The Yin and Yang of DC

Our do nothing Congress and imperial presidency.

A few weeks ago, the Treasury Department released a new anti-inversion regulation designed to make it more difficult for American companies to use various corporate deals with foreign businesses to avoid the application of U.S. corporate taxes. Although the promulgation of a regulation designed to combat corporate tax avoidance may sound completely reasonable, it represents everything that is currently wrong with our elected officials in DC.

The corporate structure and tax issues addressed by the regulation are fairly complicated, but the underlying policy issues are not.

  • The corporate tax rate in the U.S. is too high.

At 35%, America’s corporate tax rate is one of the highest among OECD nations.  This puts American businesses at a global competitive disadvantage.  For this reason, U.S. companies have increasingly sought legal avenues for avoiding the application of U.S. taxes on their earnings, including so-called “inversion” deals whereby they move their tax address overseas.

  • We should encourage U.S businesses to reinvest their overseas earnings in the U.S.

Today, U.S. companies have at least $2.1 trillion in earnings sitting overseas.  This is beneficial for their shareholders, but less so for everyone else in the U.S. Not only do these companies fail to pay taxes on those earnings, but they do not invest their post-tax earnings in the U.S. economy in form of additional jobs, increased wages, and research and development efforts.  With wage stagnation and anemic economic growth, our government should be working overtime with businesses to bring these earnings home.

Remarkably, in an era of complete political polarization, there is no substantive political disagreement that the U.S. corporate tax rate is too high and that inversion deals should be discouraged.  As the Wall Street Journal and others have reported:  “The Obama administration and congressional Republicans actually agree—and have for years now—that the U.S. should cut its corporate-tax rate, make it harder to push profits out of the U.S. and remove the incentives to stockpile profits abroad.”

Despite this longstanding political consensus, our “do nothing” Congress has, shockingly, done nothing.  In 2012, President Obama proposed legislative changes to lower the corporate tax rate and repatriate foreign profits.  Congress did nothing, justifying its dithering by claiming that that any legislative tax reform had to be comprehensive, as if making a problem larger and more complicated somehow makes it more likely to be solved rather than “too big to tackle.”  By this same logic, perhaps the U.S. should hold off on defeating the Islamic State (ISIS or ISIL) until we have a plan for world peace . . . .  Instead of working hard, our Congress is barely working.  Yin.

Although the President initially proposed legislative changes to address inversion deals, and his Secretary of the Treasury stated in 2014 that the Administration did not have the legal authority to “fully rein in” all such deals, the Administration has now predictably promulgated a series of increasingly expansive regulations designed to curb such deals.  In the face of Congressional inaction, the Administration has discovered the legal authority to act.  We have seen this before, most notably with the Administration’s unilateral action to change immigration law – action that is currently under review at the Supreme Court.   The anti-inversion regulations are thus another example of our increasingly imperial presidency.  Rather than solve the inversion problem, they will likely invite legal challenges and further discourage legislative efforts to reform our corporate tax code.  Yang.

Rather than accept this duality as part of the increasingly unnatural world that is DC, we should do something about it, starting with the upcoming Congressional elections. If you’ve grown tired of a do nothing Congress, please make that clear to your House and Senate candidates, and then vote for the candidates who understand that progress in DC requires sustained effort and compromise.  If you are fed up with 16 years of an increasingly imperial presidency, there may be little you can do given the current leading presidential candidates.  Who among them best understands that Article I comes before Article II in our Constitution?  Has the temperament to work with Congress?  Has a set of policy prescriptions that could form the basis of compromise with a Republican-led Congress?  Unfortunately, when it comes to the White House, we may be “Waiting for Godot.”

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