Economy & Business

The Penal Colony

The United States in economic retreat

The Great Wall of China was built to keep foreigners out; the Berlin Wall was built to keep residents in. Neither was effective in the long term, but the United States is nonetheless imitating both, for the worst of reasons.

At issue here isn’t the physical walls we may or may not build along the Mexican border, but the economic walls being erected and contemplated by angry populists in both political parties.

Today’s business headlines are dominated by the question of so-called corporate inversion, in this case Pfizer’s plan to merge with the Irish firm Allergan, a plan that was torpedoed by the Obama administration, which — in plain violation of both the law and traditional American practice — promulgated a new financial rule aimed not at stopping mergers of this sort but at stopping this merger in particular, a bill of attainder by presidential fiat, which is the stuff of banana republics.

Do not allow the terminology here to confuse you. There is nothing especially complicated about a corporate inversion — it is what happens when the government makes tax refugees out of businesses. A U.S. firm merges with a foreign firm, and moves the corporate headquarters abroad, generally (though not exclusively) for tax purposes. Note that in this case, Pfizer was not seeking to relocate its corporate domicile to some Caribbean tax haven but to the Republic of Ireland, which has lower taxes than many European countries but is hardly an outpost of Rothbardian stateless capitalism.

Our progressive friends sometimes bemoan the fact that the United States is the only economically advanced country that fails to offer this or that government benefit; this month’s complaint is mandatory family leave. Those things are not entirely trivial, but where the United States truly does stand alone among the advanced countries is in its tax code. This isn’t a question of rates (though the United States does have the highest top corporate-tax rate in the world) but a question of jurisdiction. Most countries have what are called “territorial” tax regimes, under which a corporation or a resident pays taxes on income or business activity within that country, while income earned in other countries is taxed under the laws of those countries. The United States is nearly unique in demanding that businesses and citizens pay taxes on all income earned anywhere on Earth.

A country that will build virtual walls to keep corporations in will do the same to individuals.

Combined with the unusually high U.S. corporate-tax rate, the unusually corrupt and complex U.S. corporate-tax code (which serves as a means of subsidizing politically connected firms and industries), a mercurial regulatory environment (e.g., executive fiats blocking perfectly legal corporate mergers), an ugly tort environment, etc., many firms, particularly those that are global in scale, find it more attractive to be based in Ireland, the United Kingdom, Canada, or Europe, or, less frequently, in Asia or Latin America. The headline-making inversions of recent years mainly involved U.S. firms looking to relocate to Ireland, the United Kingdom, Canada, and Switzerland — they are not going to Mexico or the Cayman Islands.

The response of the U.S. government to this situation might have been to improve its tax code and its regulatory environment. (Governments worried about losing out to tax havens should seriously consider becoming the tax haven; imagine the attractiveness of combining U.S. law and North American market access with something like the Swiss or Irish tax practice.) But rather than reform itself, the government has opted to build a wall — not to keep the Mongols out, but to keep Pfizer in. That the wall is a virtual wall, composed of arbitrary executive-branch rulemaking rather than stone, is in the 21st century largely incidental.

Oh, but those are just big, nasty corporations, run by toxic greedheads! But it is you, too, Sunshine. A country that will build virtual walls to keep corporations in will do the same to individuals, and, indeed, the United States already is well advanced in that project.

I used the phrase “banana republic,” but what the United States increasingly resembles is a bauxite republic, namely Jamaica. Most civilized countries make allowances for the fact that, no matter how peaceable and prosperous they may be, some people will desire to leave and to become citizens of other countries. Most nations do not make this very difficult: In Japan, for example, there isn’t even a fee to terminate one’s citizenship, nor is there in Ireland, Sweden, or South Africa. Terminating your relationship with thrifty Singapore costs $27. Jamaica, the government of which is like something out of a Joseph Conrad novel, is an outlier, and its termination fee — which is more than $1,000 — exceeds that of any other nation in the world.

Except for one.

#share#The United States has been experiencing years of record-breaking numbers of Americans renouncing their citizenships. They do this for many reasons, one of which is that the U.S. government makes it very, very difficult to be an American abroad. You may have heard of those fabled Swiss bank accounts behind the anonymous numberings of which (so the legend goes) outlaws and shady billionaires hide their filthy lucre. That’s always been something of an exaggeration, but, while the gentlemen in Geneva and Zurich are still happy to open up discreet bank accounts for people from all over the world, they generally refuse to do so for Americans, because doing business with Americans entangles them in American banking regulation, one of which is called FATCA, an incomplete acronym that illustrates what happens when obsessive-compulsive disorder encounters attention-deficit disorder. FATCA, which is intended to help federal revenuers hunt down U.S. tax scofflaws, imposes such cumbrous burdens on overseas financial firms that many of them simply refuse to do business with Americans at all.

As a result of this and other burdens, many Americans who reside mainly abroad or who have strong ties to other countries renounce their U.S. citizenship. While Jamaica charges its absurd $1,010 exit fee, the United States charges more than twice that amount, $2,350, which is almost five times what it was only a few years ago. The State Department, which had access to the famous managerial acumen of Hillary Rodham Clinton, late of the Rose Law Firm, maintains a very large backlog of these cases.

Locking out law-breaking foreigners is a very different prospect from locking in law-abiding Americans and their businesses.

But it isn’t simply a matter of handing in your passport and writing a $2,350 check. The U.S. government also lays claim to your assets if you have any to speak of or if your income has been large. (People who give up their U.S. citizenship tend to be wealthy.) In some cases, the U.S. government purports to have the power to tax you for the rest of your life, regardless of whether you are a citizen of the United States or reside therein. The Hotel California had nothing on the Hotel IRS.

Brent Saunders, the CEO of Allergan, described the situation accurately: The United States, he said, is building a wall around itself. And the rule of law, the notion upon which this nation prides itself, turns out to be no defense: “We followed the rules that Congress had set,” he said. “For the rules to have changed after the game had started to be played is a bit un-American, but that’s the situation we’re in.”

You may remember the film Dave, in which a naive imposter takes over the role of the president, eventually sparking a confrontation with the murderous political henchman who, upon being informed that he cannot have the impersonator assassinated, declares: “He’s not a president. He’s an ordinary person. I can kill an ordinary person.” If the government can arbitrarily change the rules to make Pfizer conform to the political desires of the president, it can damned sure do the same thing to a nobody like you.

It is one thing to build a wall to get control over your borders and those who would enter without authorization. But locking out law-breaking foreigners is a very different prospect from locking in law-abiding Americans and their businesses. One of those walls is part of a national-security apparatus; the other is part of a prison. Some of our tea-party friends like to joke that Atlas Shrugged wasn’t supposed to be a how-to guide — neither was The Penal Colony.

President Obama is a lost cause, and always has been. But for his successor, a few words of advice: Mr. President, tear down this wall!


The Latest