Obama is driving U.S. corporations to flee America

No hint of changing America's highest corporate tax rate.
How Obama is driving U.S. corporations to flee America

This has been a major theme of our boss for some time - and it’s not just a matter of reducing the corporate tax rate. It’s a matter of ripping the entire tax code up from its roots and establishing a new, simpler one with low rates on a very few things, without all the deductions and loopholes.



In the context of that discussion, we look at one of the truly counterproductive effects of the tax rate we now have: A 35 percent federal corporate tax rate is a major competitive disadvantage for U.S. corporations, and not only as they go up against global competitors. It is also a major disadvantage as they deal with their own costs, market challenges, labor force dynamics . . . you simply can’t create wealth in an economy that intentionally hamstrings those set up to be wealth producers.

So U.S. corporations are doing what it only makes sense to do, which is to find a way to reduce those costs. Democrats are shocked - shocked! - to learn that this often leads to the practice of inversion, which is to merge with a company in a nation with lower tax rates, and then establish your headquarters in that country. We told you recently about Walgreens making this move, and there are plenty of others. The response of the White House? Not to reduce the tax rate to keep these companies in America, silly! No, they’re demanding “economic patriotism” of corporations, which means they want them to bite the big one and watch all that revenue go out the door so they can stuff Treasury’s pockets at the expense of their own vitality.

And don’t buy the predictable nonsense about how no one really pays the 35 percent rate because of all the shelters and loopholes. That’s a load of crap for two reasons, one of which the Wall Street Journal explains here:

There’s a liberal canard that the U.S. statutory tax rate is high but companies pay only a few cents on the dollar in reality. That’s true in some cases in which companies are able to exploit loopholes (especially green-energy subsidies) or deduct big losses over several years. We’ve written about Whirlpool WHR +0.45% , for example.

But the claim is obviously false in general given deals like Mylan’s proposed acquisition of overseas generic drug businesses from Abbott Laboratories. ABT -0.29% The new combined company will be based in the Netherlands, where the corporate tax rate is a high but not insane 25%. Even a 10-percentage-point rate cut is enough of an incentive to relocate.

Mr. Lew doesn’t know much about economics or he’d realize that his rush to block these inversions will have the perverse effect of driving even more deals in the coming months. If CEOs think Congress will close the inversion possibility, and that tax reform is dead until Mr. Obama leaves office, more of them will decide to move while they still can.

As for “economic patriotism,” Mr. Lew also doesn’t understand that foreclosing inversions would only make U.S. firms more vulnerable to foreign takeovers. If executives can’t reduce their tax disadvantage by moving abroad, more of them will choose to serve shareholders by offering to be purchased by foreign firms that have a lower world-wide tax rate. And even if CEOs resist a foreign offer, shareholders might prefer the higher after-tax return on their investment. Who’s the real Benedict Arnold of tax policy here?

The other reason this argument is nonsense is that, even when it does apply, it still requires corporations to engage in behavior deemed favorable by politicians in order to reduce their tax rate. Just because you take advantage of a deduction doesn’t necessarily mean you did what was in the best interests of your company, your employees or your shareholders. Consider the example of Whirlpool, mentioned above in the WSJ excerpt. Yeah, they were able to deduct losses, but before you can do that, you have to lose money. That may get you more favorable tax treatment under the current U.S. tax code, but it’s not exactly a model for corporate success.

What we need is a simple low corporate tax rate that doesn’t reward one type of behavior over others, and certainly one that doesn’t reward and encourage losses.

Now this is where Democrats will tend to argue that that corporate losses are no big deal because big corporations like Whirlpool just view it as a write-off. That is exactly the type of thinking that leads to such an insane tax code. Any company would rather pay taxes on profits than write off losses, but the people who produce goods and services while employing people are still going to do better if the tax rate they pay on their profits is lower.

Democrats seem to have received their information about write-offs from Kramer: