President Obama sounds like a character out of Ayn Rand's libertarian manifesto "Atlas Shrugged" when he accuses companies that are fleeing the U.S.'s broken corporate tax structure of being lacking in "economic patriotism."
Obama and others in his administration are upset over a wave of American companies, mostly in the pharmaceutical and medical device fields, doing "inversions" to become foreign companies and escape the grip of the U.S. tax code. Corporate taxes in the U.S. presently are 35 percent, the highest in the developed world. Additionally, the U.S. taxes domestic companies' earnings abroad, something that is rare among western economies. Most foreign nations only tax their companies' domestic earnings.
In an inversion, a U.S. company acquires a smaller foreign company in a tax friendly domicile such as Ireland, where effective corporate tax rates are in the teens. The new company then reincorporates as a foreign entity and is taxed accordingly.
Inversions at one time were relatively rare. The Wall Street Journal reports there have been about 50 in the past decade. But the pace has quickened dramatically in the past couple of years. Almost a dozen such transactions are pending, including a $42.9 billion deal between medical device maker Medtronic and Ireland's Covidien PLC and drugmaker AbbVie Inc.'s proposed $54 billion deal with Dublin-based Shire PLC. A senior administration official was quoted by the WSJ last Friday as saying as many as 30 inversion deals may be in the pipeline.
The administration and some lawmakers are concerned about "a bandwagon effect" among health care firms as inversions pick up pace. They fear for instance that an inversion by Walgreens could put pressure on CVS Caremark to follow suit. Walgreens is in a position to do an inversion with Alliance Boots, a European drug wholesaler and retailer in which Walgreens owns a 45 percent stake. Walgreens has an option to buy the rest of the company next February and it has made clear an inversion could happen if it does so. If Walgreens does reincorporate abroad, CVS might feel compelled to do likewise to remain competitive.
These developments have panicked the Obama administration. They moved Treasury Secretary Jacob Lew to demand that Congress take action "immediately" to "shut down this abuse of our tax system."
But Lew has it backwards. The problem with inversions is not one of companies abusing the tax system. It is a problem of the United States having a corporate tax system that is not competitive with the rest of the developed world. What is needed is reform of the corporate tax code to bring U.S. rates and practices in line. There has been little in the way of leadership from the White House on that front.
Obama's ruminations about "economic patriotism" serve to underscore how poorly he grasps the economics of business and markets. Corporations have a legal duty to maximize returns to shareholders, and to that end prudent use of tax avoidance strategies is their job. Well beyond that, companies have a responsibility to survive, and that means not giving away cost advantages to competitors.
President Obama should realize that it is not inversions that are unpatriotic. What is unpatriotic is American politicians who support corporate tax policies that strangle domestic job-creators and drive them from our shores.
L Smith posted on: Thursday, July 31, 2014 5:28 PM
Title: Understanding Inversions
Obama may not understand everything, but he is doing exactly what he was put in office to do - destroy the United States, and he is well on way to accomplishing his mission.