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High taxes pushing U.S. businesses out

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You know something is wrong when major U.S. companies are fleeing to Europe to pay less in taxes.

That is not supposed to happen. America has long maintained an advantage by dint of its low taxes, light regulation and entrepreneurial culture.

But it is losing those advantages for a variety of reasons, among them a wildly inefficient health care system that eats up 18 cents of every dollar in the economy, and a punitive and convoluted corporate tax system.

The impact of the latter can be seen in drug giant Pfizer’s recent announcement that it would redouble its effort to buy AstraZeneca and reincorporate in the United Kingdom.

The loss of Pfizer as a domestic taxpayer would be a big hit to the U.S. Treasury. And if other companies followed suit, turning what is now a trickle of 50 or so into a torrent, the economic consequences would be great.

For Pfizer, the appeal of fleeing America is easy to see. The U.S. corporate rate of 35 per cent, with an average of 4.1 per cent added by states, is the highest in the world. Even with its many loopholes, it is higher than most others.

Pfizer reports paying an effective rate as high as 27.5 per cent recently and in Britain would pay no more than 20 per cent.

Even more appealing for Pfizer, and other companies contemplating a move, most European countries do not impose a tax on profits made overseas. That allows them to repatriate profits without incurring huge taxes. U.S. companies have chosen to sit on $2 trillion in overseas cash rather than take the tax hit.

At the very least, corporate tax reform of the type proposed by President Obama or by responsible members of both parties in Congress is needed. These eliminate loopholes to bring down the top rate.

Given how aggressively Europe has slashed its rates, a good case can be made for substantial cuts here as well, with the lost revenue made up elsewhere, by simplifying to eliminate loopholes and perhaps by raising the tax on dividends.

This would keep companies at home, and encourage them to bring their money home and put it to good use.

Counterintuitively, it would also help middle-class Americans, particularly those saving for retirement.

The truth is that the corporate tax is not really a tax on corporations. It is a tax on shareholders, one that is highly regressive.

Consider, for example, its impact on a billionaire and a school teacher. Their indirect hit from the corporate tax is exactly the same per share, regardless of how many shares they own or how much they make. This is true even if the teacher’s shares are held in an IRA or 401(k).

In many ways, it’s hard to feel sympathy for Pfizer. Even as it is fighting to escape the nonsensical U.S. tax code, it benefits from America’s nonsensical health care system that forces patients to overpay for drugs.

But the company is best seen as a potential harbinger. If lawmakers can’t fix the corporate tax code — and perhaps a lot of other things that are broken as well — there will be many others that follow it out the door.

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