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Jack Lew: keeping your money is unpatriotic

tax to prosperity

If George Orwell had never written the novel “1984”, then it would have been written eventually as a history of the Obama administration.

On Tuesday, Treasury Secretary Jack Lew sent a letter to Senate Finance Committee Chairman Ron Wyden. In advocating a change to existing tax law that would allow a demonstrably unproductive government to stick its hands even more deeply into the pockets of those engaged in economically productive activity, Lew includes this howler:

“Congress should enact legislation immediately – and make it retroactive to May 2014 – to shut down this abuse of our tax system.

What we need as a nation is a new sense of economic patriotism, where we all rise or fall together… We should not be providing support for corporations that seek to shift their profits overseas to avoid paying their fair share of taxes.”

What brought on this bizarre definition of patriotism and the equally bizarre assertion that by following the tax code as enacted by Congress that one is avoiding their “fair share of taxes”? The answer, of course, is the punitive treatment of corporate profits under the US tax code.

By using a tactic called “inversion,” a US based corporation can reincorporate in a foreign country and reduce the tax bite on its worldwide earnings. Via the New York Times, New Corporate Tax Shelter: A Merger Abroad:

Last year, the Eaton Corporation, a power management company from Cleveland, acquired Cooper Industries, based in Ireland, for $13 billion, and reincorporated there. The company expects to save $160 million a year as a result of the move.

In July, Omnicom, the large New York advertising group, agreed to merge with Publicis Groupe, its French rival, in a $35 billion deal. The new company will be based in the Netherlands, resulting in savings of about $80 million a year.

Also in July, Perrigo, a pharmaceutical company from Allegan, Mich., said it would acquire Elan, an Irish drug company, for $6.7 billion. Perrigo will also reincorporate in Ireland, bringing its effective tax rate to 17 percent from 30 percent, and saving the company an estimated $150 million a year, much of it in taxes.

Ireland’s 12.5 percent corporate tax rate is a big draw for some companies. Earlier in the year, Actavis, based in Parsippany, N.J., bought Warner Chilcott, a drug maker with headquarters in Dublin, and said it would reincorporate in Ireland, leading to an estimated $150 million in savings over two years.

In moving to Europe, companies are looking to avoid the scrutiny brought on by moving to such obvious tax shelters, and take advantage of the more favorable business conditions in countries like Ireland, which also has a highly skilled work force.

Once inverted, companies save money through three main techniques. First, they do not have to pay the United States statutory tax rate of 35 percent on their worldwide earnings. That alone can amount to tens of millions in savings each year.

Many companies already get around this by keeping cash from foreign sales abroad. But inverted companies are free to use this cash without paying the steep repatriation tax faced by American companies.

At The Federalist, David Harsanyi points out that the actual amount of money in question is not very substantial when placed in the context of the volume of cash sliding down the government’s maw everyday (the whole article is an excellent read, I recommend it):

Since the goal of a business is not to become a more effective tax collector or health-care provider, as this administration seems to believe, moving off-shore or tax-inversion — which might mean$20 billion less for the Treasury over a decade — is becoming more popular. But, either way, a lack of new tariffs and taxes does not “reward companies for moving profits overseas” as much as U.S. tax and regulatory policy is a punishment for them staying.

So how is giving your money to the US government in amounts above what is legally required patriotic? One is at a loss to see the connection but the Obama administration is not new to this philosophy. When Obama-Biden were curb-stomping the luckless McCain-Palin ticket in 2008, Joe Biden had this to say:

“We want to take money and put it back in the pocket of middle-class people,” Biden said in an interview on ABC’s “Good Morning America.”

Noting that wealthier Americans would indeed pay more, Biden said: “It’s time to be patriotic … time to jump in, time to be part of the deal, time to help get America out of the rut.”

And Obama weighed in a similar vein as Lew was sending his letter to Ron Wyden:

We could do so much more if Republicans in Congress would focus less on stacking the deck for those on the top and focus more on creating opportunity for everybody.  And I want to work with them.  I don’t expect them to agree with me on everything, but at least agree with me on the things that you used to say you were for before I was for them.  (Applause.)

You used to be for building roads and infrastructure.  Nothing has changed.  Let’s go ahead and do it.  (Applause.)  Ronald Reagan passed immigration reform, and you love Ronald Reagan.  Let’s go ahead and do it.  (Applause.)

I mean, what changed?  I’m just saying.  (Laughter.)  That’s what made our country great, a sense of common purpose, a sense we’re all in it together as one nation, as one people.  We can debate the issues, we can have our differences, but let’s do something.  (Applause.)  Let’s rally around an economic patriotism that says, instead of giving more tax breaks to millionaires, let’s give tax breaks to working families to help pay for child care or college.

Instead of protecting tax loopholes that let corporations keep their profits overseas,  let’s put some of that money to work right here in the United States rebuilding America.  (Applause.)  We can rebuild our airports, create the next generation of good manufacturing jobs, make sure those are made in America.

Let’s rally around a patriotism that says we’re stronger as a nation when we cultivate the ingenuity and talent of every American, and give every 4-year-old in America access to high-quality education — good-quality preschool.  (Applause.)  Let’s redesign our high schools to make them more relevant to the 21st century economy.  Let’s make college more affordable.  Let’s  make sure every worker, if you lose your job, you can get a good job training that gives you an even better job.  (Applause.)

Let’s embrace the patriotism that says it’s a good thing when our fellow citizens have health care.  It’s not a bad thing. (Applause.)  That’s not a bad thing.  It’s a good thing when women earn what men do for the same work.  That’s an all-American principle.  (Applause.)  Everybody has got a mom out there or a wife out there or a daughter out there.  They don’t want them to not get treated fairly.  Why would you be against that?

Presumably unicorns and leprechauns and fluffy puppies are patriotic also.

There is, as all but the dimmest bulbs and Democrats know, a marked moral and legal difference between tax avoidance (a time honored activity and the reason there are so many CPAs in America) and tax evasion (a felony). When Congress makes a tax law that reduces your taxes you may choose to ignore it and pay the higher rate, I’m sure there are millions of Democrat homeowners out there using the 1040-EZ because they object to the home mortgage deduction, or you can follow the law and take that home office deduction and put as much money as legally possible into that tax deferred retirement account and keep more of your money for yourself. You might organize your one-man business as an S-Corporation and avoid paying payroll tax on about 60% of your income. Of course, that makes you unpatriotic to this administration.

Now if you’ve read this carefully you’ll see that the only real loser in this is the federal government. The company doesn’t have to move existing operations, which means jobs aren’t affected… and which means the economy isn’t affected. The company gets to keep more of its profits which means higher dividends to shareholders but also more money available for productive economic activity. And starving the federal government of revenue is a feature not a bug.

In fact, inversion could actually be seen a patriotic activity precisely because it makes American jobs more secure and makes more corporate profits available for something more productive than paying Michelle Obama’s vacation expenses.

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