The Patriot Post® · In a Stew Over Inversions

Barack Obama, presiding over an unusually dismal post-recession economy, might make matters worse with a distracting crusade against the minor and sensible business practice called “inversion,” more about which anon. So, consider his credentials as an economic thinker.

Obama, who thinks ATMs and airport ticket kiosks cost America jobs, gave a 2013 speech regretting that Maytag workers in Illinois lost their jobs when the plant moved to Mexico, but rejoicing that more Honda cars “are made in America than anyplace else” and that Airbus is “building new planes in Alabama.” Maytag moved partly because in Illinois, which is not a right-to-work state, the price of unionized workers made Mexico a sensible choice. And Airbus is in right-to-work Alabama because capital, being mobile, goes where it is wanted and stays where it is well-treated.

Alabama, and the Honda manufacturing states (Alabama, Georgia, North Carolina, South Carolina, Indiana and Ohio; all but Ohio are right-to-work), attracted these jobs by practicing “entrepreneurial federalism,” tailoring tax and regulatory policies to gain competitive advantages against other states. Progressives deplore this as a “race to the bottom.” Conservatives call it a rationality competition.

Which brings us to “inversions,” whereby in the last decade approximately 50 U.S. companies have merged with foreign firms and located their headquarters overseas, becoming subject to that country’s lower corporate taxation. The U.S. system, unlike those of most major nations, taxes the profits that domestic corporations earn overseas, even though these profits are also taxed overseas. This double taxation is one reason approximately $2 trillion in U.S. corporate earnings are being kept abroad rather than brought home for domestic investment.

Progressives say corporations using inversions are unpatriotic, which is amusing. When the Supreme Court’s Citizens United decision stipulated that Americans do not forfeit their First Amendment right to political advocacy when they act together through corporations (including, and especially, incorporated nonprofit advocacy groups), progressives ridiculed the idea that corporations should be treated as people. Now, progressives charge that corporations resorting to inversion are not behaving like patriotic people.

But Democrats believe in recycling even the rhetoric of John Kerry. Campaigning for president in 2004, Kerry denounced as “Benedict Arnolds” those American business executives who moved some operations overseas for competitive advantages. He did this among South Carolinians who work at Fujifilm, Michelin and BMW plants located there by executives who Kerry presumably thought should be despised as traitors by the Japanese, French and German publics.

A publicly held corporation’s responsibility is to its shareholders; its fiduciary duty is to maximize the value of their holdings. If businesses supposedly have other responsibilities, who decides what they are? Presumably politicians such as Sen. Dick Durbin, the Illinois Democrat, who must have learned economics from the nursery story “Rumpelstiltskin.”

When the Illinois-based Walgreens retail chain planned an inversion, Durbin sent the company’s CEO a letter noting that “its stores are a staple in our communities” – as though inversion would have closed the stores. Durbin warned that Walgreens’ “financial success was built on programs and infrastructure provided by the U.S. government,” particularly filling Medicare and Medicaid prescriptions.

This is the progressive premise in action: Because government provides infrastructure (roads, etc.) affecting everyone, and because government-dispensed money flows everywhere, everything is beholden to the government, and more or less belongs to the government, and should be subordinated to its preferences, which always are for more control of the nation’s wealth. Walgreens retreated, costing its shareholders, employees and customers billions.

Inversions strengthen the U.S. economy by increasing the after-tax profits that U.S. corporations have for investment, by increasing the pool of profits available for the wages of U.S. workers, and by making the companies’ U.S. shareholders wealthier. Which is why the sensible corporate tax rate would be zero. This is so because corporations do not pay taxes, they collect them, necessarily passing on the burden as a cost of doing business. And studies suggest that corporations’ workers bear a significant portion of the burden.

This should interest Obama and Durbin, who are nothing if not loquacious about wage stagnation, the suffering middle class, etc. But they actually are less distressed by the real distresses of others than they are delighted by the chance to be operatically incensed about the predictable consequences of a tax code they perpetuate.

This illustrates the grandstanding frivolity of the political class. It legislates into existence incentives for what it considers perverse behavior, and then waxes indignant when businesses respond sensibly to the incentives.

© 2014, Washington Post Writers Group