“Because of our broken corporate tax system, I can honestly say that I will likely be the last American owner of the Boston Beer Company.”
That was Senate testimony from Jim Koch, the CEO and owner of the Boston Beer Group (you know them better as the brewers of Sam Adams) from 2015. It tells you everything you need to know about the absurdity of the corporate tax system.
There are plenty of opinions on the merit of the Tax Cuts and Jobs Act – we are very concerned with it being financed on the backs of the next generations. But this much can be certain – our corporate tax system was catastrophically broken and desperately needed an upgrade. There is a reason why one of the few domestic policies that overlap between President Obama and President Trump is the need for corporate tax reform. Relying on patriotism to overcome an illogical, counter-productive, and truly anti-competitive tax system was never sustainable. It put U.S. companies at a disadvantage globally, made them vulnerable to take-overs by foreign competitors, and incentivized trillions in profits to stay overseas.
What made the corporate tax system so terrible? It combined the worst of several worlds: the highest corporate tax rate, a worldwide tax system (meaning all profits earned worldwide are taxed at that high 35 percent), and not being able to tax profits earned overseas until that money is repatriated (which means that trillions in overseas profits remained overseas, because duh, look at the last two things). Prior to this week, the United States was the only developed country with a worldwide system and a corporate income tax rate above 30%.
It was truly a triumvirate of terribleness which resulted in very little foreign-earned income being taxed by the U.S. government, incentivizing companies to locate operations in foreign countries with lower tax rates, and leaving them vulnerable to foreign competitors. As a result of foreign countries revamping their tax systems, a string of domestic companies have used the process of inversion mergers to avoid billions of dollars in U.S. taxes. Inversion mergers involve companies moving to countries with lower corporate tax rates (which is every other country in the developed world) and utilizing their territorial system (which means the income is taxed where the income is made).
For example, the Boston Beer Group. Mr. Koch outlined in his Senate testimony how the beer industry has predominantly shifted to companies with foreign parents that enjoy much more favorable tax rates than American companies. Remember AnheuserBusch is no longer an American owned business. People approach Mr. Koch every day with opportunities to merge with foreign competitors and incorporate overseas to unlock this tax advantage. The only reason he did not accept these requests is his strong sense that Boston Beer Company (Samuel Adams) should be an American company and he is able to stand by this decision because he controls enough of the voting shares.
During his testimony, Mr. Koch revealed the data on why his business was a target for acquisition by foreign businesses. The business’ tax rate could have been reduced from 38% of income to 25% in a foreign jurisdiction. He testified that “a dollar of pre-tax earnings is worth about sixty-two cents under American ownership but about seventy-two cents under foreign ownership. To put it another way, Boston Beer Company is worth 16% more to a foreign owner simply because of the current US corporate tax structure.”
It’s not just beer companies that were spilling overseas. According to one report, the United States was regularly losing business assets through relatively small-scale, daily transactions. The report determined that with a 25% tax rate, the US would have $769 billion in more assets that are now in foreign countries and would have kept 1300 companies in the U.S. over a 10 year period.
The Tax Cuts and Jobs Act lowers the rate from 35 percent to 21 percent, moves the United States towards a territorial system that acknowledges and works within the competitive forces of a globalized economy, and puts rules in place to try to prevent corporations from avoiding taxes (the effectiveness of those are yet to be determined). The bill also puts a one time repatriation tax on the trillions of profits that have built up overseas – a toll of sorts.
Is this bill a win for American corporations? Absolutely. But before the stereotypes of Republicans and big businesses are played out, it’s important to remember the Obama administration was trying to deliver this as well. Because going from a tax system that looks like it was designed after one too many Sam Adams versus one that is designed with a purpose, is a win for businesses and taxpayers alike.