Last week, President Obama announced his intention to bring back the cash that many leading American companies are hoarding offshore by acquiring foreign companies and then relocating their headquarters abroad. This practice, known as an inversion merger, allows companies like GE and Starbucks to dodge the 35 percent corporate tax rate and pay lower taxes, if any, to the United States government. Senate Democrats including Durbin, Reed and Warren have proposed legislation — the Stop Corporate Inversions Act — that would end inversion and presumably close corporate tax loopholes. They are also urging President Obama to reform the tax policy through his executive powers.
At the same time, America’s infrastructure is crumbling, routinely receiving a D grade from the American Society of Engineers, and our government can’t find a way to pay for the necessary fixes. The highway trust fund, which pays for new infrastructure and repairs to roads, bridges and railways, has essentially run out of a dedicated source of funds. Efforts to raise more revenue by increasing the federal gas tax, stuck at about 18 cents since the ’90s, have failed. Novel ideas to access more capital to invest in infrastructure via public-private partnerships, such as the Chicago Infrastructure Trust, have so far produced scant deliverables and barely attracted corporate cash.
Looking at these two issues side by side, one wonders if there couldn’t be a match between the United States’ need for funding for infrastructure and these companies’ profits held abroad. Beyond the loss of tax revenues that inversions create, there is something unseemly about companies like Apple and Ford, both of whom have traded on their American roots to boost their brand, using foreign accounts to mask their American profits. Companies such as Walgreens have forgone their inversion mergers upon facing the outcry of the public. One senses these companies would keep their profits in the U.S. if there were a less costly alternative.
The problem with the American corporate tax rate isn’t just that it’s high (the highest in the developed world). It’s that paying the taxes provides little return for these companies. They figure, why pay American taxes when that money doesn’t result in a measurably better environment for doing business? But what if the money a company was paying into the government was funneled specifically toward infrastructure improvements that would serve both the company’s needs and those of regular citizens? One could imagine Apple and Facebook would be very interested in helping speed up the creation of a high-speed rail system that connects San Francisco to Los Angeles. That Coca-Cola and Starbucks would see the value in improving the country’s water infrastructure. Or that Ford and GM would see the benefit in better roads and bridges.
The United States has developed programs before to direct private capital toward civic purposes. For example, the EB-5 program awards green cards to foreign citizens who are willing to invest a minimum of $500,000 in job-creating development. What about applying a similar principle toward companies and infrastructure?
Currently the stockpile of cash held abroad to avoid American taxes is estimated to be $1.95 trillion. What if instead those profits were brought back to the U.S. with a percentage invested in infrastructure? At just two percent, this deal could pay for all of the country’s currently deferred maintenance.
As it stands, countries around the world are lowering corporate taxes so that corporations get a much greater benefit than countries do. Proposals to create a global minimum corporate tax seem unlikely to get traction as corporations’ pressure on governments creates a tax-rate race to the bottom. And the legislation to outlaw inversion mergers will be hard to pass, and hard to enforce if enacted by Congress or executive power; without some kind of carrot for corporations they will surely just find another loophole.
The best option may then be to provide an alternative to general corporate taxation that will direct billions in corporate profits to tangible projects that will ultimately improve these companies’ bottom line (better infrastructure has been show to pay off in producing a greater GDP) and provide the U.S. with the capital it sorely needs for infrastructure.