Somewhere in the bowels of the festering Democrat political machine, some focus group automaton has decided that “closing the inversions tax loophole” is a message that can save Democrats from destruction in 2014. By way of background, America has an astronomically high corporate taxation rate compared to the rest of the world; so what some American companies are doing is merging with overseas companies and declaring that the new, merged entity is incorporated in the overseas country as opposed to America. Treasury Secretary Jack Lew took to the Washington Post yesterday to condemn the practice as “unpatriotic.” Predictably, the various White House mouthpieces have slavishly repeated this assertion in publications across the country, including Paul Krugman, Tim Worstall, Matt Yglesias, and other various liberal luminaries (see here, here, and here, to name but a few).
From a PR standpoint, it’s easy to see why the White House has suddenly ordered their scribes in the press to obsessively discuss inversions. They want to give their base the impression that they are “doing something” to “punish the wealthy” for something that it’s easy to demonize as cowardly avoidance of taxation. In reality, of course, even if the Administration gets their way on this, they will accomplish exactly jack and squat – the total tax savings from closing this loophole would be around $2 billion a year, or around .25% of the annual Federal Tax base.
Furthermore it bears repeating that the alleged unpatriotic activity of the companies in question is NOT outsourcing or removal of jobs from America, but rather merely removal of tax base in an attempt to keep more money. In light of this indisputable fact, it seems that a few points are in order:
First, A more rational and doubtless more efficacious method to retain the corporate tax base would be to lower the insanely high corporate tax rate which creates the incentive for companies to perform “inversions” in the first place, especially in light of the fact that attempts to essentially declare that these companies are American companies when they are, in fact, not American companies anymore is a tactic that is both dubious Constitutionally and highly likely to lead to a) widespread noncompliance b) actual outsourcing of jobs as companies physically flee America to remove themselves from American jurisdiction over this question.
Second, I guess it’s understandable why people get their hackles up over companies leaving America to lower their tax burden, at least in a superficial sense. It does really seem like a facially transparent ploy to avoid tax burden by doing nothing that actually benefits the economy. On the other hand, it is considerably less insane as a tax avoidance device than a number of other “loopholes” that the Democrats are NOT complaining about. See here for a partial list just from the last fiscal cliff deal and here for some of the more bizarre ones overall. Heck, if you are a major donor to the President you can even get tax subsidies to build solar power devices on a business plan that everyone knows will never result in a profit.
Therefore the objection to inversions specifically seems to be that no major political donor has paid good money into the lobbying system for the creation of this “loophole.” Congress has created all sorts of bizarre tax avoidance devices that make little or no rational sense from an economic standpoint, and that very obviously exist for the sole reason that K Street did their job well. No one accuses these companies of unpatriotic behavior for trying to keep more of their own money.
If the Obama Administration really wants to do something that will actually work to stop inversions, they ought to remove the incentive to inversions in the first place and lower American’s insanely high corporate taxation rate. Otherwise not only will our tax base continue to decrease but also America will continue to lose actual American jobs to more competitive environments overseas. Corporations cannot be kept in America by threats of force; and if Democrats don’t get this message, they will leave.