Oops, he did it again.
In his latest budget proposals, President Obama once again took on large corporations by including proposals to tax their foreign earnings. Obama’s proposal is the latest in a series of moves that began with introducing regulations to curtail risky operations at big banks to last year’s tax notice to deter the so-called “inversion” deals.
Ever since the start of his first presidency in 2008, President Obama has had a contentious relationship with “Big Business,” a commonly used term for large corporations that wield influence in Washington’s economic policies. His first term as President was marked by the passage of the Dodd Frank law and the Affordable Healthcare Act — two laws that saddled businesses with additional regulations and taxes.
Subsequently, there have been several other instances, big and small, which the President has used to rile big businesses and wealthy individuals. In turn, big businesses have pushed back by framing the conversation as one about the role of big government in society. The emergence of the Tea Party, which veers toward the extreme right of Republican values, further set up an interesting dynamic in the government’s relationship with big business.
But, it would be incorrect to characterize Obama’s relationship with big business as completely antagonistic. In fact, the interests of big business and President Obama converge on issues like immigration reform. For example, the U.S. Chamber of Commerce and Business Roundtable, both representatives of big business in Washington D.C., support reforms because they enable cheap, expendable labor for business growth. Similarly, both organizations urged Democrats and Republicans to work together to avoid a Congress shutdown (which would hurt their bottom line). President Obama’s relationship status with Big Business would be described on Facebook as “It’s Complicated.”
Still, here are three ways in which President Obama has managed to make his complicated friend unhappy.
1. The Dodd-Frank law
Immediately after he became president, President Obama’s first order of business was to ensure that the financial crisis of 2008 would not recur. To do this, he made Congress pass the Dodd-Frank law. The Dodd-Frank law attempts to reset the operational excesses of big banks, whose reckless loans led to the current economic recession by setting operating and regulatory limits to risk.
For example, the law brings back the Glass Steagall Act making it mandatory for banks to separate their proprietary trading and investment desks. It restricts margins and replaces suitability obligations with fiduciary duty for individual brokering firms to prevent a cascading effect of moves by big banks. While the law was drafted quickly enough, its implementation has been an exercise in patience for the Obama administration. Still, it is having the desired effect as evidenced by JP Morgan CEO Jamie Dimon’s recent grumbling about being “under assault” by regulators during the bank’s latest earnings call.
2. Tax inversion deals
At 35% of revenues, the United States has one of the highest corporate taxes in the world. The situation seems even more oxymoronic when you consider that the U.S. is a capitalist society. This is because high taxes deter economic growth and entrepreneurship by making the rewards not worth the risk. In addition, they discourage organizations from reinvesting their profits back into the country.
In response to the high tax rate, a number of multinational corporations, which are increasingly earning a large portion of their revenues from outside the United States, have shifted their headquarters outside the U.S. by acquiring companies abroad. The takeover deals, which are generally financed through a corporation’s overseas earnings, are made in tax-friendly regimes, such as Ireland (which has a tax rate of 12.5%). Such deals result in a large savings for corporations. Tech giant Google used the so-called Double Irish arrangement to reduce its tax burden by $3.1 billion. The Mountain View-based company also ended up paying only 2.4% tax on its overseas revenues.
Tax inversion deals have been around for quite some time. However, recent media spotlight coupled with the Obama administration’s zeal in mopping up tax revenues have exacerbated tensions between corporations and government.
Last year, the administration issued a tax notice that made it mandatory for tax inversion deals to be financed with local borrowing. Last year’s largest inversion deal — Illinois-based AbbVie with Shire Plc — was scuttled as a result of the tax notice. Obama’s latest move is another effort to increase the government’s share of large corporations’ overseas earnings.
3. Affordable Healthcare Act
The passage of the Affordable Healthcare Act was a watershed event in the history of U.S. politics. It was the flashpoint of a raucous debate about health care that later catalyzed into policy and culminated into a media event the day before the Supreme Court passed its ruling in favor of the Act.
Although its effect on small businesses is still being determined, the Affordable Healthcare Act has mostly been a headache of compliance and additional expenditure for big businesses. This is because the Act imposes a raft of regulations and taxes on them. For example, businesses with 50 or more employees are fined $2,000 per employee if they do not offer healthcare tax. In addition, if they offer insurance, large organizations have to meet with the law’s “affordability” test.
Several large organizations, such as the United Parcel Service and the University of Virginia have trimmed healthcare plans for employees following the law. Insurance companies and medical device companies are also scrambling to reduce costs and change workflow to comply with the law’s regulatory requirements. However, Obamacare remains a contentious issue even today. And its effect on big business might very well not be known until a future date.