Americans are frequently instructed to support a suspect policy, product or team out of a sense of loyalty or patriotic duty. Two decades ago, it was our patriotic duty to choose the United States automobile industry over foreign competitors, despite the fact that foreign manufacturers were offering lower-priced cars for better value. Today, Main Street merchants nationwide play the loyalty card when they are unable to match the combination of low prices and convenience offered by Wal-Mart and Target. And Chicago Cubs fans have always been asked to support their perennially losing team out of sheer geographic devotion. When patriotism or loyalty is the principal justification for a proposal, you can be sure that you are being asked to back a losing idea. Of these three examples, only the Cubs, for reasons that defy explanation, have been able to maintain fans on that basis.
Efforts to limit so-called tax inversions, in which companies move their corporate headquarters offshore by acquiring or being acquired by a foreign entity, rely on a similarly specious argument. The Obama administration has denounced inversions as unpatriotic and is currently weighing potential actions that could keep companies and their taxes stateside. But such initiatives are destined to fail unless policymakers change the corporate tax code.
The corporate justification for relocating overseas substantial tax savings is transparent and unchallenged. The current corporate tax structure in the U.S. provides big incentives for corporations to move offshore. As Treasury Secretary Jack Lew recently affirmed, U.S. corporate tax rates are the highest among all the developed economies of the world. Since the last significant tax reform in 1986, our tax code has become riddled with loopholes, penalties, and exclusions to such an extent that large corporations now maintain an army of tax consultants to sort through the complexities of the code and look for opportunities to reduce taxes. Any well-run international organization continuously looks for ways to reduce cost. Identifying a tax arbitrage opportunity is one that provides immediate payoff, and companies are unlikely to voluntarily agree to give up potentially billions of dollars in savings regardless of their patriotic allegiances.
The appeal of moving corporate headquarters abroad also lies in the fact that it is relatively easy. In prior eras, businesses that physically moved their headquarters encountered significant disruptions or expenses on the front end. But corporate headquarters are not constituted by a particular building, business unit, manufacturing process or collection of employees. Instead, they are defined by a set of legal documents that create an entity to achieve certain business objectives such as managing liability exposure, easing access to capital markets or reaching branding and marketing goals. Moving the corporate headquarters of a company that already is in multiple countries offshore can be as simple as relocating a few key personnel and creating new legal documents. Of course, a triggering mechanism needs to occur that allows the change to happen and therein lies the necessity of either acquiring or being acquired by an overseas entity.
Asking corporate America to ignore the potential savings offered by inversions without addressing the problematic U.S. tax code is both unreasonable and unfair. Both Secretary Lew and Senate Finance Committee chairman Ron Wyden, D-Ore., have acknowledged that comprehensive tax reform is necessary in their discussions of inversions. Other nations are using tax policy as an effective way to attract capital investment and the jobs that come with it, and the best way to stop U.S. companies from leaving is to make them a better offer.
U.S. automobile manufacturers eventually stopped relying on patriotism to win back customers and started addressing the competitive threat of foreign-made cars by improving the relative value of their products. So too should our policymakers focus on the root cause of inversions: the significant disparity between U.S. corporate tax policies and the tax policies of other nations.
Mark W. Olson is chairman of Treliant Risk Advisors LLC and can be reached at email@example.com. His former positions include Federal Reserve Board governor, chairman of the Public Company Accounting Oversight Board, chairman of the American Bankers Association and bank president and CEO.