Treasury Secretary Jack Lew has written an op-ed page of the Washington Post to plead with Congress to enact legislation addressing tax inversions, which he says have been increasing at “breakneck speed.”
As we’ve been discussing all this month, the number of U.S. companies re-chartering overseas to avoid corporate taxes has been accelerating recently. Tax inversions were a major theme of President Obama’s interview with CNBC’s Steve Liesman Friday.
It’s not entirely clear why the situation has only gotten worse recently, because the U.S. federal tax code hasn’t been overhauled in almost 30 years. It’s most likely the result of other countries liberalizing their tax regimes. But you can see what he’s talking about here:
Whatever the reason for the spike, Lew says Congress needs to act now. He addresses the contention that addressing inversions specifically wouldn’t help because the underlying tax code would remain unchanged:
…we would still need to enact anti-inversion provisions because companies always would find countries with near-zero rates to which they could relocate. Moreover, even the most optimistic know that the administration and Congress need more time to complete bipartisan comprehensive business tax reform. While the business-tax-reform process moves steadily forward, the pace of inversions is increasing at breakneck speed. We must confront this problem now, before our tax base is so eroded as to damage the prospects of comprehensive reform.
Lew also explains why existing legislation that would address the issue is inadequate: It would not apply retroactively to firms that have fled U.S. shores:
Current proposals in Congress would apply to any inversion deal after early May of this year. The alternative — legislation taking effect after the president signs it into law — could have the perverse effect of encouraging corporations to act more quickly, negotiate new deals and rush to close those transactions before the bill is enacted. It would be a mistake for Congress to pass anti-inversion legislation that creates a race against the clock and encourages more, not fewer, inversions.
According to The Economist, loopholes in the corporate tax system cost the U.S. $US150 billion each year, and that U.S. firms abroad have $US2 trillion sitting on their foreign units’ balance sheets.