Obama: Be an Economic Patriot, Close Corporate Tax Loopholes

Source: Thinkstock

Source: Thinkstock

In a letter sent to Orrin Hatch, a Republican senator and ranking member of the Finance Committee, U.S. Treasury Secretary Jack Lew accused United States-based companies who eschew their American tax bill by shifting their legal headquarters to a country with a lower tax rate of lacking economic “patriotism.” Patriotism has long been linked by the Obama administration to taxation. Ahead of the 2008 presidential election, then-vice presidential candidate Joe Biden stated in an interview on ABC’s Good Morning America that it was “time for wealthier Americans to be patriotic … time to jump in, time to be part of the deal, time to help get America out of the rut.” And during Barack Obama’s presidency, the White House has made corporations a target of this conception of patriotism as well. Lew has argued that the United States should not “be providing support for corporations that seek to shift their profits overseas to avoid paying their fair share of taxes.”

But what exactly constitutes economic fairness is the perennial question that permeates the entire American political debate — from taxes to spending to government programs to new legislation.

The Obama administration’s philosophically-heavy argument for maintaining the corporate tax status quo has notable failings in the real world. As Andrew Puzder — the chief executive of CKE Restaurants, owner of Carl’s Junior — wrote in an opinion piece for CNBC, “the Secretary’s statements sound so reasonable but ignore so much.” And indeed, at the most basic level, multinational corporations save themselves many billions of dollars by jumping through bureaucratic hoops to avoid paying the United States’ 35 percent tax rate, a practice that boosts competitiveness at a global level, a strategy many argue is just good business. “The current U.S. rates are widely perceived in the corporate world as uncompetitive and therefore comparatively anti-business,” explained Nigel Green, chief executive of  the financial consultancy firm deVere Group, in a recent analysis. “This is evidenced by the fact that a growing number of American firms are considering such a move out of the U.S.” For example, incorporating in Ireland allows Apple to legally avoid paying any corporate income tax on its $30 billion of overseas profits because that Irish subsidiary, or shell company, owes no American taxes as it was incorporated outside the U.S. and no Irish taxes as it is managed and controlled from the U.S.

Ignoring that reality, means any attempt at reform will be complicated. Obama is currently pushing a proposal to eliminate this tax loophole, but so-called tax inversions have exploded in the past few years, strengthening business opposition to how the president would like to reform corporate taxes.

As Puzder wrote, the problem is “saying, as Secretary Lew does, that companies need to be more patriotic so that ‘we all rise or fall together’ ignores economic reality.” Closing corporate tax loopholes will “put American companies at a competitive disadvantage just ensures that we all fall together.” Puzder also believes that the Obama administration has overstated the degree to which multinational corporations “are benefiting from this country while not paying taxes.” To back up that claim, he pointed to the fact that U.S. companies like his pay “U.S. income tax on their U.S.-generated earnings.” He then argued that U.S. companies will be taxed three times when overseas profits are repatriated back to, and invested in, the United States (and he includes state taxes in that figure). Meanwhile, foreign domiciled companies are taxed once, and at a lower rate.

When a company carries out a merger, with the intention of obtaining a legal address abroad to escape taxes, the financial exercise is known as an “inversion.” Since 1982, approximately forty-one U.S. companies reincorporated in low-tax countries, of which twelve have come since 2012. This year alone, eight companies plan to merge with foreign partners. The July acquisition of Shire for $54.8 billion allowed Illinois-based pharmaceutical manufacturer AbbeVie to move its legal residence, but not operations, to the United Kingdom; Medtronic — the world’s fourth largest medical device company — has announced it will purchase its Dublin-based rival Covidien and move company headquarters to Ireland; Chiquita’s decision to merge with Irish tropical-fruit company Fyffes will give it a foreign address as well. As this pattern indicates, inversions have only grown more common as a large number of foreign nations have decreased their corporate tax rates, while the U.S. tax rate has remained unchanged at 35 percent, leaving it the highest in among the 34, mostly-wealthy, members of OECD, or the Organisation for Economic Co-operation and Development. And the rate of inversion transactions has quickened despite the passage American Jobs Creation Act of 2004, which contained an anti-inversion provision that lawmakers promised would end the practice, and despite the Internal Revenue Services’ decade-long effort to eliminate it.

Tax inversion costs the U.S. government as much as $20 billion over a ten-year period, according to research by the nonpartisan Joint Commission on Taxation. And while the the practice can be described as “good business,” the tax bills of major corporations like Boeing seem grossly unfair to the average American. Gallup survey data from April of this year shows that two-thirds of Americans believe corporations pay too little in taxes. According to the Government Accountability Office, using a combination of credits, exemptions, and offshore tax havens, U.S. corporations pay an average of less than 13 percent, with more than half of those companies owing no federal taxes in at least one year between 1998 and 2005. Plus, the advocacy group Citizens for Tax Justice found that 26 Fortune 500 corporations paid no federal corporate income tax over the most recent five-year period; in fact, many, even earned rebates. And while companies are paying less in taxes, Americans are paying more. It is that sense of inequality that President Obama is tapping into with his campaign for greater “economic patriotism.”

With this backdrop, the Obama administration has proposed legislation to close loopholes in the U.S. tax code that make inversions possible. The president said in a Thursday interview with CNBC that “now is the time” to reform the complex system. Tax reform is an issue Obama has brought up in a number of recent interviews and public appearances. At a Thursday speech held at Los Angeles Trade-Technical College, part of a tour of the West Coast aimed at raising money for Democrats ahead of the midterm elections, Obama clothed the issue in populist modifiers, calling those corporations who chose to pursue tax inversions “corporate tax dodgers.” In the end, his message was simple. “You shouldn’t get to call yourself an American company only when you want a handout from the American taxpayer,” Obama said. “My attitude is, ‘I don’t care if it’s legal — it’s wrong,’” he added.

As part of Obama’s campaign to make the practice illegal, the president has endorsed a piece of legislation supported by Democrats in the House of Representatives and the Senate. Authored by Representative Sander Levin, a Democrat from Michigan, that bill would redefine a foreign company under tax law as an entity with at least 50 percent foreign ownership instead of the current 20 percent requirement. That rule change would be retroactive to May 2014, meaning Medtronics’s $43-billion deal and AbbVie’s $54-billion acquisition would be impacted. And lawmakers across the political spectrum generally agree that the more U.S. companies incorporate abroad in countries like Ireland and the Netherlands, the more the U.S. tax base is at risk.

But where Republican and Democrat lawmakers disagree is whether the issue of tax inversions should be pursued separately from a broader reform of the U.S. tax code, which — given the polarization of the legislative branch — would be a much more complex and politically divisive task. Already, Senator Hatch has indicated he would not support backdating the rule. And there is also the criticism that anti-inversion legislation is only a small bandage on the larger problem of too-high corporate taxes. The other, and equally formidably problem, are American companies themselves. Corporations have long lobbied Congress to lower the corporate tax rate, which would mean the tax credits, subsidies, The White House, Congress, and corporate America agree the tax code needs to be overhauled. Caterpillar Chief Executive Doug Oberhelman spoke out in favor of a lower corporate tax in an interview with CNBC. “There is no question that a comprehensive, full-blown tax reform in this country is absolutely needed and will absolutely will stimulate growth,” he stated. Yet every tax loophole has an industry or company who benefits it and protects it, meaning a comprehensive reform seems already unreachable.

And the bill proposed by Levin would cost U.S. companies that move overseas $143 million in additional taxes over the next decade, according to the Joint Committee on Taxation, which analyzes tax bills for Congress.

The political roadblocks to tax reform are huge. President Obama has linked the overhaul to an idea of economic patriotism, a rhetorical move that does more to increase the divide between his party than get tax reform underway. And while there is no doubt a reform of the American tax code will make the system more equatable, analysts argue that merely closing the tax inversion loophole will do little to advance the president’s cause. Plus, there is the argument that stopping at anti-inversion legislation will only hurt the American people more. “To the opponents of reducing corporation tax who cite that higher corporation tax is preferable to higher personal taxation, I say this: corporations don’t pay corporation tax, people do,” wrote deVere’s Nigel Green. “The burden of comparatively high corporation tax is carried by investors through lower returns, workers through reduced wages, and/or consumers through higher prices.”

And those who see the term “economic patriotism” as political hype, point to the fact that corporate taxes declined as source of government revenue long before inversion became so popular. In 1950, corporate taxes were 26.5 percent of the government’s total income, while they now account for between 10 percent and 12 percent. But that fact alone is not reason enough to claim anti-inversion legislation is not needed, nor is the concern that the global competitiveness of U.S. corporations an invalid concern, even if you don’t believe that lower corporate taxes boost the economic activity that creates jobs and boosts wages.

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