Obama Plays Politics With Inversion Instead Of Doing What Is Right. Typical Short Term Washington Thinking! Why Won't They Solve The Darn Problem!

October 06, 2014, 07:00 am

Obama's inversion policies are only political maneuvers

By Mario H. Lopez, contributor

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The United States arguably has the most outdated corporate tax structure in the developed world, with a combined federal and state average that currently sits at 39.1 percent — the highest ranking among OECD (Organisation for Economic Co-operation and Development) member countries. To provide a quick comparison, the respective rates in Ireland and the United Kingdom are at 12.5 and 21 percent.

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Since 2005, nearly 50 companies have decided to undergo a form of reincorporation commonly called an inversion, which allows them to shift money abroad. Today, there are eight companies in the process of finalizing inversions, including the two largest such deals in U.S. history: Medtronic, Inc. and AbbVie, Inc.

Treasury Secretary Jack Lew recently addressed the issue head-on, announcing the Obama administration will take discretionary action to curb this increasingly common trend. By tightening regulations for certain loans, changing ownership rules and targeting transfers of assets, the government will take significant steps to curtail the explosion of inversion deals, especially those that are still left on the table.

Supporters say this is a step in the right direction. In the short term, they argue, companies will realize an inversion deal is no longer as profitable as they initially thought, halting those deals still in the initial stages of planning. Lew claimed that "For some companies considering deals, today's action will mean that inversions no longer make economic sense."

Leaving aside whether or not the administration’s efforts are desirable in and of themselves, Lew's claim that they will be effective might be a rather hollow statement. Medtronic's ability to loan its untaxed profits to its new Irish parent company, Covidien PLC, will no longer be an untaxable event. But will it stop them from proceeding? Robert Willens, a well-known New York corporate tax consultant, thinks not: "These rules do not strike anything like a mortal blow to the pending deals. Such deals should proceed to completion without missing a beat."

Do these actions actually do anything to solve the core problem in the long term? To most savvy onlookers, absolutely not. Burger King has already declared its plans to proceed with an $11.5 billion deal to reincorporate their headquarters in Canada. They released a statement making clear their intention to move forward, saying "This deal has always been driven by long-term growth and not by tax benefits." Many, like Burger King, agree that the administration's efforts do nothing to address long-term financial issues many companies face.

What do the Obama administration's efforts accomplish, then? By taking action now, the administration and Democratic allies can attempt to leverage Lew's lip service in an attempt to garner votes. Democrat candidates have been sliding in the polls and this could be an attempt to find a populist issue that they believe may resonate with some voters.

The administration's use of these measures as a band-aid for a problem that requires full surgery might set back the true reform that our country needs. However, by using this political moment to take limited steps without addressing the underlying issues, they are likely wasting political capital needed to enact the real solution: comprehensive tax reform.

Lowering our corporate tax rate down to an internationally competitive level while revamping our antiquated tax code is an issue that enjoys support in both parties, a rarity these days in Washington. But by relying on political grandstanding designed to attract voters in November, the administration and Congressional leaders risk curtailing the momentum that has been created by the spectacle that is an exodus of $2 trillion from our economy.

For the administration and some Democratic candidates, these political maneuvers are an attempt to maintain a fragile Senate majority and perhaps keep from losing even more seats in the House of Representatives. But for the average American, the stake is the long-term financial security of the United States, given that jobs tend to follow corporate investment. This is not a cost average Americans should have to risk.

Lopez is president of the Hispanic Leadership Fund, a national advocacy organization that promotes liberty, opportunity and prosperity.