July 02--Started out of a garage in Minneapolis in 1949, medical device maker Medtronic has grown to become a giant in the industry. It's a true American success story -- one that will soon have a non-American home office.
Medtronic announced recently that it's planning a $42.9 billion acquisition of Covidien and will make its headquarters in Dublin, Ireland, where Covidien (a Massachusetts company) has been incorporated since 2009.
Why Dublin? Blame the U.S. tax code.
Medtronic, Covidien and other companies do big business overseas but much of that revenue stays there because bringing it back to the United States means paying taxes at a rate much higher than where the money is being earned. America's federal corporate tax rate is 35 percent, one of the highest among all industrialized nations (Ireland's is 12.5 percent). U.S. companies must pay taxes not just on their U.S.-based earnings, but on those from outside our borders when those earnings are returned to America.
"We've created this crazy system where instead of taxing profits when they are earned, we only tax them when they are brought back home," Martin Sullivan, chief economist at Tax Analysts, a nonprofit firm, said on NPR. "Therefore there's a tremendous disincentive to bring the money back home."
By merging with a foreign company, Medtronic legally becomes a foreign company itself while keeping most of its operations in America. As a foreign company, it can bring money back to the United States and pay lower taxes on it.
Medtronic is hardly alone in making such moves, which are called "inversions." Bloomberg News says more than 40 U.S. companies have reincorporated overseas or have plans to do so, including 14 since 2012.
"What kind of country does this to itself?" The Wall Street Journal asked in an editorial.
It's a good question, one Congress ought to get around to answering. Sen. Rob Portman, R-Ohio, offered three suggestions last week in a Journal op-ed.
The first is to lower the U.S. corporate tax rate to 25 percent, which would be on par with the average of countries that make up the Organization for Economic Cooperation and Development. "That would undoubtedly spur job creation," Portman said.
Second, the tax code must be simplified to remove special preferences. Money saved from closing these loopholes could be used to finance the reduction in the tax rate.
Finally, create a tax structure that allows U.S. companies to better compete globally. Portman supports going to a "territorial" tax system that taxes business income only where it's earned. Every G-8 country and 26 of the 34 OECD countries have such systems, Portman said.
"Congress should act immediately to end the flight of U.S. businesses by overhauling the corporate tax code," he wrote. "That would go a long way in making America a magnet for investment again."
You'll get no argument here. The president and others in his camp like to criticize companies for keeping their money overseas, but they'd have less to complain about if the tax system didn't make those choices so attractive in the first place.
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