Nothing attests to the desperation the Obama administration faces in finding an economic meme to their liking than their claim that the recent uptick in corporate inversions represents a crisis.
Exhibit One in this manufactured crisis is Treasury Secretary Jacob Lew’s letter to the chair and ranking members of the tax-writing committees, asking them to immediately address the scourge of corporate inversions, while labeling companies that do such as thing as unpatriotic. The old saw about patriotism being the last refuge of scoundrels is the obvious retort to such a cynical ploy, of course, but a better one would be the Judge Learned Hand’s prescient observation that “any one may so arrange his affairs that his taxes shall be as low as possible is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.”
Lew’s letter was, in essence, a response to AbbVie’s $54 billion acquisition of Shire and concomitant corporate inversion, a transaction that will lower AbbVie’s effective tax rate from 22% to 13%.
Sen. Ron Wyden (D-Ore.), the Senate Finance Committee chairman, duly called a hearing on the topic for this week with a Treasury official and various economists testifying on the matter. The committee was inexplicably unable to find a company going through the inversion process to voluntarily come forth before the committee to get crucified, so Allen Sloan from Fortune magazine, who began the current economic patriotism meme, will step in to help gin up outrage over this practice.
The feigned outrage over the matter seems especially overwrought considering that the Joint Committee on Taxation, or JCT, estimated that halting corporate inversions would save a little less than $20 billion over the next decade. If Congress became outraged by every tax provision that cost the government $2 billion a year it would have little spare indignation for other outrages. Even the $2 billion figure likely overstates the true impact: JCT assumes that every single dollar held by U.S. companies overseas would eventually be returned to the United States and taxed fully, one of many scoring conventions that render the entire process beyond mockery.
Sen. Orrin Hatch (R-Utah), ranking member of the Senate Finance Committee, attempted to lessen concerns that Congress might hurriedly respond to a fake crisis with a sharp rebuttal to Secretary Lew’s letter. Hatch suggested he might be open to addressing corporate inversions in some way. While it’s hard to see a United States Senate that would have trouble agreeing on pizza toppings crafting legislation on a politically contentious issue that would get 60 votes and could still be amenable to the House of Representatives, Hatch’s comments created a concern that Congress may in fact act on this matter in some way.
The Obama administration’s efforts disguise a much bigger tax problem, namely that the United States has the highest corporate tax rate in the developed world. The average federal and state rate of nearly forty percent is twice as high as the European average. What’s more, the United States is one of the few countries that taxes income earned by U.S. companies operating overseas. As a result, U.S. companies trying to compete in foreign markets find themselves subject to a much higher tax rate than their competitors, making it more difficult to succeed abroad.
While the White House thinks the answer is to simply bring those jobs back to the U.S., it doesn’t work that way. If U.S. companies can’t compete abroad it’s not going to create more jobs in the U.S. Instead, the myriad jobs that support foreign operations — the marketing, IT, logistics, and various management positions, to name a few — will just dry up along with those jobs currently being done overseas.
The stasis in tax reform over the last few months has convinced more than a few firms that Congress won’t be doing anything to help address our wretched tax code anytime in the near future, and they’ve turned to corporate inversions to help keep them competitive. The administration has responded to this not by pushing for tax reform but with a punitive rule change that would make U.S. corporations even less competitive around the world. That the White House sees no interest in engaging with Congress to achieve some version of tax reform is a symptom of an administration trying to win the news cycle rather than thinking beyond the next election.
Ike Brannon is a Fellow at the George W. Bush Institute and President of Capital Policy Analytics, a consulting firm in Washington, D.C.