Once again moving in where the Republican Congress fears to tread, the Obama administration Tuesday announced new rules to prevent US corporations from dodging taxes.
US corporations have taken to buying or merging with corporate counterparts overseas to avoid paying their US tax bills. This process called "inversion" has been exploited by Burger King, Johnson Controls, a Wisconsin industrial an auto parts supplier, and others. It is, as the president said, "one of the most insidious tax loopholes out there."
Johnson Controls demonstrates how inversion works. In January, the company sold itself to a much smaller company in Ireland, Tyco International, which makes fire safety equipment. Johnson can now call itself Irish and save roughly $150 million a year in US taxes while keeping its operations in the US, where its executives can enjoy the perks of being wealthy Americans. The New York Times points out the irony that Johnson probably would have gone out of business during the 2008 economic collapse if it had not received a portion of the taxpayer-funded $80 billion bailout of the auto industry. This is how the company chose to pay back Americans.
A new Treasury Department rule creates a three-year window within which a company would not be allowed to use inversions to reduce or eliminate its tax bill. It may be too late to undo Johnson's slick move but Pfizer may be prevented or discouraged from enacting a proposed $150 billion inversion with Dublin-based drug maker Allergan.
There are limits to what the White House can do without Congress. Some good ideas, like preventing investors from using low capital gains tax rates when selling stock in an inverted company, require a do-nothing, loophole friendly Republican Congress from acting. Real reform will require major changes on Capitol Hill.