The Treasury Department put out the word that Secretary Jack Lew is considering regulatory curbs on corporate tax inversions, a step that may be intended to increase pressure on Congress to act once it returns from its summer recess in September.
The matter of how much authority Treasury has to limit inversions has generated its own controversy. My colleague Steve Rosenthal and Harvard Law School professor Steve Shay argue that Treasury has broad authority to curb the practice. Others, including USC law professor Ed Kleinbard, are skeptical.
It appears, however, that the Administration may announce a move to limit inversions sometime next month. That could accelerate the pace of deals, as firms and their lawyers rush to beat any curbs. And it surely will increase pressure on Congress to act. Until now, lawmakers have been stuck in the usual partisan mire, unable to respond despite widespread rhetorical concerns from lawmakers of both parties about the practice.
Just by putting out the word that Lew is mulling administrative curbs, Treasury has sent a powerful signal to corporations. If they fear restrictions will be imposed retroactively, it could slow the deal train. But if lawyers don’t take that threat seriously, or write agreements to reflect that contingency, it is more likely to generate a rush to close deals ASAP.
If Treasury adopts rules curbing inversions, it will be sending another strong message, this time to Congress: If you don’t like what we are doing, pass your own bill. Senate Finance Committee Chair Ron Wyden (D-OR) says he’s trying to cobble together a bipartisan measure to address the issue. However, top committee Republican Orrin Hatch (R-UT) insists anti-inversion legislation must be a “bridge” to broader tax reform and must not be retroactive.
At the same time, Senator Chuck Schumer (D-NY) says he’ll soon introduce a bill that targets the practice of “earnings stripping” where inverted firms (as well as others) shift tax-deductible debt to their U.S. units—where high tax rates make the deduction more valuable—and thus boost profits for subsidiaries located in low-tax countries.
This is one of the practices Rosenthal and Shay argue Treasury could curb administratively, without the need for congressional action. Depending on just how Treasury (or Congress) does it, restricting earnings stripping could make both past and future inversions less beneficial.
Hatch accuses Democrats of playing politics with the inversion issue. He’s quite right, of course, though whenever Politician A accuses Politician B of playing politics, it usually means Politician B has hit on a winning campaign argument (though not always a satisfactory economic one).
With the upcoming congressional elections remarkably devoid of national issues, Democrats have been testing the theme of economic patriotism. The message: Democrats are the party of the hard-working middle class while Republicans defend plutocrats and greedy corporations. The inversion issue plays perfectly into this narrative.
The White House seems to have the upper hand here. If it really wants to curb inversions quickly, it could act administratively. Its legal authority is strong, though not unassailable. Regulatory restrictions always could be challenged in court, of course, but that process would take years.
In theory, Congress could try to reverse any anti-inversion rules. But Hill Republicans won’t even try before the elections, given the political risks. Next year may be a different story, of course, but how many lawmakers ever think about next year.
Tea party rhetoric aside, Obama has been relatively modest in his use of regulatory authority. Especially when it comes to tax policy, he’s tread relatively lightly. For instance, Treasury has never moved against the practice of hedge fund managers treating compensation as capital gains rather than as ordinary income, though it may already have the authority to do so.
Will Obama be more aggressive when it comes to inversions? It appears so, given what seems like an orchestrated Treasury leak yesterday.