TAX BYTES: Muddled morality and a whopper of a tale

The Obama Administration, along with a couple senators, have been leading a campaign of moral indignation against “inversions.” In tax terms, inversions are a U.S. incorporated company changing its residence to a lower tax country to reduce the tax burden on its income. Because U.S. companies are taxed in the country where the income is earned and then again by the U.S. at the highest global income tax rate, inversions are a logical, if unfortunate, response.

President Obama’s populist political move before the mid-term elections was to wag his finger at companies and demand “economic patriotism.” He dismissed the legality of the move instead saying that he doesn’t care if it is legal, that it is wrong. The president has decided to fight this one on moral grounds. The less-than-clear Treasury Department has promised some sort of action sometime in the future. Meanwhile, the Senate is moving with anti-inversion legislation to heavily penalize companies that have opted to invert since 1994, changing the law and holding companies liable going back twenty years.

Morality lessons are a tricky business and in this case, the self-appointed scolds fail, or deliberately ignore, the repercussions of their populist rant. The most recent target of their political ire is the home of the Whopper, Burger King, which is owned by a Brazilian private equity firm.

A couple weeks ago Burger King announced it was buying Tim Horton’s, a Canadian coffee and donut chain, and becoming a Canadian company. As many analysts have made clear, the deal makes sense regardless of the tax benefits. But not to politicians who know little to nothing of the business decision. They want to find a means to force the company to choose the U.S. or otherwise punish their legal decision.

What would be the result?

• Penalizing further U.S. companies that already struggle to compete in the international marketplace because they bear the burden of paying the highest taxes in the world, even on profits earned overseas.

• Reducing hiring as U.S. companies become less competitive, and inviting foreign takeovers.

• Leaving in place a ridiculously out of date, inappropriate corporate tax system when instead the Senate should be engaging in real tax reform and solving the evident problems.

• Making clear that yet more area of law is not to be trusted even years later.

• Substituting a politician’s judgment for the private business owners decision in that these legal business moves are perfectly logical and helpful to the ongoing enterprise.

It would seem that the president actually sums it up best, “It is true that there are a lot of things that may be legal that probably aren’t the right thing to do by the country.” An anti-inversion law that ignores broader tax reform might be legal but certainly is not the right thing to do.

Today’s TaxByte was written by Bartlett D. Cleland, Resident Scholar, Tax and Innovation Policy with the Institute for Policy Innovation.