On Tax Day, Former Treasury Officials Urge Secretary Lew to Reconsider Decision to Curb Inversions

WASHINGTON, April 18, 2016 /PRNewswire-USNewswire/ -- Today, a group of bipartisan high-ranking Treasury officials from six presidential administrations, including former Secretary George Shultz, sent a strongly worded letter to the current Secretary Jacob Lew, urging him "to reconsider the release on April 4 of temporary and proposed regulations aimed at preventing U.S. companies from merging with smaller foreign companies and adopting headquarters abroad -- a process known as inversion." The letter is being distributed by Ike Brannon and Ambassador James Glassman, two former government officials who composed the letter and collected signatures.

The former officials wrote, "Current rules regarding corporate inversions don't need revision. Instead, we urge you to focus your attention on addressing the competitive disadvantages that are harming capital investment, employment, and economic growth in the United States."

In addition to Shultz, who served in four Cabinet positions, the signers include such well-known policy makers as John Taylor, the highly regarded economist who served as Under Secretary of the Treasury for international affairs under George W. Bush. Taylor also held government positions in the Carter, Ford, and George H.W. Bush administrations.

Also among the signers are Curtis Hessler, former Assistant Secretary for economic policy under President Jimmy Carter; Philip Swagel, who held the same post under President George W. Bush; Anna Cabral, Treasurer of the United States from 2004 to 2009; Ernest Christian, Deputy Assistant Secretary for tax policy in the Gerald Ford administration; and Stephen Entin, Deputy Assistant Secretary for economic policy under President Ronald Reagan.

In recent weeks, the Treasury decision on inversions has been criticized by prominent economists and policy makers, including Henry Paulson, Secretary of the Treasury under President George W. Bush. On CNBC April 8, Paulson said he was "troubled and disappointed" by the Treasury's surprise regulations.

The former officials wrote in their letter that, "concerns about retaining business headquarters in the United States are well-intentioned, but this unprecedented regulatory fix by your department is not the answer. It will likely make matters worse."

The letter added, "Inversions are a symptom. The disease is America's anomalous international tax code."

The signers cite two aspects of the U.S. corporate tax code that have encouraged U.S. firms to merge with foreign businesses, in part to free up profits now stranded overseas:

First, the U.S. has the highest corporate tax rate among all 34 members of the OECD, the organization of the largest free-market economies. Our combined federal and state rate is 39 percent. The average rate for an OECD nation is 25 percent. The rate is Ireland is 12.5 percent; in the U.K., 20 percent; in Korea, 24 percent.

Second, unlike the vast majority of OECD countries, the U.S. operates on a worldwide tax system. Wherever a U.S.-based company earns its profits, it must still pay corporate taxes in the United States. By contrast, 27 of the 34 OECD nations use a territorial system: companies pay taxes only to the country in which profits are earned.

"Combined," says the letter, "these two tax policies put U.S. companies at a huge disadvantage to their foreign counterparts…. It's no wonder we now rank 32nd out of 34 OECD countries on the Tax Foundation's International Tax Competitiveness Index, ahead of only France and Italy. As a consequence, U.S. economic growth is suffering."

Instead of stopgap measures to prevent inversions, the letter urges Secretary Lew to focus on reforming the tax code to "create a level playing field with international competitors. With lower rates and a territorial system, we would not only increase domestic investment by U.S. companies, but also boost capital spending in the U.S. by foreign companies." The result would be a more robust economy.

The entire text of the letter follows:

April 18, 2016

The Honorable Jacob J. Lew
Secretary of the Treasury
1500 Pennsylvania Avenue, NW
Washington, D.C. 20220

Dear Secretary Lew:

As former Treasury Department officials, we urge you to reconsider the release on April 4 of temporary and proposed regulations aimed at preventing U.S. companies from merging with smaller foreign companies and adopting headquarters abroad -- a process known as inversion.

Concerns about retaining business headquarters in the United States are well-intentioned, but this unprecedented regulatory fix by your department is not the answer. It will likely make matters worse.

Inversions are a symptom. The disease is America's anomalous international tax code. There are two problems.

First, the U.S. has the highest corporate tax rate among all 34 members of the OECD,^[1] the organization of the largest free-market economies. Our combined federal and state rate is 39 percent. The average rate for an OECD nation is 25 percent. The rate is Ireland is 12.5 percent; in the U.K., 20 percent; in Korea, 24 percent.

Second, unlike the vast majority of OECD countries, the U.S. operates on a worldwide tax system. Wherever a U.S.-based company earns its profits, it must still pay corporate taxes in the United States. By contrast, 27 of the 34 OECD nations use a territorial system: companies pay taxes only to the country in which profits are earned.^[2]

Combined, these two tax policies put U.S. companies at a huge disadvantage to their foreign counterparts. Since 2000, there have been over 100 tax rate reductions of at least one percentage point by OECD countries.^[3] Many of them have also switched to territorial regimes. It's no wonder we now rank 32nd out of 34 OECD countries on the Tax Foundation's International Tax Competitiveness Index, ahead of only France and Italy.^[4] As a consequence, U.S. economic growth is suffering.

Lower taxes overseas entice U.S. firms to move their operations abroad – and to keep their earnings there. If profits are repatriated, then companies have to pay the much higher U.S. rate (after deducting what they paid abroad). Trillions of dollars that could be invested in the United States are "stranded" in other countries.

The remedy is not to erect higher barriers against inversions. That would simply lead to larger foreign companies buying up American businesses or force U.S. firms to move capital and employees abroad to comply with the new rules – and it would perpetuate the tax-based competitiveness gap with the rest of the world. Also, changing the rules of the game and applying those new rules retroactively, as some have proposed, creates added uncertainty and unpredictability, producing a chilling effect on investments in the United States. 

This lack of predictability hurts US companies more than it does foreign companies operating here.  Those foreign companies enjoy the same benefits and protections of doing business in the United States without the double taxation or regulatory uncertainty suffered by U.S. firms.  This asymmetry helps explain the uptick in foreign acquisitions of U.S. companies, which, for the first quarter of 2016 set a record in dollar volume, 46 percent greater than the same period last year, according to Mergermarket.^[5] 

This is why we believe the only sustainable remedy is to reform the U.S. tax code and create a level playing field with international competitors. With lower rates and a territorial system, we would not only increase domestic investment by U.S. companies, but also boost capital spending in the U.S. by foreign companies.

Current rules regarding corporate inversions don't need revision. Instead, we urge you to focus your attention on addressing the competitive disadvantages that are harming capital investment, employment, and economic growth in the United States.

As a bipartisan group of former Treasury officials, we don't underestimate the political difficulties your department faces in confronting the inversion issue. We are deeply concerned, however, that you appear to have chosen a route that bypasses the legislative process. We ask that you reconsider this decision and instead focus on urging Congress to do its proper duty and advocating an economic solution that takes the best interests of our great country to heart.

Sincerely,

George P. Shultz, Secretary, 1972-74
John Taylor, Under Secretary, international affairs, 2001-05
Curtis Hessler, Assistant Secretary, economic policy, 1980-81
Phillip Swagel, Assistant Secretary, economic policy, 2006-09
Anna Cabral, Treasurer of the U.S., 2004-09
Ernest Christian, Deputy Assistant Secretary, tax policy, 1974-75
Stephen Entin, Deputy Assistant Secretary, economic policy, 1981-88
David Malpass, Deputy Assistant Secretary, developing nations, 1986-89
Roger Kodat, Deputy Assistant Secretary, domestic finance, 2001-07
James E. Carter, Deputy Assistant Secretary, economic policy, 2002-06
Robert Stein, Deputy Assistant Secretary, macroeconomic analysis, 2003-06
Nada Eissa, Deputy Assistant Secretary, economic policy, 2005-07
Kimberly Reed, Senior Advisor to the Secretary, 2004-07
Michael Desmond, Tax Legislative Counsel, 2005-08
Ike Brannon, Senior Advisor, tax policy, 2007-08
Lawrence Goodman, Director, quantitative analysis, 2003-05
JD Foster, Economic Counsel, tax policy, 2001-02
John J. Kelly Jr., Special Assistant, tax policy, 2001-05

^[1] https://stats.oecd.org/Index.aspx?DataSetCode=TABLE_II1
^[2] http://www.liftamericacoalition.com/territorial-and-worldwide-tax-systems-in-the-oecd/  
^[3] http://www.rstreet.org/wp-content/uploads/2013/04/RSTREETshort3.pdf
^[4] http://taxfoundation.org/article/2015-international-tax-competitiveness-index  
^[5] http://www.mergermarket.com/pdf/MergermarketTrendreport.Q12016.FinancialAdvisorLeagueTables.pdf  

Contact Elizabeth Heaton: 202-725-8785

SOURCE Ike Brannon, Ambassador James Glassman