Tags: Kleinbard | US | corporate | tax

USC Professor Kleinbard Destroys Myth of High US Corporate Taxes

By Michael Kling   |  

U.S. corporations continuously argue that their high corporate tax rates burden them a competitive disadvantage. That's why a growing number of American corporations are buying foreign companies and reincorporating overseas in a controversial process known as inversion.

But that argument "is largely fact-free," Edward Kleinbard, a professor at the Gould School of Law at the University of Southern California, reveals in a paper published on Social Science Research Network.

Contrary to pervasive arguments, the U.S. corporate tax system gives American corporations a competitive advantage, argues Kleinbard, a former chief of staff to the Congressional Joint Committee on Taxation.

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"Whether one measures effective marginal or overall tax rates, sophisticated U.S. multinational firms are burdened by tax rates that are the envy of their international peers."

Competitiveness has nothing to do with the inversion deals, Kleinbard states.

"The recent surge in interest in inversion transactions," he argues, "is explained primarily by U.S. based multinational firms' increasingly desperate efforts to find a use for their stockpiles of offshore cash (now totaling around $1 trillion), and by a desire to "strip" income from the U.S. domestic tax base through intragroup interest payments to a new parent company located in a lower-taxed foreign jurisdiction."

Although the U.S. corporate tax rate is 35 percent, the highest in the developed world, companies paid an average tax rate of 12.6 in 2010 because of tax breaks.

By taking advantage of those number tax loopholes, or by "aggressive tax planning technologies," big American companies are actually more competitive than foreign corporations, the professor explains.

Walter Galvin, retired vice chairman and CFO of Emerson Electric Co., writes in The Wall Street Journal that the U.S. tax system blocked its acquisition of American Power Conversion (APC) and allowed French company Schneider Electric acquire it.

"A close reading of the public record surrounding the APC deal, however," the professor counters, "leads to the conclusion that this gripping tale represents a corporate false memory, like the adult recollection of a childhood trauma that never took place."

Schneider was widely criticized for paying a 30 percent premium over APC's stock price, but never mentioned taxes when defending its acquisition.

The paper is worth reading even if you disagree with its conclusions, according to The New York Times columnist Andrew Ross Sorkin. It helps explain why corporate tax reform will be difficult even though both political parties claim they support it. It also gives an idea why corporations may oppose some proposals, even if they might lower the tax rate.

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U.S. corporations continuously argue that their high corporate tax rates burden them a competitive disadvantage. That's why a growing number of American corporations are buying foreign companies and reincorporating overseas in a controversial process known as inversion.
Kleinbard, US, corporate, tax
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