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.
What a way to run the economy!
The United States economy is not doing well. In fact, over the past two to three weeks, economists have been lowering their estimates of economic growth over the near term. Even some governmental agencies have joined the crowd and reduced their estimates of the potential economic growth of the country to 2.0%.
The economic recovery that began in July 2009 has been the weakest on record since World War II.
One of the major reasons for this lackluster performance has been the uncertainty created by the government, in my opinion. Both small and large companies have been unwilling to invest in plant and equipment, commit to the future, given the failure of the government to offer any kind of supportive action. Both parties have argued that corporate tax reform was necessary. Yet, nothing has been done.
Corporations are being hit on both sides. Corporate taxes are so high they impact a firm's ability to compete. But if executives act to protect their companies, they are being singled out as unpatriotic and deserters who are "renouncing their citizenship."
This certainly does not contribute to an environment in which corporations are going to commit to the future.
Washington, D.C. has had five and a half years to do something about tax reform. It seems the main issue on the minds of Washington politicians is the fall election.
According to a New York Times article, the president's speech was supposed to focus on job training. With a labor participation rate near a 40-year low, it is a shame that the president concentrated on politics and not the needs of the working force.
At the time of publication, the author held some Abbott labs stocks, although positions may change at any time.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.