[IMGCAP(1)]In his weekly address on Saturday, July 26, 2014, President Obama criticized large corporations that employ tax inversion strategies saying, “They’re keeping most of their business inside the United States, but they’re basically renouncing their citizenship and declaring that they’re based somewhere else, just to avoid paying their fair share.”
He argued that businesses that “cherrypick their taxes,” because of current loopholes in U.S. tax policy, are responsible for damaging the nation’s economy at large. President Obama went on to characterize tax inversions as “unpatriotic.” This speech launched the Obama administration’s campaign against Big Business ahead of the 2014 midterm elections, and caused a stir in the business community. The problem with the President’s criticism of tax inversions is that it allows him to vilify American corporations rather than focus on the nation’s overwhelming need for tax reform.
Put simply, a tax inversion is the practice of shifting an American company’s legal headquarters to a country with a lower tax rate to partially relieve the high U.S. tax burden. Although estimates vary as to exactly how much higher it is, there is no dispute that the United States has the highest effective tax rate in the developed world. A PricewaterhouseCoopers report published last year listed the effective U.S. tax rate at 27.9 percent while the average for countries that are part of the Organization for Economic Cooperation and Development is 15.9 percent.
For the most part, tax inversions are occurring because the United States is the only advanced nation that taxes profits earned abroad. Foreign profits are double taxed; in other words, the United States taxes profits that were earned and already taxed in another country. Therefore, an independent U.S. corporation may wind up paying more taxes than an identical U.S. corporation owned by a foreign parent. To avoid this damaging result, many American corporations are creating or purchasing a foreign parent.
In a USA Today editorial, Robert J. Coury, executive chairman of Mylan Inc., explained the true reasons behind corporate tax inversion, which can be summed up in one phrase—corporate responsibility. Coury explains that while the global economy has changed dramatically, the U.S. Tax Code has not.
He compares international corporate tax rates to state income tax rates, which often dictate where a family decides to live: “The lower your tax rate, the more you have to spend on things like home improvements or college tuition. If your friends and family have a lower tax rate than you, they can afford to pay more for those things and you can’t keep up.”
Similarly, U.S. corporations are faced with competitors who have significantly lower tax rates and can afford to invest more in their businesses. The disparity makes corporations like Mylan “an easier acquisition target, which could result in the downsizing or elimination of our U.S. facilities and workforce.”
Coury effectively makes the argument that corporations like Mylan have a responsibility to their shareholders and workforce to preserve shareholder value and remain competitive in the current global economy.
“President Obama has merely taken aim at the symptoms of the problem and is missing the true issue at hand" said Joe Garza, senior partner at Garza & Harris, a Dallas-based tax law group. “The way multinational businesses are taxed in the U.S. is broken. We are long overdue for a Tax Code overhaul; the current system is archaic and not reflective of the modern global economy.”
Most politicians agree that tax inversion, which is expected to cost the United States over $2.2 billion in lost revenue in 2015, is bad for the U.S. economy. Many politicians from both parties agree that a reformation of the Tax Code is necessary to eliminate the incentive for corporations to move their headquarters overseas in the first place. However, the legislation proposed by the President and presented by House Democrats only addresses the practice of tax inversion itself.
Tax professionals argue that the proposed legislation will only exacerbate the problem by “setting U.S. companies up for takeovers by larger foreign acquirers.” In other words, legislation “doesn’t stop the flow of capital out of the U.S. It simply changes the vehicle for leaving.” Even Treasury Secretary Jack Lew has acknowledged that comprehensive tax reform is clearly the best way to address the problems in the U.S. Tax Code that trigger inversions. In light of these arguments, made by Democrats and Republicans alike, President Obama’s decision to crack down on tax inversions appears counterproductive, if not detrimental to U.S. tax policy and the nation’s economy.
President Obama has continuously diverted attention from the need for tax reform by demonizing “Big Business,” characterizing a corporation’s fiduciary responsibility to make a profit as simple greed. Coury accuses politicians of “carelessly [throwing] around words such as unpatriotic’ to describe our company.”
Indeed, corporate taxpayers still pay the exorbitant U.S. tax rate on profits made within the United States. Rather than working with the American business community to resolve the obvious problems within the tax code, the President has instead chosen to accuse them of being “unpatriotic” tax dodgers.
As Coury argues, “Patriotism is defined as having great love for your country. We do love this country—enough to fight for the jobs that are in it and push for the changes that are needed to save the American dream.”
If President Obama truly wishes to mend the damage that tax inversion have done to America and its corporate community, he should take Coury’s words to heart.
Carrie Lowery is an attorney in Tennessee and owner of the Authority Legal Research & Writing Service who originally wrote this article for The Capital Press.
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