The Corner

Economy & Business

Once Again, the Obama Administration Threatens to Crackdown on Corporate Inversions

Liberals tend to have a hard time wrapping their heads around this simple fact: People and corporations tend to try to get around paying punishing taxes. In the case of the extremely punishing corporate income tax system, one of the responses employed by corporations is what are called inversions, the practice of  acquiring a foreign company and then relocating one’s legal headquarters out of the U.S for tax purposes. 

Inversions, which are legal, are a symptom of the bad tax system. I explained last year why companies make such a move:

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.

The best way to stop them is through a fundamental reform of the corporate tax system. Yet, in spite of a large consensus that the system needs to be reformed, the Obama administration is once again focusing on cracking down on inversions themselves. Why? Because inversions mean less revenue for Uncle Sam.

For that reason, the U.S. Department of Treasury will be resorting to administrative actions to prevent them. However,  it also recognize that acquiring more statutory authority from Congress would be better:

Later this week, we intend to issue additional targeted guidance to deter and reduce further the economic benefits of corporate inversions. As before, we will continue to review our existing authorities to identify additional ways to address this serious problem. It is important to emphasize, however, that Treasury cannot stop inversions without new statutory authority. Unless and until Congress acts, creative accountants and lawyers will continue to find new ways for companies to move their tax residences overseas and avoid paying taxes here at home. 

Fixing a bad tax system by cracking down on inversions is idiotic to say the least. We do not have details about what the administration has in mind, but no matter what it does, it is unclear what it will achieve. It certainly won’t encourage companies who keep large amounts of cash abroad to bring their money back for investment in the country. 

Also worth noting: While there is indeed bipartisan support for reforming the corporation income tax system, Senator Elizabeth Warren has decided that it would be outrageous to do so. I will follow with interest this story, but I can say right now that the administration and Warren will fail to achieve their goal but will manage to impose significant wealth destruction in the process.

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