President Obama returned to his theme of “economic patriotism” last week, invoking the phrase “corporate deserters” to describe multinational companies that use mergers with overseas firms to reduce their tax liability in the United States.
“It’s legal, but it’s not right,” Obama said Thursday in an outdoor speech at the Los Angeles Trade-Technical College. The appearance came at the end of a California campaign trip in which the president spoke at fundraisers for this year’s Democratic candidates in congressional elections.
“They’re technically renouncing their U.S. citizenship,” he said of the companies. “They’re declaring they are based someplace else even though most of their operations are here. You know, some people are calling these companies corporate deserters.”
Obama is calling for congressional action against a process called “inversion” by which an overseas subsidiary legally becomes the parent company. Under current tax law, when a U.S. corporation acquires and merges with an overseas firm, the parent company may claim the overseas address as its corporate headquarters, so long as the foreign company owns at least 20 percent of the combined stock. In his 2015 budget, Obama has proposed raising that to 50 percent. A White House blog notes that the acquired company is “usually one that’s in a country with a lower tax rate than the United States.” It does not mention that countries with a lower tax rate include every other country in the industrialized world, since none has a corporate tax rate as high as the 35 percent levy against U.S. companies. While many large corporations are able to mitigate that cost through deductions, tax shelters, and other “loopholes” in federal tax law, many states also tax corporate income, pushing the effective tax rate above that 35-percent mark, according to the Washington, D.C.-based Tax Foundation.
Last week Treasury Secretary Jack Lew called on Congress to discourage companies from shifting their corporate residences to avoid U.S. taxes. “Congress should enact legislation immediately,” Lew told a business conference in New York hosted by cable television channel CNBC. “We should have some economic patriotism here.” Republicans and some Democrats say the issue should be considered as part of an overall tax reform that will include lowering of the corporate tax rate.