Lew: Forbid Tax Inversions, Then Tackle Tax Reform

Monday, 28 Jul 2014 09:41 AM

By Dan Weil

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While some say President Obama should abandon his effort to ban tax inversions and focus on corporate tax reform instead, Treasury Secretary Jacob Lew argues that Congress should first ban the inversions and then take up reform.

Inversions occur when a U.S. company acquires a foreign one and then domiciles itself in the foreign country to escape U.S. corporate taxes, which go as high as 35 percent.

"It is so important that we reform our business tax code to make the U.S. economy more competitive and to accelerate economic growth and job creation," Lew writes in The Washington Post.

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"But one particular tax loophole has become increasingly urgent to address: the fact that the law rewards U.S. corporations with substantial tax benefits when they buy foreign companies and declare that they are based overseas."

The White House has nothing against cross-border merger activity, he explains. "But these activities should be based on economic efficiency, not tax savings."

Even with tax reform, inversion limits are necessary, "because companies always would find countries with near-zero rates to which they could relocate," Lew notes.

"By moving their tax homes overseas, these companies are making the decision to reduce their taxes, forcing a greater share of the responsibility of maintaining core public functions on small businesses and hardworking Americans," he argues. "That includes paying for the things all of us, particularly U.S. businesses, depend on: our national defense, education, medical research, courts and vital infrastructure such as roads, bridges and airports.

"Our tax system should not reward U.S. companies for giving up their U.S. citizenship, and unless we tackle this problem, these transactions will continue."

Obama has received some fierce criticism for mounting a charge against tax inversions rather than fighting for corporate tax reform.

Grover Norquist, president of American for Tax Reform, strongly disagrees with Obama's strategy. "It's the president's fault that he has done nothing in five years to reduce corporate rates, which he said he was going to do," Norquist tells CNBC.

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