28 April 2024

Jack Lew: Investment Killer?

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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.

Click here to access the full article on The Wall Street Journal. 

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