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I’ll make it plain and simple: The Obama administration has made it harder for companies to bring money from overseas to invest in the United States.
Yesterday, the Treasury Department issued new tax guidance [subscription required] to stem the recent trend of corporate inversions. The Wall Street Journal reports:
Treasury officials took action under five sections of the U.S. tax code to make inversions harder and less profitable, removing some of the appeal that has made the transactions more common in recent years, particularly in the pharmaceutical industry.
The kicker is in the Washington Post’s story which reads:
Tax analysts praised the new regulations, saying they will make it much harder for U.S. firms to bring cash earned abroad back to the United States tax-free.
Since when is it a good thing to put up barriers to investment in America? That doesn’t help anyone except politicians who prefer election year posturing instead of improving America’s business climate.
This action will make it harder for the economy to grow.
Many U.S. companies earn profits overseas and want to invest those profits in America. However, by having the world’s highest corporate tax rate and a worldwide system of taxing overseas profits, the United States discourages that. As a result, profits aren’t invested in new American factories, new American workers, more R&D, or shared with middle-class investors in their retirement funds. Treasury's proposed guidence will only further complicate our antiquated tax code.
Dr. Martin Regalia, the U.S. Chamber’s Chief Economics explained the absurdity of this policy:
If companies want to use the accumulated cash in the former foreign subsidiary, they can still do so. They just must use the proceeds abroad to create income and jobs abroad. In fact, the administration just assured that deferred income in the once foreign subsidiary will never come back to the U.S. to help create income, jobs, and economic growth here.
He goes on:
Bad public policy produces bad economic results. Just look at what the policies of this administration have done to economic growth over the last five years. Capital flows to places where it is valued and well treated, and it avoids places where it is abused by onerous tax systems. The administration’s vain attempt to lock corporations in to an obsolete tax system will only serve to further lock capital out.
Rather than piecemeal, onerous actions, the administration should undertake comprehensive tax reform that lowers rates for all businesses and shifts to an internationally competitive system that welcomes investment and produces the economic growth this country needs.
Before the Treasury Department announced its plan, on Fox Business Judge Andrew Napolitano predicted, “They will probably try to get the Federal Reserve or the Treasury Department to issue some regulation which will present an obstacle to this.” He was on the right track. Fox Business host Stuart Varney replied, “We are pushing money out of America.” Unfortunately, he is also right.
Corporate inversions are a symptom of an uncompetitive tax code. The United States ranks 32nd in the Tax Foundation’s International Tax Competitiveness Index. Instead of taking actions that makes America’s tax environment even less competitive, let's fix the problem with fair, comprehensive tax reform.
UPDATE: I originally wrote that the Treasury Department issued new tax regulations. In fact, it released new tax guidance. The text has been corrected.