Politics & Policy

The Answer to Corporate ‘Inversion’

Political issues, not practical answers (Joe Raedle/Getty Images)
Rather than trying to ban the practice, why can’t Obama address corporate tax reform?

The Obama administration is highly exercised about “inversion,” the practice by which an American corporation acquires a foreign company and moves its headquarters out of the U.S. to benefit from lower tax rates abroad.

Not fair, says Barack Obama. It’s taking advantage of an “unpatriotic tax loophole” that hardworking American families have to make up for by the sweat of their brow. His treasury secretary calls such behavior a violation of “economic patriotism.”

Nice touch. Democrats used to wax indignant about having one’s patriotism questioned. Now they throw around the charge with abandon, tossing it at corporations that refuse to do the economically patriotic thing of paying the highest corporate tax rate in the industrialized world.

Odder still because Democrats routinely ridicule the very notion of corporations as persons. After Mitt Romney suggested this in 2011, Democrats mocked him right through Election Day. In the Hobby Lobby case, they challenged the very idea that corporations can have religious convictions. Now, however, Democrats are demanding that corporations exercise a patriotic conscience. Which is it?

Moreover, corporations have an indisputable fiduciary responsibility to protect their shareholders’ interest. Surely Walgreens betrayed this responsibility when it caved to administration pressure and canceled its plans to move its headquarters to Switzerland. The inversion would’ve saved it billions of dollars. Its cancelation caused an instant 14 percent drop in Walgreens shares.

But the Democrats’ problem is deeper. Everyone knows why inversions are happening. America’s 35 percent corporate tax rate is absurdly uncompetitive. Companies are doing what they always do: legally lowering their tax liabilities.

What is maddening is that the problem is so easily solved: tax reform that lowers the accursed corporate rate. Democrats and Republicans agree on this. After the announcement of the latest inversion, Burger King buying Tim Hortons and then moving to Canada, the president himself issued a statement conceding that corporate tax reform — lower the rates, eliminate loopholes — is the best solution to the inversion problem.

It’s also politically doable. Tax reform has unique bipartisan appeal. Conservatives like it because lowering rates stimulates the economy and eliminating loopholes curbs tax-driven economic decisions that grossly misallocate capital.

The appeal to liberals is economic fairness. By eliminating loopholes, tax reform levels the playing field. Today, the more powerful companies can afford the expensive lobbyists who create the loopholes and the expensive lawyers who exploit them. Which is why the nominal corporate tax rate is 35 percent but the effective rate for some of the largest corporations is about 13 percent.

So why not attack the inversion problem with its obvious solution: tax reform? Time is short, says Obama. He can’t wait. Instead, he wants legislation to outlaw inversion.

No time? Where has he been? He does nothing about tax reform for six years (during two of which Democrats fully controlled Congress), then claims now to be too impatient to attempt the real solution. Instead he wants to hurry through a punitive anti-inversion law to counterbalance the effects of our already punitive tax rates.

This is nuts. But amusing, given that a major financier of the inversion-celebre of the day, the Whopper-to-Canada deal, is none other than Warren Buffett, Obama’s favorite plutocrat.

Buffett’s demand that the rich be required to pay more taxes made him a hero to the president. In 2012, Obama repeatedly held up Buffett as a champion of economic justice. What does Obama say today about his 2012 class-war comrade-in-arms — now become, by Obama’s own lights, an economic traitor?

And more such Benedict Arnolds are being minted every week. One of the reasons for the recent acceleration of inversions is that corporations want to move before Obama outlaws it, locking them into America’s anti-competitive corporate tax rate.

The Wall Street Journal cited a Buffett confidant as saying he likely wouldn’t have backed a deal like Burger King if it were purely for tax reasons. Indeed, there are other considerations that can always be invoked. Which makes some of the contemplated anti-inversion proposals even more absurd: They would outlaw only those mergers done for tax reasons. How do you prove motivation? Lie detectors?

A real political leader would abandon this sideshow and actually address corporate tax reform with a serious revenue-neutral proposal to Congress. There would be hearings, debate, compromises. We might end up with something like the historic bipartisan tax reform of 1986 that helped launch two decades of nearly uninterrupted economic growth.

But for that you need a president.

 Charles Krauthammer is a nationally syndicated columnist. © 2014 The Washington Post Writers Group

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