The Obama administration stunned the business world yesterday with new, draconian rules designed to prevent so-called tax inversions. Inversions allow American corporations to escape most U.S. income taxation. The animus against such inversions is emotional and financial. On the one hand, companies wanting to leave are accused of being ungrateful, unpatriotic, insidious, or worse. In other words, the rationale against inversions is an appeal to emotion. But the real driver of that antipathy is that their escape from U.S. taxation creates a bigger tax burden for the rest of us. I believe that if the money weren’t the issue, the emotion wouldn’t be there.
Not too long ago, America was the destination of choice for individuals and companies. I don’t recall any of this emotion in reverse. America has accepted foreign investment, including wealthy foreign individuals and foreign companies wanting to domicile here, with open arms. In fact, these types of immigrants were considered America’s due for being the freest, most business-friendly nation on earth. We would have regarded the idea that they were “economic deserters” with respect to their home countries as bizarre or unhinged. America has generally accepted foreign individuals much more grudgingly and with suspicion, but we never thought of immigrants as wronging their country of origin just for leaving. Neither did their former compatriots, with one exception.
That exception, of course, is communist countries. They demonized their emigres with the same epithets that our political leaders apply to inverting corporations. Their accusations should sound familiar. “After all we gave you—food, education, jobs—you want to leave us?” But in the west, we saw the twisted logic of such appeals for what they were, i.e., a presumption that just because you provide things to someone, you own them. We properly viewed these self-serving claims the way we viewed abusive husbands saying, “after giving you a roof over your head, good food, nice dresses…” And when communist appeals to patriotism and threats failed to dissuade, they required their emigres to leave behind virtually everything they had acquired or built on the theory that “you didn’t build that.” Communist countries literally built walls to keep their people in. We used to ridicule their tactics and reasoning. When America was the place people wanted to be, we believed that keeping your citizens captive was wrong, and voting with your feet and wallet were basic freedoms.
We often hear that greed is driving corporate inversions. That’s true, I suppose, to the extent that corporations want to be in the most favorable business environment possible for making money for their owners. But it is far more true with regards to politicians trying to extract every dollar they can from their citizens, including corporate citizens. In the case of the U.S., that includes profits for products made in India to sold in Austria, if the company is headquartered in Chicago. That is what our tax system lays claim to.
We are unique among advanced nations in claiming taxes on global earnings. It is an arrogance held over from the postwar period when America could dictate the terms of trade, and when our tax rates were competitive with those of most other nations.
In the intervening years, foreign competition has grown in both commerce and tax policy. And we–meaning the U.S. government and the people pretending that the last 50 years haven’t happened–have ignored those realities. And we expect our companies to ignore it, and continue to pay the highest marginal tax rates on earth. And when they buck, we complain like petulant shop owners bitching that their customers are leaving for better prices and less arrogant service, and calling their departing customers bad names for doing what all of us would do in their place. It appears that people believe in competition when they’re competitive, and in duty or loyalty when they’re not.
But if we let these companies go, doesn’t that create a bigger burden for the rest of us? Only if you begin with one of two presumptions, what I call the “entitlement’ presumption and the “Soviet” presumption.
The Entitlement presumption is that the U.S. is entitled to uncompetitively high tax rates, that out 40 percent (average) marginal tax rate on global income is a divine right. If we did what every other major country has done, and give up our pretense at global hegemony and reduced our corporate tax rate to something like 2o percent, the inversions would grind to a halt without any wall necessary.
The Soviet presumption is simply that the government owns us, and has a permanent claim to whatever we make. I get that every country would like to see their people (and their property) as their possession. But that is not America. American citizens or corporations are not the property of their government. Americans have the most basic right of all, the right to walk away. Most Americans, including myself, have chosen America above their native countries because of its promise of freedom and opportunities (and not its promise of stuff).
Admittedly, choosing a nation is not like choosing a place to shop. Allegiance and loyalty are important in citizenship, as it is in marriage. But allegiance and loyalty have to go both ways. If it doesn’t, if one side abuses the relationship, we allow for divorce, and we don’t give the abuser a veto. We don’t force people to stay in relationships they don’t want.*
Today, most sensible people ridicule the wall that Donald Trump wants to build to keep people out. We claim that such a wall goes against what America stands for. I would agree, even if our actual history somewhat belies that. But America is now in a new world where we are not just dealing with people who want to come, but with people who want to leave. However un-American one might consider a wall to keep people out, it pales to the idea of a wall to keep people in. For us to suddenly decide that you can’t leave because we want your money is the height of hypocrisy.
Regardless of one’s attitude about walls, the fact is that walls ultimately don’t work. They might keep people in or out for a while, but in the long run, humans are remarkable at overcoming such barriers. Companies have repeatedly overcome government restrictions to migrate, and they will again. In fact, the higher the walls, the more energy people will spend to get over, under, around, or through them, until the walls end up as ineffectual scars on the landscape. Or tourist attractions.
* I’m not sure that comparing corporate citizenship to individual citizenship is the perfect analogy, but that is the analogy used by the people applauding the new tax laws.