WHEN A MEDICAL device company that was started in a garage in Minnesota buys a competitor that is run from Massachusetts so they can have an address in Ireland, you know something must be wrong with the U.S. corporate tax system.
Former U.S. Treasury Secretary William Simon once said, “The nation should have a tax system that looks like someone designed it on purpose.” What we have today isn’t even close.
Of course, the medical device company I’m talking about is Medtronic, one of the great success stories of my home state, Minnesota. They recently announced a merger with Covidien PLC, whose executives are in a suburb of Boston, but whose legal address is Ireland. Medtronic is the latest and largest U.S. company to use this technique, known as inversion.
American manufacturing, particularly in the medical device industry, is the global gold standard. Our manufacturers are the most productive in the world, surpassing worker productivity in all other major manufacturing nations. In the innovation economy, companies that were started here should have every opportunity and incentive to build their products right here.
Unfortunately, the United States has one of the world’s highest corporate tax rates at 35 percent, by one study a full 14 percentage points higher than the OECD average, while Ireland’s is 12.5 percent.
By changing their address, Medtronic increases their cash flexibility. The Wall Street Journal reported that Medtronic has promised to distribute to shareholders a significant amount of the $14 billion in cash they are currently holding onto, much of it from foreign operations. As an Irish company, Medtronic could pay dividends without owing U.S. corporate tax.
This transaction points to the need for significant corporate tax reform. We live and work in an interconnected world. Our tax system needs to recognize that 95 percent of global consumers live outside the U.S. and a significant amount of corporate earnings are likely to occur overseas. What exists now encourages companies to keep those funds overseas.While not a silver bullet, allowing American corporations to bring foreign earnings back home without facing the full brunt of the highest corporate income tax rate in the world would be a step in the right direction. Congress should devise a reasonable plan that will incentivize companies to repatriate those funds and deploy them in a way that will boost manufacturing and jobs here at home.
Many argue the 2004 foreign tax holiday did little to grow jobs. With lessons learned from that exercise, policymakers should incorporate ideas that will encourage money brought back to be used in ways that will lead to job growth. There’s little doubt our economy and American workers could use the jump start that would come from a share of the roughly $1.7 trillion now parked offshore.
Tim Pawlenty is a former governor of Minnesota and a former candidate for the Republican nomination for President.