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The Senate Finance Committee held a hearing today on U.S. tax policy as it relates to corporate inversions. U.S. companies are merging with foreign, primarily European companies, and shifting their domicile outside the U.S. in the process. The effect of the transaction is to improve shareholder value in part by reducing U.S. tax on the formerly U.S. companies’ foreign income.
The economic situation is brought about entirely because the U.S. tax code remains grossly out of sync with the global economy, while the Administration again refuses to lead and the Congress still refuses to act on comprehensive tax reform to lower business tax rates and move toward a globally competitive tax system. Seeing the inertia in Washington, U.S. companies sometimes find they have to bite the bullet and do the deal.
The right answer is comprehensive tax reform. The wrong answer and the answer preferred by many in the U.S. Senate –the Stop Corporate Inversions Act of 2014 introduced by Senator Carl Levin (D-MI) -- is to attempt to increase the artificial tax barriers to these transactions.
One point on which almost everyone can agree is that these transactions will continue, and U.S. corporate headquarters will continue to emigrate, as long as the U.S. corporate tax rate remains so far above that of our major competitors, and especially so as long as the U.S. imposes the most punitive tax system on companies’ foreign earnings.
However, not only would erecting artificial tax barriers fail to slow the exodus materially, it might even accelerate the trend as corporate executives perhaps properly infer the U.S. Congress is so dysfunctional and the Senate in particular so oblivious to economic realities that there is really no valid justification for holding off any longer if a suitable foreign partner can be found.
The issue is not one of patriotism, but of economic survival in the face of a lousy anti-growth tax code. The patriotic act at this point would be for the Administration and the Congress to do their jobs -- to reform the tax code to encourage U.S. companies not just to remain domiciled in the United States, but to encourage foreign-domiciled companies to come to the United States.
In proposing a non-solution to a real problem, one might be excused for thinking certain Senators were up to their old games of playing politics with the tax code. Certain Senators may feel they’ve got a good campaign issue to use to draw attention away from the many ignored problems and crises piling up on the nation’s doorstep. However, there is strong evidence to suggest the political saliency of the inversion issue may be vastly overstated. The evidence, as is so often the case, rests on what they do, not what they say.
As of the Senate hearing, 22 Senators had co-sponsored Senator Levin’s bill. No surprise there.
According to RealClearPolitics.com (RCP), the seats of five sitting Democrats in the Senate are listed as tossups. How many of these at-risk Senators are on the Levin bill. Zero.
Begich of Alaska? No.
Pryor of Arkansas? No.
Hagan of North Carolina? No.
Landrieu of Louisiana? No.
Udall of Colorado? No.
One Democratic Senator’s seat (Shaheen of New Hampshire) is listed by RCP as leaning Democrat. Is she on the bill? No. That’s 0 for 6 among seriously at-risk Democrats.
Another Democratic Senator’s seat (Walsh of Montana) is listed as leaning Republican. Is he on the bill? No, but he does have his own bill which likewise would complicate the tax code further without addressing the underlying problem. The Walsh bill, which has 23 cosponsors including some of those in at-risk seats, is also not getting much attention from Senate leadership, which has apparently latched onto the Levin bill as their preferred vehicle.
To be sure, certain Democratic Senators running for re-election are co-sponsors of the Levin bill. For example, Senator Merkley of Oregon is a co-sponsor and he is up for re-election. The latest poll listed by RCP has him up 18 points.
Senator Franken of Minnesota is also a co-sponsor and he is up for re-election. He’s up 11 points in the latest poll.
Senator Schatz of Hawaii is also a co-sponsor. He still faces a primary opponent, but if he prevails this being Hawaii his re-election is not much in doubt.
If the inversion issue is such a winner for Democrats, why are all the vulnerable Democrats (according to RCP), running away from the bill? The rule of thumb seems to be that Senators out of cycle or those in safe seats can join the fun; for all others this political playpen is just too dangerous. Once again, while the substance of the matter is of great import, it appears when it comes to the politics there’s a lot less to this issue than the Democratic leadership would have us believe. Their own members tell us so.