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Bromund: Of bacon and Apple and taxes and beer

A Smithfield ham at a grocery store in

A Smithfield ham at a grocery store in Richardson, Texas. Chinese meat processor Shuanghui International Holdings Ltd. agreed Wednesday, May 29, 2013, to buy Smithfield Foods Inc. for approximately $4.72 billion in a deal that will take the world's biggest pork producer private.o) Photo Credit: AP, 2011

Late last month Shuanghui International, China's largest pork producer, announced a surprise agreement to buy Smithfield, the largest such U.S. firm, for $7.1 billion, including debt.

Expect more deals like this in the future. The reasons tell us a lot about what is right, and what is wrong, with the United States as an economic power.

On its surface, the Shuanghui-Smithfield deal is strange. It's not a minnow swallowing a whale, but it's close. The Chinese firm reportedly had revenues of about $6 billion last year. Smithfield brought in over $13 billion. So the smaller firm bought the bigger one.

The Chinese have been doing a lot of deals recently. As my colleague at the Heritage Foundation, Derek Scissors, points out, Beijing invested more than $12 billion in U.S. companies last year. That brings total Chinese investment here to $52 billion.

We shouldn't panic about this. China's not about to buy us out. Their stake is puny compared to the $140 billion that Britain has invested in U.S. manufacturing alone.

But the Chinese share is growing. The United States has an organization called the Committee on Foreign Investment in the United States that assesses the national security consequences of potential foreign purchases. It needs to do its job effectively and transparently.

In addition, we need to ensure that Chinese entities that operate in the United States obey U.S. laws, not Chinese ones: If they don't, they should be invited to leave. And the more China operates on our shores, the more leverage we have to compel China to open up its markets. We should use that leverage.

But we also need to clean up our own house. And that means switching focus from bacon to beer. Shuanghui's purchase of Smithfield has made your ham Chinese, but your All-American Budweiser has been Belgian since beer giant InBev bought Anheuser-Busch in 2008.

It often makes better sense for foreign companies like Shuanghui to buy American than the other way around, even if the foreign company is the smaller one. The reason has a lot to do with our tax code.

The U.S. corporate tax system is worldwide. That means we tax what U.S. firms earn around the world and bring back to the United States. Most countries don't do it that way. They just tax what their companies earn at home.

So if a U.S. firm buys a foreign one, all of the new company's worldwide profits are taxed at the U.S. corporate rate of 35 percent. But if a foreign firm buys a U.S. firm, it only has to pay the U.S. rate on the profits of its new U.S. subsidiary.

Since the U.S. corporate tax rate is the highest in the developed world, American companies prefer being bought to doing the buying. But that's not all it means. A few weeks ago, gadget-maker Apple was in hot Congressional water for not bringing the money it earns abroad back home to be taxed. Anheuser-Busch, Smithfield and Apple all want to stay away from that worldwide U.S. corporate tax system.

The fact that we have a high corporate tax rate encourages foreign investors not to buy American, if they can find another attractive takeover target elsewhere in the world. But our worldwide corporate tax system also imposes less obvious costs. It leads to more U.S. firms being bought by foreigners, and discourages U.S. firms from venturing abroad.

By itself, foreign investment here is a good thing. But we should put U.S. business on an equal footing. Our system punishes firms that sell abroad or buy foreign subsidiaries. It encourages them to engage in complicated financial engineering, as Apple did, and it's turned the Clydesdales into Belgians.

Our problem isn't the Chinese buying our bacon. It's that we're focusing on the sizzle: We're so obsessed with making companies pay their taxes that we're punishing successful, export-oriented businesses. It's a subtle form of protectionism, but that doesn't make it any less self-destructive.

Ted R. Bromund is a senior research fellow in The Heritage Foundation's Thatcher Center for Freedom.


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