Obama and Treasury Secretary Jack Lew are overreaching their constitutional powers again, this time to extort money from companies that are obeying the tax laws and are acting perfectly within their rights. The rest of the industrialized world is marching in the other direction and getting fabulous results, but we've got the Keystone Cops running the administration.
Jack Lew’s Corporate Tax Ambush
ENLARGE
Treasury secretary Jack Lew in Washington D.C. on March 30.Photo: Bloomberg News
April 5, 2016 7:51 p.m. ET
You can tell it’s an election year, because the Obama Administration is moving again to blame U.S. companies for trying to remain competitive despite the developed world’s worst corporate tax burden. No less than President Obama himself appeared in the White House press room Tuesday to praise new Treasury rules, issued the day before, that sandbag PfizerInc. and other companies using foreign takeovers to reduce their tax burden.
Mr. Obama started by telling everyone how splendid the U.S. economy is doing, which shows how low political expectations have sunk after seven years of 2% growth. This Obama boom will be news to Bernie Sanders and Hillary Clinton, who are both promising faster growth through better socialism.
But on that score Mr. Obama wants to help his fellow Democrats with one more lawless Treasury rewrite of longstanding U.S. tax law. Twice before, in 2014 and 2015, Treasury Secretary Jack Lew simply issued notices that changed the rules to make it more difficult for a merging company to adopt a foreign legal address—so-called corporate inversions. But those attempts flopped—because the business incentive is so great to escape America’s destructive combined state and federal corporate tax rate of more than 39%.
Now Mr. Lew is really turning the screws, as he announced a new crackdown on “serial inverters.” He’s referring to companies that have repeatedly done things that are perfectly legal. And now he’s going to make them pay, starting with the Pfizer merger with Allergan that Mr. Lew wants to stop. Allergan shares lost more than $15 billion in market value Tuesday after the Treasury ambush.
In order for a U.S. firm to gain the full tax benefits of an inversion under longstanding rules, its foreign merger partner has to be almost as large. After a series of inversion deals in recent years, there are now more big foreign companies, many based in Ireland. Mr. Lew doesn’t want them merging with any more U.S. companies and pulling the headquarters addresses over to Dublin. So his new rule will ignore transactions conducted in the last three years and pretend that these firms are smaller than they really are in order to prevent them from doing deals that other companies can still do.
This would almost surely be thrown out if it were challenged in court, but Mr. Lew knows that is unlikely to happen. Team Obama figures they can get away with this illegal rewrite because potential corporate partners would likely need to merge and then suffer at the hands of the IRS before they could have the standing to sue. Not many corporate executives—or their shareholders—are willing to do that.
Mr. Lew also wants to ban what liberals call “earnings stripping.” The rest of the world calls this lending money to a U.S. subsidiary, but the basic idea is that whenever a U.S.-based division of a company legally deducts interest payments from its taxes, Mr. Obama sees a tragic reduction in federal tax revenue. So Mr. Lew has decided to reinterpret a 1969 law to propose a new rule in 2016 that changes longstanding conceptions of the difference between debt and equity in order to raise corporate tax bills.
And here’s where it gets ugly for everybody, not merely “serial inverters.” All loans within a company will now have to be scrutinized and categorized according to new standards. A prominent tax lawyer tells us to prepare for a “sea change in corporate back offices” as companies navigate a new ocean of compliance questions.
As if this weren’t bad enough, Messrs. Obama and Lew accompanied their new rules with lectures about the benefits of operating in the U.S. and its “rule of law.” But these companies are acting legally and behaving rationally under the law that Congress has written.
***
The irony is that Congressional leaders in both parties are eager to rewrite the corporate tax code in a way that helps the U.S. economy. Paul Ryan has been trying to negotiate a corporate tax reform since 2014, as have Chuck Schumer and Rob Portman in the Senate. But Messrs. Obama and Lew won’t deal in good faith because they want any corporate reform to be a huge net tax increase yielding tens of billions in new annual revenue they can spend.
So the rest of the world will continue to march down the Laffer Curve on corporate tax rates, making their countries better destinations for companies that want to be globally competitive. Britain’s Tories recently announced a plan to cut the U.K. corporation tax rate to 17% by 2020, from 20% now, which is down from 28% in 2010. The lowest Mr. Obama will even consider is 28%, which is barely worth the political effort.
All of this is one more example of how Mr. Obama’s economic policies increase political uncertainty and erode the potential for faster growth and rising incomes. No one can see the investment that won’t occur or the jobs that won’t be created in the U.S. because of the Obama-Lew desire to stick it to corporations and their workers in an election year.
Jack Lew’s Corporate Tax Ambush
Treasury secretary Jack Lew in Washington D.C. on March 30.Photo: Bloomberg News
April 5, 2016 7:51 p.m. ET
You can tell it’s an election year, because the Obama Administration is moving again to blame U.S. companies for trying to remain competitive despite the developed world’s worst corporate tax burden. No less than President Obama himself appeared in the White House press room Tuesday to praise new Treasury rules, issued the day before, that sandbag PfizerInc. and other companies using foreign takeovers to reduce their tax burden.
Mr. Obama started by telling everyone how splendid the U.S. economy is doing, which shows how low political expectations have sunk after seven years of 2% growth. This Obama boom will be news to Bernie Sanders and Hillary Clinton, who are both promising faster growth through better socialism.
But on that score Mr. Obama wants to help his fellow Democrats with one more lawless Treasury rewrite of longstanding U.S. tax law. Twice before, in 2014 and 2015, Treasury Secretary Jack Lew simply issued notices that changed the rules to make it more difficult for a merging company to adopt a foreign legal address—so-called corporate inversions. But those attempts flopped—because the business incentive is so great to escape America’s destructive combined state and federal corporate tax rate of more than 39%.
Now Mr. Lew is really turning the screws, as he announced a new crackdown on “serial inverters.” He’s referring to companies that have repeatedly done things that are perfectly legal. And now he’s going to make them pay, starting with the Pfizer merger with Allergan that Mr. Lew wants to stop. Allergan shares lost more than $15 billion in market value Tuesday after the Treasury ambush.
In order for a U.S. firm to gain the full tax benefits of an inversion under longstanding rules, its foreign merger partner has to be almost as large. After a series of inversion deals in recent years, there are now more big foreign companies, many based in Ireland. Mr. Lew doesn’t want them merging with any more U.S. companies and pulling the headquarters addresses over to Dublin. So his new rule will ignore transactions conducted in the last three years and pretend that these firms are smaller than they really are in order to prevent them from doing deals that other companies can still do.
This would almost surely be thrown out if it were challenged in court, but Mr. Lew knows that is unlikely to happen. Team Obama figures they can get away with this illegal rewrite because potential corporate partners would likely need to merge and then suffer at the hands of the IRS before they could have the standing to sue. Not many corporate executives—or their shareholders—are willing to do that.
Mr. Lew also wants to ban what liberals call “earnings stripping.” The rest of the world calls this lending money to a U.S. subsidiary, but the basic idea is that whenever a U.S.-based division of a company legally deducts interest payments from its taxes, Mr. Obama sees a tragic reduction in federal tax revenue. So Mr. Lew has decided to reinterpret a 1969 law to propose a new rule in 2016 that changes longstanding conceptions of the difference between debt and equity in order to raise corporate tax bills.
And here’s where it gets ugly for everybody, not merely “serial inverters.” All loans within a company will now have to be scrutinized and categorized according to new standards. A prominent tax lawyer tells us to prepare for a “sea change in corporate back offices” as companies navigate a new ocean of compliance questions.
As if this weren’t bad enough, Messrs. Obama and Lew accompanied their new rules with lectures about the benefits of operating in the U.S. and its “rule of law.” But these companies are acting legally and behaving rationally under the law that Congress has written.
***
The irony is that Congressional leaders in both parties are eager to rewrite the corporate tax code in a way that helps the U.S. economy. Paul Ryan has been trying to negotiate a corporate tax reform since 2014, as have Chuck Schumer and Rob Portman in the Senate. But Messrs. Obama and Lew won’t deal in good faith because they want any corporate reform to be a huge net tax increase yielding tens of billions in new annual revenue they can spend.
So the rest of the world will continue to march down the Laffer Curve on corporate tax rates, making their countries better destinations for companies that want to be globally competitive. Britain’s Tories recently announced a plan to cut the U.K. corporation tax rate to 17% by 2020, from 20% now, which is down from 28% in 2010. The lowest Mr. Obama will even consider is 28%, which is barely worth the political effort.
All of this is one more example of how Mr. Obama’s economic policies increase political uncertainty and erode the potential for faster growth and rising incomes. No one can see the investment that won’t occur or the jobs that won’t be created in the U.S. because of the Obama-Lew desire to stick it to corporations and their workers in an election year.
