One thing that can be said about President Barack Obama is that he has a jeweler’s eye for the populist political pitch and he seems convinced he has found another: U.S. companies using “inversion” deals to shelter their earnings from the U.S. corporate tax bite. The president’s political acumen notwithstanding, we think his presciption for this problem is aimed at its symptoms and not its cause. Inversions involve U.S. companies acquiring or starting a business in another country and then making that country their home for tax purposes. That gets their earnings taxed at the corporate rate of the new home country, which is invariably less than the rate in the U.S., approximately 35 percent. Criticism of this maneuver has been growing. Two weeks ago, Treasury Secretary Jack Lew urged U.S. companies to forgo inversion deals and, in effect, questioned the patriotism of any that didn’t honor his request. The president has been criticizing inversions as he has been traveling around the country doing political fundraising, and during an interview last week with cable business channel CNBC. We are aware that many people question whether U.S. companies really face a significantly bigger corporate tax burden, thanks to loopholes and other breaks, and aren’t at a real competitive disadvantage compared to companies in other countries with supposedly lower corporate tax rates, such as Ireland and the U.K.
In the end, we treat the symptoms of the problems caused by the nation’s tax code because no one has the political skill or will to give it the major makeover it needs. Until that happens, everything else surrounding inversions and other tax matters is just hot air.