A Reality Check On Inversions

Stephen Adkins

September 22, 2014

(Stephen Adkins is a research fellow at the Taxpayers Protection Alliance.) In July President Obama noted that, “I don’t care if it’s legal, it’s wrong. It sticks you for the tab to make up for what they’re stashing offshore.” This was said to a crowd of supporters at a Los Angeles area technical college. After defending the record of his administration, emphasizing the challenges posed by the financial crisis and subsequent Great Recession, Obama then turned his attention to the growing phenomenon of tax inversion (American businesses engaging in cross-border mergers in order to escape heavy corporate tax rates here at home).  In a July 24th speech Obama declared that, “stopping companies from renouncing their citizenship just to get out of paying their fair share of taxes is something that cannot wait.”

While being careful to refer to this practice as “tax avoidance” (not to be confused with its illegal cousin “tax evasion”), Obama railed against so-called “corporate deserters,” whining that American businesses require a renewed “economic patriotism.” In other words, American businesses’ primary responsibility is not, as one might think, to maximize shareholder value, but instead to stay put and let the Internal Revenue Service bleed them dry.  And that, is somehow patriotic.

If nothing else, Mr. Obama has impeccable timing. His diatribe came just weeks before Burger King shocked the business world by purchasing Canadian fast food giant Tim Hortons, and thereby proposing to move its headquarters to Canada. While the sale certainly has stockholders pleased, it is just the sort of thing the President was talking about – good American companies jumping ship just when they’re needed most.

Of course, Burger King executives will be the first to insist that this purchase had nothing to do with corporate income taxes. In the words of Daniel Schwartz, Burger King’s CEO, ¨We don’t expect there to be meaningful tax savings. This transaction is not about tax rates, but about growth.” While we can take Mr. Schwartz at his word, the fact remains that Burger King has chosen to pursue growth outside Uncle Sam’s tax jurisdiction, like so many other US companies have recently done. This is probably not a coincidence.

Obama certainly has his doubts, but then again, maybe it’s time the President asks himself why so many companies are fleeing in the first place. After all, there would be no reason for businesses to use tax avoidance measures if there weren’t so many taxes to avoid. The President should focus on making the US a more attractive, competitive business environment, instead of driving productive companies away. History shows that lower tax rates actually increase the tax base, yielding higher revenues, but of course that requires a bit of patience, which the President seems to lack.

This kind of shortsighted thinking is nothing new. As the French economist Frederic Bastiat wrote in 1848,”The State is the great fiction, through which everybody endeavors to live at the expense of everybody else.” President Obama, in accusing a small number of profitable businesses of being the cause of our woes, is simply tapping into the age-old whopper fallacious reasoning whereby society as a whole becomes wealthier to the degree that the government can rob its most productive members. In other words, envy-baiting.

The obvious problem with this is that any extra revenue the government could possibly collect by outlawing tax inversion would be a drop in the bucket compared to the current $400 billion deficit (not to mention the $17.6 trillion debt). What President Obama calls “corporate defecting” is more commonly referred to as “the free flow of capital.” Attacking perfectly legal corporate restructuring as though it were criminal behavior would do immense damage to America’s already not-stellar reputation among the global business community.

An ironic side note, the President also criticized so-called “top-down” economics. This is supposed to mean an economic system that benefits the richest members of society more than everybody else, but his solution is to further empower the federal government to prevent this free flow of capital, so that more and more of it would run through the IRS and be distributed in the form of handouts and subsidies. A monolithic bureaucracy managing large percentages of an entire nation’s wealth is literally the most top-down system imaginable, short of totalitarian socialism.

Again, though, this is nothing new. Demagogues throughout history have always vilified the wealthy capitalist, while selflessly toiling for “labor” or “the proletariat.” Obama’s speechwriters have simply updated the language a bit: “labor” has become “hard workin’ folks”, while “the capitalist” has been modernized to “our companies,” since, apparently, being elected President means you own every business in the country.

Instead of further cannibalizing the US’s rapidly retreating business community, President Obama should drop the antagonistic stance and do his part to rebrand America as the land of opportunity it once was.

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