The Treasury Department issued two new rules Monday to make it much more difficult for American companies to leave the country. Technically, what the companies do is a "tax inversion," taking over a foreign firm and adopting its target's address as its headquarters.
By doing this, it can pay only the foreign tax rate on the profits it makes abroad. This is attractive because taxes in other developed nations are invariably lower than those in the United States. Yes, ours are the highest in the world.
Monday's two rule changes were President Obama's third attempt to end corporate inversions and stop the exodus of corporations fleeing his economic mismangement. The effects of this latest move will be far the most far-reaching, indeed they already have been, for Pfizer immediately dropped its $160 bilion takeover of Allergan, a drug company in Dublin.
The first new rule targets "serial inverters," which are companies created by one inversion after another. (The phrase "serial inverter" is a deft piece of propaganda, echoing "serial killer," suggesting something heinous even though inverters have simply been following the law.
The second rule limits "earnings stripping," another legal process by which one part of a company makes a loan to another and thus converts taxable income into non-taxable debt.
The moves are intended to reduce or end a trend in which companies find ways to escape American taxes, which hinder their ability to compete with foreign rivals.
None of this would be necessary if the U.S. weren't now such an inhospitable place to do business. The recent wave of inversions and mergers are a direct result of America's 35 percent corporate tax rate. On top of that, America's tax system is not confined within U.S. shores, as most tax systems are, but instead reaches out to try and tax American corporations and citizens wherever they are in the world. This leads to double taxation of overseas profits, first by the foreign tax jurisdiction in which the U.S. corporation operates, and then by Uncle Sam.
It's distressing to see so many U.S. companies move abroad. But Obama's fixes don't address the problem. They attack a symptom without producing a cure. The remedy is a government that stops viewing American business as its own fatted calf to be slaughtered again and again. Companies are merely looking out for the interests of their investors when they leave the U.S. Rather than move out, they'd move in if the tax code were reformed.
President Obama has called for reform, but when he and congressional Democrats talk of reform, they really mean changes that will sluice yet more revenue into the Treasury to finance their spending plans. Republicans in Congress are seeking a larger overhaul of America's illogical and overly burdensome tax code, something that polls shows most Americans want. Under a Republican plan, reform would include reductions in both the corporate tax rate and taxes on the foreign earnings of American companies.
In 2014, when the Treasury first issued rules to try to cut down on companies moving abroad for tax purposes, Obama called the practice "unpatriotic." But it's not unpatriotic for corporations to reduce their burden and maximize the wealth of American investors. By the same token, it certainly isn't patriotic to insist on a ruinous corporate tax rate that taxes companies so heavily that it drives them into exile, and encourages them to keep as much income as possible out of the country to avoid a tax bill that, by some estimates, would not amount to some $2 trillion, more than 10 percent of GDP.
Donald Trump has courted controversy this campaign season by proposing to build a "big beautiful wall" to keep out illegal immigrants. But with this move President Obama is building a wall of his own to keep companies in. That's what prisons are. He wants to subject American business to the highest tax rates in the world. They are competing with global rivals with one hand tied behind their backs.