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The tax inversion manufactured crisis

July 22, 2014 5 minute Read by Ike Brannon

Nothing attests to the desperation of many politicians in finding an economic meme to their liking than the recent claim that corporate inversions represent a crisis to be dealt with at once.

Exhibit One in this manufactured crisis is Treasury Secretary Jacob Lew’s letter to the chair and ranking members of the tax-writing committees, asking them to immediately address the scourge of corporate inversions, while labeling companies that do such a thing as unpatriotic. The old saw about patriotism being the last refuge of scoundrels is the obvious retort to such a cynical ploy, of course, but a better one would be Judge Learned Hand’s prescient observation that “any one may so arrange his affairs that his taxes shall be as low as possible is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.”

Lew’s letter was, in essence, a response to AbbVie’s $54 billion acquisition of Shire and concomitant corporate inversion, a transaction that will lower AbbVie’s effective tax rate from 22% to 13%.

Finance Committee Chair Ron Wyden has called a hearing on the topic for this week with a Treasury official and various economists testifying on the matter. The committee was inexplicably unable to find a company going through the inversion process to voluntarily come forth before the committee, so Allen Sloan from Fortune--who began the current economic patriotism meme--will step in to help gin up outrage over this practice.

The feigned outrage over the matter seems especially overwrought considering that the Joint Committee on Taxation, or JCT, estimated that halting corporate inversions would save a little less than $20 billion over the next decade. If Congress became outraged by every tax provision that cost the government $2 billion a year they would do little else.  Even this figure likely overstates the true impact: JCT assumes that every single dollar held by U.S. companies overseas would eventually be returned to the United States and taxed fully, one of many scoring conventions that render the entire process beyond mockery.

Senator Hatch, ranking member of the Senate Finance Committee, attempted to lessen concerns that Congress might hurriedly respond to a fake crisis with a sharp rebuttal to Secretary Lew’s letter and suggesting he might be open to addressing corporate inversions in some way. While it’s hard to see a United States Senate that would have trouble agreeing on pizza toppings crafting legislation on a politically contentious issue that would get 60 votes and could still be amenable to the House of Representatives, his comments created a concern that Congress may in fact act on this matter in some way.

But the efforts disguise a much bigger tax problem, namely that the United States has the highest corporate tax rate in the developed world. The average federal and state rate of nearly 40% is twice as high as the European average. What’s more, the United States is one of the few countries that taxes income earned by U.S. companies operating overseas. As a result, U.S. companies trying to compete in foreign market find themselves increasingly at an economic disadvantage.

While some think the answer is to simply bring those jobs back to the U.S., that won’t erase the tax rate penalty our companies face, and it ignores the fact that companies locate operations abroad because that’s the only way they can compete abroad.

The stasis in tax reform over the last few months have convinced more than a few firms that substantive tax reform to address these problems is not in the offing, and they’ve turned to corporate inversions to help keep them competitive. Unfortunately, rather than pushing for tax reform, many in Washington have responded to this “crisis” by suggesting a punitive rule change which would make American corporations less competitive around the world.  It makes one wonder if they are merely trying to win the news cycle. 

Ike Brannon is a Fellow at the George W. Bush Institute and President of Capital Policy Analytics, a consulting firm in Washington DC. 


Author

Ike Brannon
Ike Brannon

Ike Brannon served as an Economic Growth Fellow of the George W. Bush Institute from 2012 to 2015. He has a Ph.D. in economics from Indiana University and a B.A. in math, Spanish, and economics from Augustana College. View his full bio

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