In an appearance in Washington this morning, Treasury Secretary Jack Lew described the trend of U.S. corporations moving their headquarters overseas to avoid taxes as an urgent problem that is “eroding America’s corporate tax base.” The corporate tax moves, Lew said, mean that “all other taxpayers—including small businesses and hardworking Americans—will have to shoulder more of the responsibility of maintaining core public functions that everyone, particularly U.S. businesses, depends on.”
Many of the incentives for businesses to execute a so-called “corporate inversion” are baked into a decades-old U.S. tax code that both parties in Washington agree needs to be rewritten. However, Lew said, “We cannot wait to complete business tax reform before taking action to fix this problem,” and added, “It is imperative that lawmakers get this done.”
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Lew’s remarks, delivered at an event hosted by the Tax Policy Center in Washington, came the same day Bloomberg News reported that Sen. Charles Schumer (D-NY) will soon introduce a bill that would slash the amount of interest an inverted firm can deduct from its U.S. income from 50 percent to 25 percent.
The two events weren’t necessarily planned to coincide, but coming together as they did, they make it clear that the Democrats are planning to make corporate inversions a campaign issue in the two months before the 2014 midterm elections, either by engineering a legislative “win” for the president, or by forcing Republicans to avoid acting on the issue and then criticizing them for it on the campaign trail.
Corporate executives and business groups have pushed for comprehensive tax reform that would address a nominal U.S. corporate rate of 35 percent, the highest among all developed countries. Unlike most countries, the U.S. requires companies to pay taxes on overseas earnings.
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The desire to be taxed at a level similar to that of your global competitors seems reasonable, but what really aggravates many opponents of inversions are the steps inverted companies take to eliminate even the remaining tax liability of their U.S. operations. “When a U.S. company inverts…the company is still subject to U.S. income taxes,” explains Steven Rosenthal, a senior fellow at the Urban Institute in Washington. “But after the inversion, the foreign company loads up the U.S. company with debt, and the interest payments, in effect, zero out the U.S. income.”
Rosenthal said he basically agrees with Lew. “Once a corporation inverts it’s gone and the remaining U.S. taxpayers are left holding the bag.”
The administration has called corporations that invert “corporate deserters” and called for “economic patriotism” from corporate leaders.
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For their part, many Republicans have resisted taking on the corporate inversion issue, generally not because they don’t think the law should be changed, but because they view it as a bargaining chip that will help them get some of the other things they want in a major tax reform package.
Regardless, it is now clear that Democrats in D.C. plan to make the inversion issue play to their advantage in the fall. The only question is whether they will be able to gather enough Republican support to pass a bill and give the president his win, or will simply spend the next few months calling the GOP a front for big business.
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