The Obama Administration keeps wondering why businesses
don’t invest more and why it gets no credit for what it claims is its wonderful
economic recovery. Look no further than its new and increasingly successful
campaign to prevent money that corporations earn overseas from returning to the
United States. That’s the practical economic impact as so-called
corporate-inversion deals die in the wake of Treasury’s September tax raid on
cross-border mergers.
On Wednesday the board of Illinois pharmaceutical company AbbVie Inc.
urged shareholders to vote against its pending acquisition of Shire PLC of
Dublin, Ireland. The deal had called for the new combined company to be based
in the U.K., which would have allowed AbbVie to invest more of its future
overseas earnings in the U.S. without paying the U.S. combined federal-state
corporate tax rate of 40% that is the highest in the developed world. The U.K.
rate is 21%.
Uncle Sam is also one of only six governments in the
developed world that demands payment even on earnings that have already been
taxed by other governments overseas. Yet any CEO who seeks a legal way to
invest these previously taxed foreign earnings in the U.S. without penalty is
branded as a “corporate deserter” by President Obama.
Last month White House spokesman Jack Lew, aka the Treasury
Secretary, announced a series of significant tax policy changes effective
immediately. Though even Mr. Lew admitted that the best way to address the
issue was with a fundamental tax reform passed by Congress, he went ahead and
skipped even the normal federal rule-making process in order to scotch pending
deals in time for the election season.
And he has succeeded. In calling for shareholders to vote
down the Shire deal even at the cost of a $1.6 billion break-up fee, AbbVie
said the new Treasury rules eliminated certain of the financial benefits of the
transaction, most notably the ability to access current and future global cash
flows in a tax efficient manner as originally contemplated in the transaction.
Introducing damaging levels of uncertainty into American
business is this Administration’s default regulatory setting. And in this case
it went well beyond Mr. Lew’s seat-of-the-pants September regulating aimed at a
particular set of companies.
Somehow Beltway Democrats never see connections between
hyperactive bureaucracy, rhetorical assaults on business and an era of slow
growth and limited opportunity. But businesspeople notice. When corporations
sit on cash it’s not because they are optimistic about the policy environment.
Investors notice, too. Obviously investors have lately
received discouraging news about U.S. retail spending, Europe and the global
economy in general. But they have also specifically been given reason to mark
down the prospects of potential cross-border merger partners, and anyone else
who might get caught in Mr. Lew’s new tax net.
The hyperpartisan Mr. Lew and fellow Democrats conjured
their anti-inversion scheme as a populist riff to help retain Senate control in
November’s election, but on the present polling it won’t turn out that way.
Instead it’s reinforcing how clueless this Administration is about the sources
of economic growth and confidence.
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