NEW YORK (TheStreet) –– The top gun, U.S. President Barack Obama, has been brought out to highlight the so called inversion issue. That is when American corporations acquire a foreign company and then relocate their headquarters abroad to escape U.S. taxes.
On Thursday, in a speech at the Los Angeles Trade-Technical College, Obama called the companies who have completed such transactions "corporate deserters," saying they are giving up their American citizenship.
The name-calling raised the issue beyond its economic bounds, taking on a purely political tone. The attack did not occur "out of the blue."
It all started nearly two weeks ago, when U.S. Treasury Secretary Jack Lew sent a letter to Dave Camp (R-MI), chairman of the House Ways and Means Committee, inviting Congress to crack down on companies opting out. That's when concern over "inversion" immediately made its way into the press.
The corporate tax rate in the United States is at 35%, one of the highest in the developed world. With such a high tax rate, big corporations with global operations have no problem in justifying to their boards and investors their decision to opt out of the country. The U.S. rate is about double the average European tax rate and more than three times Ireland's 12.5%.
The trickle of transactions began some time ago. Earlier this year, Pfizer (PFE) made a failed attempt to buy U.K-based Astra Zeneca (AZN). In July, generic drug maker Mylan (MYL) announced that it will buy Abbott Laboratories' (ABT) branded specialty and generics business outside the United States in a $5.3 billion deal that will cut its tax bill. According to the Financial Times, 25 companies are looking to follow.
As this administration looks for combustible topics to help the Democrats retain a majority in the Senate ahead of the election in the fall, the issue seems worth floating.
There is no question that there is a problem here. Republicans firmly believe that something needs to be done about the tax issue. But, the solution is one of rational tax reform and not of emotional electioneering.
The president called for quickly enacted, "short-run solutions" and asked to prevent corporations from taking action before the legislation is in place. He has asked that the measures to stop inversion be retroactive to May. Already, corporations seem to be lining up to engage in inversion transactions before Congress can pass anything.
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