Jedis, DREAMers and Tax Schemers

Member Group : Lincoln Institute

It could be labeled a Jedi mind trick, or perhaps double speak worthy of a George Orwell novel. President Obama and the Left have raised to an art form the ability to name a policy initiative the exact opposite of what it actually is, thus making opponents look bad for opposing it.

The "Affordable" Health Care Act which has resulted in higher health care costs; and the proposed "DREAM" Act that supposedly would solve the nation’s immigration crisis, but actually would simply grant amnesty to lawbreakers are but two examples. In recent weeks the president and his minions have been touting "economic patriotism."

Setting aside the obvious irony of the Obama Administration posing as patriotic, it is safe to assume most Americans would not want to be viewed as unpatriotic. On the face of it "economic patriotism" would sound like the latest version of a "buy American" campaign, or a push to patronize your local small business. In actuality it is part of the administration’s effort to demonize corporations for trying to lower their tax burden and maximize profits.

Taken a step further, as individuals we would be viewed as economically unpatriotic if we took our home mortgage deduction, child tax credit or charitable giving deduction because we are depriving the federal treasury of the funds it needs to finance the President’s big government agenda. So, stop waving that flag and start finding ways to maximize the amount of money you fork over to the IRS every April.

What has set the president’s patriotic heart aflutter is the growing trend of large U.S.-based corporations merging with partners overseas and locating their corporate headquarters in nations with more favorable corporate tax rates, a practice known as corporate inversion. This is totally legal and what would be expected in a free market system. But the president has determined that legal or not, it is – in his opinion – wrong. And, he having a pen and a phone is the final arbiter of all things legal and moral.

Treasury Secretary Jacob Lew got the debate started by asking congress to outlaw corporate inversion. In highly inflammatory language he proclaimed corporations "seek to shift their profits overseas to avoid paying their share of taxes while benefiting from the United States without paying a dime."

That, of course, is absurd. Both foreign and domestic corporations are subject to the U.S. corporate income tax. The problem is the United States sports a 35% corporate tax rate, the highest rate among the world’s 34 most industrialized nations. And this gets to the heart of the matter. Scott Eastman of the Tax Foundation explains: "The U.S. is one of only six developed nations with a ‘worldwide’ tax system that subjects its domestic corporations to double taxation. Income earned by American corporations abroad is taxed once by the nation in which it was earned, and again when the income is back within our borders."

It is both the structure of American tax policy and the excessively high tax rate that makes it attractive for corporations to headquarter elsewhere. Consider that Japan is in the process of lowering its corporate tax rate to 25%. Thus, an American corporation that executes an inversion with a Japanese partner will immediately realize a 10% decrease in its tax obligation simply by virtue of that move alone.

Rather than demonizing American companies that are simply reacting to the nation’s oppressive corporate tax policies the Obama Administration should be working with congress on reforming the system. Republicans in the U.S. House of Representatives have been pushing for such comprehensive reform, but as with virtually all GOP initiatives it has been met with a stone wall of opposition from the White House.

In the meantime, recovery from the Great Recession continues to lag as it will until and unless the underlying disincentives for business investment and growth contained within U.S. tax policy are changed. And no amount of name calling by the president and the treasury secretary will change that fact.

(Lowman S. Henry is Chairman & CEO of the Lincoln Institute and host of the weekly Lincoln Radio Journal. His e-mail address is [email protected].)

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