For those who aren’t familiar with the expression, tax inversion occurs when companies purchase property in another country in order to change their tax base to another, more financially advantageous location. Northern Ireland is the latest geographic sector to benefit from burgeoning U.S. firms like Google and Facebook, which are said to be thriving under more generous tax provisions. Biopharmaceutical giant Pfizer, which earlier this month attempted to purchase U.K. pharmaceutical firm AstraZeneca, is also suspected of trying to change its physical address.
“My attitude is: I don’t care if it’s legal,” Obama said in a speech in Los Angeles this week. “It’s wrong.”
What I often appreciate about Obama is his ability to come right to the core of the issue, which often doesn’t have to do with pragmatism, or partisanship (although, he’s been known to trump that card as well), but ethics. Few presidents have had the moxie to aim for the moral bull’s-eye as many times as Obama and hit it squarely on the mark.
And he’s particularly skilled in coming up with phrases that speak to the heart of the matter, but might never have found their way into the English lexicon if it hadn’t been for the latest debacle.
Pointing out the benefits of “economic patriotism” Obama called on Congress to “close wasteful tax loopholes and invest in education, and invest in job training that helps the economy for everybody.”
Critics have pointed out that there’s some value to international collaboration, and companies like Pfizer that invest in overseas companies help further technological and healthcare research, not just expand their businesses.
I think Obama knows that, because it wasn’t more than a few months ago that he openly rejected calls for the U.S. to become more “isolationist,” pointing out that “[The] values of our founding inspire leaders in parliaments and new movements in public squares around the globe.”
Of course, at the time he was speaking before the Military Academy in West Point, and the topic wasn’t company tax inversion or collective brainstorming with competitors you may wish to buy, but global security. Still, in the eyes of some, what’s good advice for global governments that handshake across the pond is great advice for small multi-billion-dollar companies that want to expand their markets.
And don’t look for this tax loophole to close any time soon. The federal government has actually been trying to facilitate a change since 2012, when the administration published a concise 25-page report on the President’s Framework for Business Tax Reform. It has plenty of interesting ideas like cutting the corporate tax rate so companies will actually want to stay in the U.S., and my favorite: simplifying and cutting taxes for small businesses. But so far, Congress hasn’t stepped up to the challenge.
In the meantime, as Treasury Secretary Jacob Lew points out, companies that benefit from U.S. resources currently have the ability to pick and choose their principal tax base.
“Many of these companies are for all intents and purposes still based in the United States, and they remain here to take advantage of everything that makes the United States the best place in the world to do business: our rule of law, our universities, our research-and-development capabilities, our innovative culture and our skilled workforce.”
What neither Obama nor Lew addressed is the question of whether companies like Google and Facebook would have been able to reach the pinnacle of success that they have reached if they had been forced to pay taxes under the current U.S. tax system. Would the many others that have changed their addresses succeeded as well, like Apple and General Electric?
Perhaps the answer is finding ways to incentivize collaboration by not only making it more worthwhile for companies to keep their tax bases in the U.S., but also by encouraging more global commerce that benefits commercial growth and exchange.
The Obama administration is correct, however: Economic patriotism has its value in every country. But in this global day and age, when it’s the aspiration of most business owners to expand their business beyond the borders of their homeland, nations have responsibilities as well. And those responsibilities, as Obama’s proposal points out, include keeping abreast with the rest of the world to ensure that tax laws benefit the business owners that must cover their bottom line, not just the financial needs of the country. In today’s global marketplace it seems, everybody is a competitor. Even Uncle Sam.
Image of President Obama: Nick Knupffer