Bismarck on the Potomac

by The Editors

President Barack Obama, who in his political dotage is enthusiastically getting in touch with his inner Otto von Bismarck to such an extent that we half expect him to start sporting a walrus mustache and a pickelhaube, on Saturday treated the ailing republic to another lecture on the theme of “economic patriotism,” by which he means an arrangement under which companies adopt tax strategies that maximize the amount of money they send to President Obama and his colleagues to dispose of as they see fit. He demanded that companies “embrace an economic patriotism,” presumably one defined by Barack Obama, rather than “cherry-pick” their tax liabilities.

There was a time, not long ago, when questioning someone’s patriotism was considered unseemly in a political leader. For that, we may consult the wisdom of Barack Obama, who vowed in 2008 that he would “never question the patriotism of others,” and who proclaimed that “the question of who is and or is not a patriot all too often poisons our political debates.”

That was then. Now, President Obama is one-upping Charles Wilson and his de facto declaration: What’s good for Barack Obama is good for America.

It is worth considering who is in fact doing the cherry-picking here. There are corporations that enjoy a considerable degree of political clout, though we are far from the Bladerunner-style corporate state of the progressive imagination. But, powerful though they may be, corporations do not write the tax laws. Rather, they merely attempt to comply with them, and to do so in a manner that does not unnecessarily burden them. If President Obama or congressional Democrats wished to rewrite the tax code, they had ample opportunity to do so when they controlled the White House and both branches of Congress; instead of enacting a better and fairer corporate-tax regime, they chose to take the current system, already riddled with political favoritism, and lard it up with still more favoritism, e.g., the “Solyndra Memorial Tax Break,” which, we note for the record, served to enrich important Democratic donors. Cherries for political allies, thistle for the unanointed.

To understand the incentives at work here, one must appreciate the nearly unique perversity of the U.S. corporate-income tax. The United States charges the highest statutory corporate tax rate in the developed world, but collects significantly less in corporate taxes than do most industrialized countries — about 1.3 percent of GDP versus an average of 2.5 percent for other advanced economies. Because the tax code is riddled with sundry political favoritism — favoritism that Barack Obama and his Democratic colleagues in Congress consistently seek to expand — the effective rate paid by large, politically sophisticated firms tends to be much lower: The Government Accountability Office (we cannot write those words without wincing) estimates that firms with at least $10 million in assets pay about 12.6 percent on average. In essence, the federal government is working with a carrot-and-stick model: The stick is the asset-draining top rate, and the carrots are the special breaks and discounts offered to companies that behave in ways that politicians desire.

In practice, many U.S. companies pay lower taxes than they would in other countries. The mystery, then, would seem to be why a firm such as Walgreen’s would consider relocating to Switzerland, where the total corporate tax rate (federal, cantonal, and municipal) runs about 21 percent, higher than the average bill, in the United States, for enterprises of comparable size and complexity. There are several factors at play. One is that, in the United States, firms that do not benefit from political favoritism face a corporate tax rate of nearly 40 percent, far higher than in countries such as Germany or the Netherlands. Another factor, probably more significant, is that the United States is one of a tiny minority of countries — the others are North Korea, Zimbabwe, and Eritrea — that apply their domestic tax rates to income earned abroad. If yours is a large, complex firm with operations in several countries, being domiciled in the United States means having the gentle ministrations of the Internal Revenue Service layered atop whatever local tax regime is operative in your overseas operations. This means not only potentially higher tax rates but significantly higher compliance costs — for a tax that produces only about 9.5 percent of federal revenue.

Taxes are only one reason that companies relocate abroad. When President Obama uses labor regulators to attack businesses pursuing strategies he finds objectionable, when Elizabeth Warren proposes to employ the SEC as a weapon in her own endless political vendetta, when the IRS is targeting politically unpopular organizations, a forward-thinking firm with any level of financial and political sophistication might decide it would rather deal with Switzerland’s FINMA or the Central Bank of Ireland than with the people who inflicted Dodd-Frank on the world.

“Economic patriotism” is a cheap, shallow, and dishonest rhetorical formulation, but let us consider for a moment what exactly such a phrase might hope to mean. If by “economic patriotism” we mean doing what is in the interests of the United States as a whole — rather than what is in the interest of the Obama administration or the financial interests it patronizes — then, yes, there is much that we should do to encourage investment in the United States and to ensure the growth and security of the U.S. economy. If we are to have a corporate-income tax, then reforming it in order to make it fairer and less onerous would be a step in the right direction — a step in the opposite direction of what President Obama proposes. That alone will not necessarily make Springfield, Ill., a better investment than Zurich for any particular company, but it would not hurt, and our concern should be general economic conditions, not the business practices of any particular corporation. We might do any number of things to improve our economic situation, from education reform — an absolute necessity for our future prosperity — to stabilizing our public finances and allowing our national energy renaissance room to flourish to its full potential. What stands between us and those worthy goals is Harry Reid and Nancy Pelosi — and, not least, Barack Obama, whose idea of patriotism is a strange and unaccountable one.

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