While Groundhog Day was celebrated on Feb. 2, it’s arriving a little late this year on Capitol Hill. And unlike the film of the same name where we were humored by Bill Murray reliving the same day over and over again, bad legislation returning isn’t quite as entertaining.
On Tuesday, Congressmen Chris Van Hollen (D-Md.) and Sander Levin (D-Mich.) introduced legislation “aimed at reducing the number of corporate tax inversions by limiting the use of ‘earnings stripping.’” If this sounds familiar, it’s because in 2014 Sen. Charles Schumer (D-N.Y.) introduced a bill to combat the recent slew of inversions, also aimed at earnings stripping.
While the Van Hollen/Levin bill generally mirrors Schumer’s approach, it makes some minor changes – for example, it includes a carryforward period and eliminates the annual approval requirements of Schumer’s bill. And it does contain one significant change that merits note – clarifying application solely to inverted companies, applying a 50% ownership threshold. This provision simply tells companies to lessen the ownership interest of U.S. stockholders in inversion transactions from 60%, which is permitted under current law, to 49% in order to avoid punitive tax treatment. It is unclear why U.S. congressmen are incentivizing less U.S. control of a merged entity, and, even worse, making them more attractive targets for a foreign takeover. Hundreds of U.S. companies are acquired or taken over by foreign firms each year, and this proposal would only make this situation worse.
Otherwise, this bill looks pretty familiar. So is our response. As we said in 2014, this is purely a political messaging piece. And what we said then still rings true now (with my edits below) ….
“While making inversions less advantageous, it is not likely to stop inversions since it in no way addresses the underlying causes of companies inverting, i.e. the U.S.’s sky high 35% tax rate and its antiquated and atypical double taxation of monies earned overseas.
“This proposal is overly complex, raises little new revenue, is contrary to decades of tax law, potentially violates the non-discrimination clause of existing tax treaties, and would likely harm employment growth and international investment in the US.
“The reality is that
(Schumer’s) the Van Hollen/Levin bill is nothing more than political demagoguery in the (final legislative) days leading up to the elections. If (Schumer) they wanted to make the United States an attractive place for both domestic and foreign companies to do business, invest, and create jobs – and in the process nip the inversion wave in the bud -- (he) they would stop wasting time on this kind of polarizing political rhetoric and would instead work seriously to undertake comprehensive tax reform that lowers rates for all taxpayers and shifts to an internationally competitive tax system.”
Washington doesn’t agree on much these days, but there’s a strong, broad consensus that the wave of tax-driven inversions is a problem that needs to be addressed quickly. The smart solution is to identify and correct the aspects of the U.S. tax system driving these transactions. Fortunately, we know what those are – high tax rates and an anti-competitive international tax system – and we know how to fix them.
The discouraging alternative approach is to score messaging points with legislation that would, if enacted, rapidly accelerate the purchasing of successful U.S. companies by foreign companies. It’s unclear why Congressmen Levin and Van Hollen prefer solutions that would hollow out America’s economy, but that’s for them to explain.