A scholar for a free-market think tank predicted regulations aimed at stopping companies from fleeing to lower-tax countries are “doomed to fail.”
The Treasury Department issued new rules on Monday intended to discourage corporate inversions, in which U.S. firms merge with foreign companies in order to move their headquarters to lower-tax countries.
In a statement announcing the new rules, Treasury Secretary Jacob Lew said the department was forced to take action, because “it is clear that Congress won’t act before the lame duck session.” (RELATED: Lew Urges Congress to Crack Down on Companies Fleeing US Taxes)
Lew was likely referring to prospects for the Stop Corporate Inversions Act of 2014, a bill sponsored by Michigan Democratic Sen. Carl Levin that would treat corporations as domestic for tax purposes if at least 50 percent of stockholders are American, or if at least 25 percent of the company’s sales, employees, or assets are located in the U.S. (RELATED: Democrats Would Deny Federal Contracts to Corporations That Relocate Overseas)
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In a statement released on his website, Levin acknowledged that, “the changes the administration announced today are an important step toward ending these blatant tax dodges,” but asserted that, “only Congress can fully close the tax inversion loophole.”
The new rules, Lew said, “will significantly diminish the ability of inverted companies to escape U.S. taxation,” and for some companies, “will mean that inversions no longer make economic sense.” (RELATED: Public Shaming and Punitive Actions Will Not Stop Corporate Inversions)
Treasury released a fact sheet to accompany the announcement that outlines four basic changes. The fact sheet also asserts that, “Treasury will continue to examine ways to reduce the tax benefits of inversions,” and solicits comments about how it might accomplish that.
Under current law, firms are taxed on foreign earnings only when those profits are repatriated, so most of the rules are targeted to restrict the ability of inverted companies to shelter the un-repatriated earnings of their foreign subsidiaries.
Other rules “make it more difficult for U.S. entities to invert,” by strengthening the requirement that the combined company have less than 80 percent U.S. ownership. Specifically, they prohibit companies from artificially inflating the new parent’s size, or deflating the U.S. firm’s size, prior to an inversion deal.
In his remarks, Lew drew a distinction between the mere “shifting of a firm’s tax address,” as opposed to “a merger driven by business reasons, such as efficiency or expansion.” He declared that the former “may be legal, but they are wrong, and our laws should change.”
Others, however, contend that the fault lies not with companies that pursue inversions, but with the punitive tax code that drives them to do so.
Jason Fichtner of the nonpartisan Mercatus Institute, a free-market think tank, told The Daily Caller News Foundation that attempts “to treat the symptoms of the corporate tax code’s problems—rather than the issues causing them—are doomed to fail.”
“Tweaking around the edges and failing to fundamentally reform the corporate tax code will create troublesome results,” he predicted, including “the continuation of harmful tax policies that are biased against saving, investment, job creation, and economic growth.” (RELATED: US Tax Code Causes Businesses to Flee Overseas)
Fichtner believes that a better solution would be “structural corporate tax reform,” that lowers rates, eliminates special-interest loopholes, and ends the taxation of foreign earnings. “Absent that,” he said, “U.S. competitiveness will continue to languish.”
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