President Obama chided companies who have essentially moved overseas for tax purposes. He shamed them for practically renouncing their citizenship and not exercising “economic patriotism.” Obama is not planning on stopping at just publicly denouncing companies and hoping they comply with his view of economic patriotism. He intends on taking action to prevent this from occurring, and he is asking congress to pass legislation in response.
Obama’s statements at a California fundraiser were regarding a procedure called inversion, which is entirely legal. A corporate inversion is when two companies merge, one domestic and one foreign. The foreign company can then be appointed as the “parent” if its stakeholders own 20% or more of the newly merged stock. If this threshold is met, then a new official headquarters can be claimed overseas, meaning they can take advantage of another country’s lower tax rates.
Whether by executive or congressional action, President Obama aims to restrict the use of inversion. Perhaps after 47 companies have gone through this process in a decade and less than expected tax revenue is enough to make the dysfunction in Washington DC dissipate. Obama stated his desire to alter the tax code and require foreign companies own at least 50% of the combined stock in order to move the headquarters overseas. A bill introduced in May of 2014 would mandate the 50% stock ownership threshold and enforce a 2 year ban on corporate inversions.
The motivation behind halting corporate inversions isn’t based on patriotism or saving American jobs. It’s about securing a revenue stream for the federal government. It’s known that corporate inversions rarely lead to domestic job losses. Many times, corporate inversions actually lead to more hiring within the US because this form of restructuring is largely a “paper transaction” with financial benefits. For instance, by relocating an American corporation’s headquarters to Ireland, a company can cut their corporate taxes by much more than half. In a capitalist economy, this just makes sense. Just as the costs of taxation and regulatory compliance are passed on to the consumers, the savings from corporate inversions may also be passed on to Americans.
The real shocking claim is not that many companies are moving overseas but that it took them this long to do so. The United States has created a hostile environment for businesses. This didn’t happen overnight, and President Obama is not entirely at fault. Years of mismanagement from several administrations and congresses share the blame. In 1909, when the corporate tax rate was introduced, it was 1%. By 2013, America attained the dubious honor of having the highest corporate tax rate in the developed world at 39.1%including state taxes. The federal corporate tax rate alone is as high as 35%. This puts American companies at a distinct disadvantage since the average corporate tax rate is25% among industrialized nations.
These high taxes are leading multinational companies with interests in the United States to hold their foreign profits overseas to avoid over-taxation. A study found that these companies are sitting on 2.1 trillion dollars in foreign banks. The Joint Committee on Taxation believes the US is losing out on an estimated 50 billion dollars a year in tax revenue on these earnings. While lawmakers see big dollar signs if they can find a way to tax the 2.1 trillion dollars, companies are given a legitimate reason to invest elsewhere. If these taxes are eased, then companies may feel safe enough to invest in the United States, creating a boom.
Adding to the despair of American companies is that they are burdened by over-regulation whether it’s statutory or a policy of a government agency. The amount of regulations have reached almost colossal proportions. The Code of Federal Regulations is over 175,000pages long, and the 2013 Federal Register was over 80,000 pages. Many of these regulations are highly and unreasonably burdensome and downright ridiculous. For example, in 2013, General Motors was forced to recall 18,941 Camaros because a federal rule was violated when it was discovered that the air bag caution labels could potentially peel off of the sun visor.
Companies’ decisions to seek lower taxes are not done out of their disloyalty for America. It is done to become more competitive in the marketplace. Lawmakers who say otherwise are simply avoiding the real problem – poor tax and regulatory policies. Unnecessarily burdensome taxes and intrusive regulations interfere with the economy, and seeking a 2 year ban on corporate inversions is an obvious example of market interference. If lawmakers really want to keep companies from relocating overseas and attract more businesses to the United States, then they will have to reduce their overbearing influence on these institutions. Publicly branding them as unpatriotic “corporate deserters” will not accomplish that goal.