The White House’s latest target for “executive authority” is the scheme that allows American companies to establish a corporate headquarters in another country to reduce their debt to the U.S. Treasury. In the business world it’s called “inversion.” In plain English, it’s called a tax dodge.
Ideally, no president should resort to executive authority to accomplish the nation’s business. Article 1 of the U.S. Constitution vests “all legislative powers” in Congress, plain and simple. But when lawmakers cynically use the checks and balances of democracy to block action on critical issues, presidents are called on to exercise regulatory power within the limits of the law.
“Inversion” has been around for awhile, but lately there’s been a rush to take advantage of this tax loophole. One company drawing attention in Congress is Coral Gables-based Burger King, which is moving to Canada (though keeping its current presence here). That deal, to be fair, seems to be driven more by higher sales prospects than by tax avoidance.
Since the start of 2012, however, at least 21 U.S. companies have announced or completed a legal move beyond the U.S. border, out of reach of the IRS. They have a legal right to move, but it’s unfair: They continue to benefit from operating in the United States, but they pay less for the privilege, and it gives them an unfair advantage over companies that choose to stay and pay. In recent testimony before Congress, Treasury Secretary Jacob Lew complained that many transactions were motivated purely by tax savings. He begged lawmakers to act in the name of “economic patriotism,” citing harm to the government’s bottom line.
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The administration’s plan would eliminate incentives for U.S. firms to acquire a foreign company and use its foreign address to claim tax status. To make sure the merged company is not merely masquerading as a non-U.S. entity, shareholders of the foreign company would have to own at least 50 percent of the newly merged corporation (higher than the current 20 percent standard). It would also be retroactive, to prevent a stampede by companies rushing overseas before legislation is enacted.
Administration critics say the real culprit is the complexity of the outdated tax code, which hasn’t been overhauled since 1986. In the almost 30 years since then, it has turned into an overlong, inefficient, loophole-ridden monstrosity. Also motivating the corporate rush for the exits: the U.S. corporate tax rate of 35 percent to 40 percent, the highest in the industrial world, although the average effective rate is 27 percent to 28 percent after deductions and exclusions.
Either way, it’s too high. Congress should not only lower that rate, but also rewrite and streamline the tax code from top to bottom to make it more efficient and less anti-competitive.
But the need to perform major surgery on the tax code is no excuse for refusing to stop the bleeding of tax dollars right now. Given the gridlock on Capitol Hill, waiting for tax reform could stall action on tax avoidance by “inversion” for years. Meanwhile, by some estimates, the Treasury could lose up to $20 billion as corporations engage in “earnings stripping” by moving overseas.
Appeals for Congress to act quickly are likely to fall on deaf ears. Only tax reform can solve the problem, but until Congress is ready to act, President Obama must do what he can by regulatory action to stop U.S. corporations from eroding America’s corporate tax base.