WASHINGTON, August 29, 2014 — With American icon Burger King adding its name to a growing list of companies that are using so-called “business inversions” to avoid paying often higher U.S. taxes, there are a number of solutions on the table to address this growing threat to the American economy and tax base. On the left, there is an effort to restructure when American companies can take advantage of inversions. On the right, lowering and simplifying the corporate tax seems to be the preference, while switching to a territorial tax system where corporations pay taxes based on where they earned revenue is also a large be part of their ideal solution.
The latter options are simpler and appear most advantageous than others, as they could help make the U.S. far more competitive. That said, the U.S. is a far larger economy than countries, such Japan and Britain, that have been successful in their efforts to switch to territorial tax systems. This means a competitive advantage could very well disappear for all countries with territorial tax systems and never materialize for the US. More importantly, it would be far easier for businesses to shift revenue and assets around the globe, thus affording companies even more opportunities to avoid taxes while making it more advantageous to shift production to countries where costs are lower.
Business inversions are a symptom of a much larger problem: the eroding of America’s economic sovereignty.
Before American workers paid federal income taxes, the U.S. government was largely funded by tariffs and other fees imposed on those looking to access the American economy. As the world grew more complicated and expensive, the Federal government passed the Sixteenth Amendment in order to collect a “fair share” of revenue from American citizens. At the same time, emerging liberal economic theories on what modern scholars now call “free trade” were embraced by Democrats then later Republicans. From there, the American government started making often uneven deals against the United States, with other nations that largely eliminated tariffs. In doing so, America increased the tax burden of American businesses and citizens while undermining its ability to discourage harmful practices of foreign competitors and American importers.
Although it does seem quite silly to punish individuals and corporations for helping build the U.S. economy by taxing those within the US more than those who simply want to access the US economy, a quasi- free market has many advantages that the U.S. can and should exploit. In the wake of the Great Recession, however, even free market cultists should now recognize such philosophies also have catastrophic disadvantages. More importantly, the global economy, which has been built on free trade, has short-circuited many of the control mechanisms needed to deal with the shortcomings of a supposed free market economy.
For example, the argument most often used against any form of regulation is that regulation will drive businesses out of the country.
In other words, instead of addressing issues like pollution, safety, worker rights, the national debt, e.g. a higher effective corporate tax rate, when legislation is passed, companies are incentivized to leave America and import their goods. The effects of this is an incentive for governments to avoid necessary and proper regulation. It also weakens the ability of workers to negotiate the value of their goods, i.e. their labor, in order to maintain Middle Class lifestyles and spending while encouraging the propagation of unhealthy business practices, and the displacement of pollutants/hazards onto foreign workers willing and/or forced to absorb these costs in order to have some form of economic success. American economic sovereignty, as well as the economic sovereignty of all other nations, is threatened by unfettered free trade.
During the Clinton era, globalization was embraced by seeking a global economy built by incentivizing regional and national economies to service global demand with each country offering a selection of specialized goods. Because this model creates a fragile global market built on global pricing of overly relied upon goods and price suppression, which is often experienced in the form of lower wages and suppressed tax revenues, it can only sustain poverty with marginal improvements in living standards until the system collapses. National economies must be built on industries that serve the local needs of a people with locally plentiful resources that are as local as possible with excess production being used to participate in the global economy.
There are many industries that are vital to the economic health and national security of the U.S. However, one-size-fits-all free trade agreements which make quality American goods that once supported middle class jobs far more expensive than foreign knockoffs, instead of reducing the cost of foreign goods made more efficiently outside of the U.S. and opening new markets for high quality American products, undercut these industries. The solution has not been to refine America’s free trade agreements, but rather, to spend money, or cut taxes, by subsidizing various industries. This includes oil, agriculture, etc. to spend money, as well as time, constantly retraining workers for jobs that may not exist or pay sustainable wages, and to spend more money buying imports with the hope that foreign countries like China will eventually play fair and support free trade agreements by buying American goods, instead stealing American technology.
Meanwhile, America uses sanctions to attempt to address crises around the world, i.e. the Ukrainian crisis, North Korea, and Iran. The often limited success of these policies against governments generally do not outweigh the damage done to the peoples underneath misbehaving regimes. Thanks to the increasingly fractured nature of the international community, sanctions hurt those imposing sanctions as much as those receiving sanctions. Countries like China have capitalized on the use of Western sanctions to their benefit by supporting rogue states and rogue behavior.
The U.S. economy is the largest consumer in the world, so whether the US tariffs or not, other nations are going to want to do business with America. Much damage has been done over the last few decades and this prevents the US from simply raising tariffs as America once could have done. World leaders are trying to address issues like global climate change and human rights by creating a one-size-fits-all approach involving supposedly binding and nonbinding international agreements that rely on member states to play fair, even though they can profit by cheating.
The status quo cannot solve global issues. The U.S. and all other nations need to reestablish their economic sovereignty by fine-tuning trade policies to better serve their national interests.
Moreover, the issue of business inversions cannot be solved without addressing the broader issues of free trade policies and reclaiming American economic sovereignty.