Just Cut Corporate Taxes Already

Jacob Lew's decrees can't fix everything.

U.S. Treasury Secretary Jacob Lew's new rules to discourage corporate tax avoidance are more aggressive than expected and will have some effect. Still, that's no reason for applause.

Lew's announcement yesterday, concerning so-called corporate inversions, fails to address the main issue: the need to reform the byzantine U.S. corporate tax system. It also illustrates the limits of making tax policy by administrative decree instead of legislation.

The U.S. taxes corporate profits at 35 percent, the highest of any developed country. The U.S. is also unusual in taxing profits from foreign operations, once the money is brought back to the U.S. If a U.S. company with foreign operations and a lot of accumulated foreign profit turns itself into a foreign company -- say, by buying a small U.K. company and putting the nominal headquarters of the new combined company in London -- it can avoid a lot of tax. That's an inversion.

QuickTake How U.S. Companies Buy Tax Breaks

The maneuver has proved popular lately, and more inversions are in the works. The administration deplores the practice, and sees political advantage in attacking it. "We've recently seen a few large corporations announce plans to exploit this loophole, undercutting businesses that act responsibly and leaving the middle class to pay the bill," President Barack Obama said yesterday, "and I'm glad that Secretary Lew is exploring additional actions to help reverse this trend."

There's little in the new initiative for the middle class or anybody else to be glad about. The new rules will make it a bit harder to invert and to shield foreign profits after inversion. They'll probably make some companies rethink their plans. But the more successful the administration is in enforcing the U.S. corporate tax system, the more its anomalies will weigh on the U.S. economy -- and the less attractive the U.S. will be as a place to start and build businesses with global ambitions. The corporate tax code needs to be reformed, not shored up.

Moreover, this way of trying to enforce a bad system causes additional collateral damage. There's a limit to what administrative action, as opposed to legislation, can do. The Treasury's rule makers have multiplied the complications in the code -- the changes are a bonanza for tax lawyers, if not for anybody else -- and that creates additional uncertainty. The muddle is worsened by the administration's threat to keep looking for more ways to crack down. Something is wrong when sowing confusion becomes an instrument of tax policy.

The U.S. needs comprehensive corporate tax reform. A more intelligent corporate tax code -- conforming to international norms, based on a lower rate, more uniformly applied -- could easily raise more revenue than the current system, however zealously enforced.

The middle class, like the rest of the country, has an interest in a code that raises revenue as simply and efficiently as possibly and makes the U.S. a great place to invest. Righteous indignation over inversions doesn't serve that cause.

--Editors: Clive Crook, Michael Newman

To contact the editor on this story:
David Shipley at davidshipley@bloomberg.net