October 30,2013

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Sean Neary/Meaghan Smith

Baucus Statement on the Urgent Need for Corporate Tax Reform

As prepared for delivery

The famed author George Bernard Shaw once wrote, “The reasonable man adapts himself to the world; the unreasonable one persists in trying to adapt the world to himself.”

A few weeks ago, lost among the headlines about shutdowns and showdowns was another very important news story.  This story didn’t receive big headlines, it didn’t make the evening news, and it wasn’t trending on Twitter.

Yet the story in the October 8 edition of the New York Times has serious implications for the future of our economy and our ability to adapt to the modern world.

The eye-opening article discussed the merger of the California-based chip maker Applied Materials with the Japanese company Tokyo Electron.

Applied Materials is one of the biggest companies in Silicon Valley – an industry leader with a global presence.  They have more than 13,000 employees across 18 countries.  But their headquarters — where they got their start 46 years ago — is in Santa Clara, California.

In addition to 8,000 workers in the Bay Area, Applied Materials has employees at research, development and manufacturing facilities in Texas, Utah, Massachusetts and in my home state of Montana.

But now, with the merger with Tokyo Electron, this all-American company is shifting its incorporation.  Not to Japan, but to the Netherlands.  That’s right, this new American–Japanese company will be incorporated in Holland.

Why are they moving?  Let me read you part of the New York Times article on the merger.

Reporter David Gelles writes, “Executives at Applied Materials highlighted a number of advantages in announcing a merger recently with a smaller Japanese rival, but an important one was barely mentioned: lower taxes.

“The merged company will save millions of dollars a year by moving — not to one side of the Pacific or the other, but by reincorporating in the Netherlands.”

The article goes on to note that Applied Materials’ effective tax rate will drop from 22 percent to 17 percent as a result of the merger.  For a company that had nearly $2 billion in profit in 2011, that amounts to savings of about $100 million a year.

Mergers resulting in U.S. companies being owned by companies in tax-haven jurisdictions — like Ireland, Bermuda, or the Cayman Islands — are a new spin on the old “inversion” problem.  And it’s becoming an increasingly popular practice.

The Times article highlighted the following additional examples:

Last year, the Eaton Corporation, a power management company from Ohio, acquired Cooper Industries, based in Ireland, for $13 billion, and reincorporated there. The company expects to save $160 million a year as a result of the move.

In July, Omnicom, the large New York advertising group, agreed to merge with Publicis Groupe, its French rival, in a $35 billion deal. The new company will be based in the Netherlands, resulting in savings of about $80 million a year.

Also in July, Perrigo, a pharmaceutical company from Michigan, said it would acquire Elan, an Irish drug company, for $6.7 billion. Perrigo will also reincorporate in Ireland, lowering its effective tax rate from 30 percent to 17 percent, and saving the company an estimated $150 million a year, much of it in taxes.

Earlier in the year, Actavis, based in New Jersey, bought Warner Chilcott, a drug maker with headquarters in Dublin, and said it would reincorporate in Ireland, leading to an estimated $150 million in savings over two years.”

It would be easy for us to attack these companies by calling them immoral and unpatriotic.  But it’s more constructive to step back and ask, “What’s motivating these companies to move their headquarters abroad?  How can we keep them in the United States? How can we adapt to the world and fix the problem?”

This is a simple issue. Globalization has made America’s tax code out of date.

The U.S. is stuck with a 35 percent corporate tax rate – one of the highest in the world – and a maze of incentives that only an army of tax lawyers can navigate.  Some of these tax incentives are extremely costly but are much less valuable to businesses than a rate reduction with the same price tag.

When U.S. companies look abroad, they see other countries with more modern, efficient, competitive tax codes.  Then they reincorporate overseas by acquiring or merging with another business.

They are not necessarily breaking laws.  In fact, many of these companies are following the rules of America’s outdated, overly-complicated tax code. But the United States is losing hundreds of millions in revenue as a result.  Even worse, when headquarters move abroad, good-paying jobs often move too.

We need to reverse that tide.  We need to bring our tax system into the 21st century and make the U.S. more competitive.

That’s what tax reform can do – it can help America overcome the competitiveness crisis that’s driving businesses and jobs overseas.

This competitiveness crisis was made very clear in a Harvard Business School study last year, with the sobering title, “Prosperity at Risk.” This in-depth report examined the risks that threaten to undermine U.S. competitiveness in the global marketplace.  It also looked at what action can be taken to restore America’s economic vitality.

Harvard Business School surveyed 10,000 of its graduates who live and conduct business around the world. They asked about the challenges of doing business in America. These individuals are leaders on the front lines of the global economy.  They are CEOs, CFOs, business owners and presidents.  They are personally involved in decisions about whether to hire, where to locate, and which markets to serve.

And unfortunately, these business leaders are pessimistic about America’s economic future. They think America’s prosperity — our success, our growth, our economic status — is at serious risk.

The vast majority of those surveyed – 71 percent -- expected U.S. competitiveness to deteriorate over the next several years.

The survey found that the U.S. fared poorly when competing to attract business, and pointed to increased competition from emerging markets.  According to the survey, “For the first time in decades, the business environment in the United States is in danger of falling behind the rest of the world.”

And what did they identify as the root of America’s competitiveness problem?  Respondents pointed to America’s tax code.  Specifically, they pointed to the complexity of the code as one of the greatest current or emerging weaknesses in the U.S. business environment.

The Harvard study made clear that our current tax code puts American businesses at a competitive disadvantage on the world market.  That should concern all of us.

So where do we go from here?  I believe we have to reform our tax code to make America more competitive.  We have to give companies like Applied Materials a reason to keep their headquarters here in the U.S.

We’ve been through a difficult and counterproductive period here on Capitol Hill.  The recent shutdown and the threat of default undermined confidence in the U.S. and did $24 billion in unnecessary damage to our economy.  According to a report from the White House Council of Economic Advisors, the shutdown cost 120,000 jobs in October.

I just spent last week home, meeting with my bosses in Montana. They were not happy about the antics here in Washington — rightfully so.

Fortunately, that battle is behind us, and the government is back to work.  It’s time for us to come together to tackle the challenges facing the U.S.

Right now, there are more than 11 million unemployed Americans looking for work.  Our economy is expected to continue growing at a sluggish rate for the next year – less than three percent.

So we have to ask: How can we create jobs? How can we spark faster growth in our economy? How can we boost our competitiveness and keep American companies here at home in America?

Tax reform must be part of the solution.

That was the clear message I heard travelling across the country this summer with my friend Dave Camp, the chairman of the Ways and Means Committee.  Dave and I met with families and businesses – big and small – to hear about their experiences dealing with the tax code.

We visited a family-owned bakery in Minneapolis, a small appliance store in New Jersey, a tech start-up in Silicon Valley, and a farm in Tennessee.  We visited some large companies as well -- companies like 3M, Intel and FedEx that employ thousands of people here and around the world.

At every stop, Dave and I heard the same message. U.S. companies and workers want a simpler, fairer tax code that helps them compete and strengthens our economy.

This issue is not going away.  It is too important.

With so many people out of work, with economic growth still too slow, with a competitiveness gap costing us jobs and revenue, it’s time for us to act.  It’s time for us to reform our tax code.

The chairmen of the House and Senate Budget committees brought their conferees together for the first time this week. They came together to try and find common ground on a budget and a plan to rebuild confidence in our economy.

Patty Murray and Paul Ryan are incredibly smart, hardworking people.  I’m confident they can craft a compromise to help get America back on track.  I look forward to working with Chairman Murray and Chairman Ryan on the tax and entitlement components of their discussions.

At the same time, I will continue to work on a parallel track with the Finance Committee, advancing tax reform.  We’re working hard – in Shaw’s words -- to adapt to the world and build a tax code that works.  And Dave Camp is doing the same in the House.

We are going down separate paths but coming together with a common goal — reducing the deficit, creating jobs and promoting economic growth.  We are coming together to put America back on track.