There's no real tax reform inside. Photographer: Brendan Smialowski/Bloomberg
There's no real tax reform inside. Photographer: Brendan Smialowski/Bloomberg

Treasury Secretary Jack Lew is continuing the Barack Obama administration’s war on corporate “inversions” by writing in today's Washington Post that such activity is akin to economic treason. The practice of inversion, whereby U.S.-based companies merge with foreign ones and then declare that they are based abroad, is denounced as an unpatriotic way for corporations to minimize tax obligations.

Make no mistake: The administration's manufactured outrage isn’t about good policy or fairness. It’s raw politics, as the White House and its Democratic allies in Congress desperately search for any campaign issue, from the minimum wage to student-loan financing, to help them retain control of the Senate in the midterm elections.

You’d think, based on the administration’s latest political salvo, that the federal government is forgoing a huge sum of tax revenue because of these inversions. The congressional Joint Committee on Taxation recently concluded that ending the practice would save about $2 billion a year for the next 10 years -- a drop in the bucket in a corporate tax system that collects $274 billion a year.

The essence of the administration’s argument is that businesses engaging in inversions are depriving the federal government of revenue it could use for many more “patriotic” activities, such as giant infrastructure projects. This argument smacks of the cronyism all too common in Washington: the notion that the federal government should be the one picking the winners and losers.

By indicating that corporate tax inversions show a lack of “economic patriotism,” Lew is also implying, then, that companies taking advantage of other provisions in the tax code -- such as bonus depreciation, the research-and-development tax credit, or even the much-debated credits for wind power or biodiesel and renewable fuels -- are also unpatriotic.

Where do we draw the line? At least several hundred provisions allow U.S. companies to reduce their tax liability. Thus, by extension, corporations that provide employer-sponsored health insurance (and are able to claim a tax deduction for this expenditure as an ordinary and necessary business expense) might also be considered unpatriotic. After all, the revenue the government is forgoing from all of these legal provisions could also go toward schools, roads and bridges.

Lew and several other policy makers and commentators have said that the ultimate answer to the problem is for Congress to lower the corporate tax rate while eliminating some deductions, credits and other carve-outs in the current system. Such an overhaul is long overdue, particularly since the U.S. has the highest corporate tax rate in the industrialized world.

But those changes remain stalled because administration officials have preferred to spend their time manufacturing crises such as this latest one, rather than leading on fundamental tax reform. If they were committed to limiting U.S. corporate tax inversions, they could support, for example, the transition to a territorial system that would bring parity to the taxation of income earned domestically and abroad. Yet the administration has never been friendly to this idea.

No one should be surprised that both Republicans and Democrats are looking to maximize their chances of political success in an election year. But by paying lip service to tax reform rather than committing to it, Obama and Democrats in Congress are showing an inability and unwillingness to face the nation's real challenges. And ultimately it's the U.S. economy that suffers.

To contact the writer of this article: Lanhee Chen at lchen301@bloomberg.net.

To contact the editor responsible for this article: Katy Roberts at kroberts29@bloomberg.net.