Delivering lectures on taxes others should pay isn’t nearly as effective as revising the tax code.
Illinois’ Democratic U.S. Sen. Richard Durbin is running for re-election, and that explains, at least in part, why he recently chastised Chicago-area company AbbVie for its plan to move its corporate headquarters overseas, and Deerfield-based pharmaceutical chain Walgreen Co. for its consideration of following AbbVie’s example.
In a ringing populist tone, Durbin calls it a “decision to desert America.”
Instead of following’s Durbin’s do-as-I-say-not-what-the-law-permits approach, the better answer would be to change the incentives that encourage businesses to take the actions he vigorously condemns.
In other words, encourage them to stay home.
Aside from the obvious politics at play, the contentious issue involves a practice known as “inversion,” defined as reincorporating a company overseas in order to reduce its tax burden on income earned abroad.
It is a tactic embraced by companies that earn much of their income outside the United States. Because that income is taxed abroad as well as in the country of incorporation, businesses often choose reincorporation in a country that has a lower tax rate than the United States.
It has been legal for roughly 30 years, but inversion has become increasingly popular in recent years as companies have discovered the potential savings.
One need not have the wisdom of Adam Smith to understand a fundamental rule of economics: Individuals and organizations can be counted on to act in their best interests.
That’s why almost everyone, including Durbin, takes the maximum personal exemptions and deductions for mortgage interest when filing annual state and federal income taxes.
Corporations are no different. They seek to minimize their expenses and maximize their revenue so as to make the largest profit the tax code allows.
Durbin seems to recognize that reality, calling the tax code a “legal jumble of credits, deductions, specialized breaks and arcane policy” and saying he wants to fix it.
So fix it.
No one, of course, is happy to see American companies redirect their home bases abroad for tax reasons, and it is scandalous that the tax code encourages that behavior.
But as big businesses become increasingly focused and dependent on foreign markets, they will continue to do so.
In a worldwide market, the U.S. must be competitive with foreign countries or suffer the adverse consequences.