proposed tax reform, Company X would have paid $0 in tax in 2016,” or something like that, remember: Patriotism for US businesses is investment, not taxes.


 

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