The Problem With Economic Patriotism

President Barack Obama called for “economic patriotism” last week in response to the renewed focus on corporate inversion, the process where a company reincorporates in another country despite retaining near identical operations. I wrote a bit about corporate inversion a while back. This, however, is the first I’ve heard about “economic patriotism.” If you’re wondering what it is, I am too.

During a speech at a technical college in Los Angeles, Obama declared the following about corporate inversions: “I don’t care if it’s legal. It’s wrong.” It’s an odd statement. And a bit troubling, when you think about it.

When it comes to economic patriotism, most tax accountants are raised on the words of the awesomely named Judge Learned Hand:

Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose the pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.

To put it another way, economic patriotism means a taxpayer pays their legal obligation, and nothing more.

The problem with President Obama’s call for “economic patriotism” is that it’s a moving target, subject to the fickle whims of the country. Right now the public is riled up about corporate inversions. Last year it was companies not paying any corporate taxes. Who knows what it’ll be next year. Do tax accountants figure out how to pay in new taxes based on public polling as well?

Actually, let’s talk briefly about the GE issue, since that illistrates the complexity we’re dealing with here. The main items allowing GE to chop down its tax bill were tax credits to create green energy and tax credits for creating domestic manufacturing jobs. Congress previously decided those two issues were so important that they’d give companies economic incentives to invest in them. So now, which would be “economic patriotism”: creating green energy and domestic manufacturing and taking the legal credit? Or not creating green energy and sending manufacturing overseas in order to pay a higher tax bill?

If we’re going to create incentives for companies to act in a certain way then demonize them when they act that way, who is the fool?

Creating a third tax system (after the regular system and the Alternative Minimum Tax) based on the court of public opinion  is irresponsible and fickle. If you don’t like the (legal) way a company is running, then pass a law through Congress. That’s why it’s there.

And, yes, it is hard to get laws through, especially right now. That’s exactly how our system was designed. Remember, our government was set up to force people of differing opinions to work together and compromise, instead of, as the saying goes, having two wolves and a lamb decide what to eat for lunch.

By the way, the companies in question aren’t moving to some backwards hole-in-the-wall country. They aren’t setting up in anyone’s definition of the Third World to run around taxes. The current crop of companies aren’t even moving to low-tax Ireland. They’re moving to England. To Switzerland. Countries that have been traditionally known for high taxes and even higher costs of living. We need to stop focusing on the fact that these companies are moving overseas, and start considering what we’re doing so wrong that would make those countries a better economic choice.

Figuring that out. . .well, that’s real economic patriotism.

 

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Feature image by Steve Jurvetson