The Corner

The Administration Gets It All Wrong on Inversions Again

Lawmakers have a tendency to fix problems by treating the symptoms rather than the causes. That’s what happened yesterday with the White House’s response to the recent wave of corporate inversions, the practice of  acquiring a foreign company and then relocating one’s legal headquarters out of the U.S for tax purposes. 

The reason for inverting is obvious to most economists: U.S. companies doing business abroad are put at a terrible disadvantage because of our punishing corporate-income-tax system. The U.S. has the highest rate of all the OECD countries (35 percent at the top federal level, and close to 40 percent when you add state taxes). In addition, the U.S. taxes income on a worldwide basis: It means that a U.S. company operating in Ireland pays the Irish rate first on its Irish income, and then, it will pay the U.S. rate minus the tax paid in Ireland when it brings the income back to the U.S. If it has, say, a French competitor in Ireland, the French company pays the low Irish rate of 12.5 percent, period. To cope with the penalty, or to try to stay competitive, U.S. companies are either not bringing back their income to the U.S. or they’re performing inversions.

In the same way that people don’t renounce their citizenship lightly, companies do not resort to inversion lightly. Inversion is legal. It is not tax evasion. The companies that use inversion will continue paying U.S. taxes on their U.S. income. But it’s a symptom of a serious problem: high tax rates and our worldwide tax system. If the U.S were to cut its corporate-income-tax rate dramatically, much of the problem would go away. 

Unfortunately, rather than do what is right, the administration has decided to make it harder for companies to invert without addressing the reasons behind the inversions.

As the Wall Street Journal editorial board explains this morning, the idiotic move is actually going to make it harder for companies to bring money earned overseas for investment in the U.S. It will also reinforce the practice of U.S. companies keeping their money abroad to shelter it from high tax rates. This should be the last thing we want during a weak recovery. But following now a well-known trend, Obama-administration officials seem obsessed with the notion of tax fairness as defined as the government being able to tax every single dollar one earns at the highest possible rate. And for what? It isn’t clear, as the Wall Street Journal notes:

“Inversion transactions erode our corporate tax base,” said Treasury Secretary Jack Lew on Monday. Mr. Lew may be famously ignorant on matters of finance, but now there’s reason to question his command of basic math.

Corporate income tax revenues have roughly doubled since the recession. Such receipts surged in fiscal year 2013 to $274 billion, up from $138 billion in 2009. Even the White House budget office is expecting corporate income tax revenues for fiscal 2014 to rise above $332 billion and to hit $502 billion by 2016.

The nearby chart shows the corporate tax boom as a share of total federal revenues. Corporate tax receipts are climbing back from the recession trough to nearly 11% of total tax revenue this year and will hit 14% in 2016. So how are inversions hurting revenues again?

As for fairness, Mr. Lew said on Monday that inversion transactions “may be legal, but they are wrong, and our laws should change.” It must be fun for corporate executives to get a moral lecture from a guy who took home an $800,000 salary from a nonprofit university and then pocketed a severance payment when he quit to work on Wall Street, even though school policy says only terminated employees are eligible for severance.

What’s really wrong is a U.S. tax code that has the highest corporate rate in the developed world and is also one of only six industrialized countries that demands to get paid on money earned outside its territory. In a Monday visit to our offices, Sen. Tom Carper (D., Del.) said the “root cause” of inversions is the need for corporate tax reform.

The whole thing is hereFor the record, Jack Lew is also the guy who wrongly claims that Social Security doesn’t add to the deficit

Veronique de Rugy — Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

Most Popular

PC Culture

Hate-Crime Hoaxes Reflect America’s Sickness

On January 29, tabloid news site TMZ broke the shocking story that Jussie Smollett, a gay black entertainer and progressive activist, had been viciously attacked in Chicago. Two racist white men had fractured his rib, poured bleach on him, and tied a noose around his neck. As they were leaving, they shouted ... Read More
U.S.

White Progressives Are Polarizing America

To understand how far left (and how quickly) the Democratic party has moved, let’s cycle back a very short 20 years. If 1998 Bill Clinton ran in the Democratic primary today, he’d be instantaneously labeled a far-right bigot. His support for the Religious Freedom Restoration Act, the Defense of Marriage Act, ... Read More
Politics & Policy

The Strange Paradoxes of Our Age

Modern prophets often say one thing and do another. Worse, they often advocate in the abstract as a way of justifying their doing the opposite in the concrete. The result is that contemporary culture abounds with the inexplicable — mostly because modern progressivism makes all sorts of race, class, and ... Read More
PC Culture

Fake Newspeople

This week, the story of the Jussie Smollett hoax gripped the national media. The story, for those who missed it, went something like this: The Empire actor, who is both black and gay, stated that on a freezing January night in Chicago, in the middle of the polar vortex, he went to a local Subway store to buy a ... Read More
Elections

One Last Grift for Bernie Sanders

Bernie Sanders, the antique Brooklyn socialist who represents Vermont in the Senate, is not quite ready to retire to his lakeside dacha and so once again is running for the presidential nomination of a party to which he does not belong with an agenda about which he cannot be quite entirely ... Read More
Film & TV

A Sublime Christian Masterpiece of a Film

‘There are two ways through life -- the way of nature and the way of grace,” remarks the saintly mother at the outset of The Tree of Life, one of the most awe-inspiring films of the 21st century. She continues: Grace doesn’t try please itself. It accepts being slighted, forgotten, disliked, accepts insults ... Read More
PC Culture

Changing Reality with Words

The reinvention of vocabulary can often be more effective than any social protest movement. Malarial swamps can become healthy “wetlands.” Fetid “dumps” are often rebranded as green “landfills.” Global warming was once a worry about too much heat. It implied that man-made carbon emissions had so ... Read More