Tax Analysts Blog

Republican Populism and Inversions

Posted on Jul 21, 2014

There is an increasing gap between the thin slice of the U.S. population that enjoys fantastic wealth and the vast bulk of middle-income Americans whose paychecks have hardly grown at all in two decades. (See the figure below.)

Unlike the past, however, Republicans are not minimizing the plight of the poor and the power of corporations. That’s because they know that if they ever want to win the White House again, they must directly address the economic insecurity of Middle America. They know they must shake off their identification as the party of the rich. And they are working feverishly to connect with regular people and distance themselves from anybody or any group that can be labeled elite. And at the top of their list, after big government, is big business. Consider the following:

    • Sen. Ted Cruz, R-Texas, on March 7 told conservative activists gathered in Maryland, “We need to end corporate welfare and crony capitalism.”
    • In a video that began airing in April, Louisiana Gov. Bobby Jindal (R) tells viewers: “If you don’t think the Republican Party should be the party of big government, big business, or big anything, you’re thinking like a New Republican.”
    • In an April 30 speech at the Heritage Foundation, Sen. Mike Lee, R-Utah, spoke of “America’s crisis of crony capitalism, corporate welfare, and political privilege in which government twists public policy to unfairly benefit favored special interests at the expense of everyone else.”
    • On June 25, repeating a theme he has used in several recent speeches, Sen. Marco Rubio, R-Fla., said, “I have one criticism of my party. It's that too often, Republicans allow themselves to be a party that's not for growth, but that's for big business.”
    • And two days before the he defeated former House Majority Leader Eric Cantor, R-Va., in the Republican primary, David Brat wrote in the Richmond Times-Dispatch: “I am running against Cantor because he does not represent the citizens of the 7th District, but rather large corporations seeking insider deals, crony bailouts and a constant supply of low-wage workers.”
It is probably too much to ask, but it may even be possible that Republican wrath against big business could be aimed at U.S. tax rules that allow multinationals to receive tax benefits from inversions. At the rate we’re going, a very significant portion of the Fortune 500 could be domiciled outside the United States before the next presidential election. If, as most Republicans are now arguing, we wait for tax reform to address the problem, we would probably have to endure a prolonged period of international tax chaos. While most companies would be stuck playing by the old rules, a significant minority of lucky duckies will have a coupon that says they can be treated as a foreign corporation, and another large group would be wandering in limbo trying to figure out how they could become members of this privileged club.

Just as with any law that provides a tax shelter, rules that allow some firms to invert give rise to a variety of unhealthy economic consequences. In the current inversion-crazed environment, there are probably hundreds of businesses expending enormous amounts of cash and time evaluating one or more possible ways to invert. For the dozens that will actually consummate these deals, there will be additional millions of dollars of legal, accounting, and consulting fees. Except in the unlikely case in which all firms in an industry are able to invert on similar terms, tax rules will be creating winners and losers within an industry. And because some industries are more inversion-prone than others, the result will be an arbitrary tilt of the economic playing field in favor of some industries over others.

Pro-business establishment Republicans are comfortable allowing the inversions to continue. But saying you favor some yet-to-be-specified tax reform that may or may not occur at some unknown point in the future -- and which, by the way, is unlikely to eliminate inversions -- is no excuse for allowing this sorry state of affairs to prevail in the near term. That’s the policy argument against inversions.

Here’s the politics: Inversions are allowing a privileged group of big businesses with the help of high-priced lawyers and Wall Street investment bankers to quit the United States while other businesses and the public are left behind to be taxed as U.S. residents. Perhaps at some point populist Republicans will come to realize that allowing a few corporations special tax privileges is not consistent with their anti-corporatist, pro-working-class agenda.

This post is excerpted from an article that first appeared in Tax Notes.

Read Comments (4)

vivian darkbloomJul 20, 2014

I suppose, Mr. Sullivan, had you been faced with the problem of a few
"privileged" persons escaping East Germany prior to the re-unification, your
solution would have been to build bigger and better walls. After all, those
"privileged few" enjoyed benefits by leaving that were not available to those
who stayed behind.

Maybe there is another, better way, to solve this "problem". Start with
identifying what the "problem" is and what is causing it. By not restricting
inversions even further, those multinationals who do undergo "inversions"
(often through acquisitions by larger foreign companies) would enjoy tax
benefits that most of the civilized developed economies of the world offer.
But, rather than further restrict their freedom of movement, we should offer
our corporate "citizens" a better environment from which to operate globally.
Start with abandoning the idea that the US is entitled to tax global profits
simply because the parent happens to be incorporated in the United States and
combine that with a marginal corporate income tax rate that is competitive with
the rest of the world.

Adam SmithJul 20, 2014

Nice graph. Glad to see how well Obama has been at raising the Middle Class.
Nothing like "results" to show the efficacy of "progressive" policies on the
Middle Class. Can't imagine why we aren't getting more of this "good" policy!

edmund dantesJul 21, 2014

Ms. Darkbloom captures my sentiments exactly. And as the WSJ has pointed out,
when you handicap American companies with world-record tax rates, you make them
vulnerable to foreign takeovers. Would that be better than inversions? Or do
you also plan to restrict capital inflows to the US?

We know what the correct answer is. Bring the corporate tax rate down to the
worldwide average, and end the insanity of double taxing repatriated foreign
profits. Easy peasy, corporate inversions end overnight. This common sense
solution should not be held hostage to a grand bargain tax reform that's never
going to happen. Or is the dispersal of American companies to the rest of the
world the new form of foreign aid?

BTW, the Republicans are not the party of the rich, the Democrats are. Soros,
Gates, Buffett, the most politically active billionaires are all Democrats.
Middle class economic interests are represented by the Tea Parties, still
trying to break into the Republican party. That's why IRS felt so comfortable
in targeting them.

travis rechJul 23, 2014

"BTW, the Republicans are not the party of the rich, the Democrats are. Soros,
Gates, Buffett, the most politically active billionaires are all Democrats."

This true to an extent, I have no solid numbers but my gut instinct is to say
that the majority of billionaires are liberal, and the majority of millionaires
are conservative. My guess is that once you hit billionaire status (and
probably no longer as hungry for further gains) you have opportunity to
seriously evaluate and address the wrongs in the world.

But when you just made your first million you're still in a winner take all
survival of the fittest mentality.

Just an amateur sociologist guess but it makes sense to me.

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