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One of the penalties for refusing to participate in politics is that you end up being governed by your inferiors. -- Plato (429-347 BC)

Wednesday, September 24, 2014

Editorial Boards: Obama Admin "Inversion" Rule " Not The Answer | Reform Needed for ‘Byzantine U.S. Corporate Tax System’

On Monday, Bloomberg News reported, “The Treasury Department announced steps that will make it harder for U.S. companies to move their addresses outside the country to reduce taxes, clamping down on the practice known as inversions. . . . Even without more authority from Congress or aggressive steps that former government officials had advocated, the new rules are expected to give companies and their advisers pause and require recalculation of some pending deals. . . . [Treasury Secretary Jack] Lew, who said in July that Treasury lacked authority to stem inversions, reversed himself in August and the administration began studying its options. In recent days, Lew said the department was completing its work.”

Here we have another example of President Obama circumventing Congress when it has refused to pass legislation he wants, in an attempt to enact the changes through executive action. And like some of the president’s other dubious executive actions, the Treasury Secretary admitted he didn’t have the power to take these actions, but then reversed himself and did it anyway.

As The Wall Street Journal editors write, “[E]ven the White House admits that changes in tax law ought to involve Congress. So how does Mr. Lew's Treasury propose to change the rules on its own? . . . [T]he sections of the law that Treasury cited on Monday in claiming the authority to rewrite business tax rules are still a unilateral diktat designed solely with an election in mind.”

Beyond the questionable authority the Obama administration is using to try to change tax rules, editorial boards agree that from a policy standpoint, this action on inversions isn’t particularly helpful and is no substitute for badly needed broad tax reform.

The WSJ editors explain, “The regulations are ostensibly to prevent so-called corporate inversions, in which U.S. companies acquire foreign firms and then relocate their legal headquarters offshore for tax purposes. . . . Inversions are for businesses that want to make money overseas and then bring it back here. But if the changes work as intended, they will make it more difficult and expensive for companies to reinvest foreign earnings in the U.S. Tell us again how this helps American workers. Team Obama knows this, because they spend most of their time talking about tax fairness and the alleged threat inversions pose to federal revenues. . . . What's really wrong is a U.S. tax code that has the highest corporate rate in the developed world and is also one of only six industrialized countries that demands to get paid on money earned outside its territory.”

In their must read editorial, the Bloomberg editors say, “Just Cut Corporate Taxes Already.” They write, “Lew's announcement yesterday, concerning so-called corporate inversions, fails to address the main issue: the need to reform the byzantine U.S. corporate tax system. It also illustrates the limits of making tax policy by administrative decree instead of legislation. The U.S. taxes corporate profits at 35 percent, the highest of any developed country. The U.S. is also unusual in taxing profits from foreign operations, once the money is brought back to the U.S. . . .

“There's little in the new initiative for the middle class or anybody else to be glad about. The new rules will make it a bit harder to invert and to shield foreign profits after inversion. They'll probably make some companies rethink their plans. But the more successful the administration is in enforcing the U.S. corporate tax system, the more its anomalies will weigh on the U.S. economy -- and the less attractive the U.S. will be as a place to start and build businesses with global ambitions. The corporate tax code needs to be reformed, not shored up.”

They continue, “[T]his way of trying to enforce a bad system causes additional collateral damage. There's a limit to what administrative action, as opposed to legislation, can do. The Treasury's rule makers have multiplied the complications in the code -- the changes are a bonanza for tax lawyers, if not for anybody else -- and that creates additional uncertainty. The muddle is worsened by the administration's threat to keep looking for more ways to crack down. Something is wrong when sowing confusion becomes an instrument of tax policy.

“The U.S. needs comprehensive corporate tax reform. A more intelligent corporate tax code -- conforming to international norms, based on a lower rate, more uniformly applied -- could easily raise more revenue than the current system, however zealously enforced.”

And even the editors at The Washington Post agree that real tax reform is the better way to handle things. “As Mr. Lew was the first to admit, however, the new actions are in no way a substitute for a broader reform of the U.S. corporate tax code. They are, at most, a short-term fix for one specific manifestation of the code’s overall inefficiency. The main reason that U.S. firms sought to ‘reflag’ themselves as foreign companies was that the top federal tax rate for corporations, 35 percent, is the highest in the developed world (not counting state levies). . . . [T]he high U.S. rate, in combination with the United States’ unique claim to tax worldwide earnings of its firms, drove many companies to seek new headquarters abroad.”

As the Bloomberg editors conclude, “The middle class, like the rest of the country, has an interest in a code that raises revenue as simply and efficiently as possibly and makes the U.S. a great place to invest. Righteous indignation over inversions doesn't serve that cause.”

Tags: editorial boards, agree, Obamaa Administration, inversion rule, not the answer, reform, Byzantine, U.S. Corporate, Tax System, tax code To share or post to your site, click on "Post Link". Please mention / link to the ARRA News Service. and "Like" Facebook Page - Thanks!
Posted by Bill Smith at 1:45 PM - Post Link

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