A recent hot economics topic to have surfaced (at least here in the U.S.) is that of “economic patriotism”. Here’s what you need to know.
What is Economic Patriotism?
Economic patriotism can generally be defined as “the coordinated and promoted behavior of consumers or companies (both private and public) that consists of favoring the goods or services produced in their country or in their group of countries.” (Wikipedia. Economic Nationalism.)
But recently, the term has become synonymous with the call to stop corporate inversions. Which begs the questions of: What is a corporate inversion? And how does it relate to “economic patriotism”?
In his article “Corporate ‘inversions’ are the latest ploy to upend the US tax code”, award-winning online journalist, economics reporter for CNBC.com, and co-founder of msnbc.com, CNBC, and public radio’s Marketplace, John W. Schoen, does an excellent job explaining what an inversion is and how it works. I will cite it here:
“In an inversion, a U.S. company sets up or buys another company in a country with a lower corporate tax rate and then calls the new country home—thereby dodging U.S. taxes it would otherwise have had to pay.
How does it work?
When a company undertakes an inversion, it’s basically just moving its legal address outside the country for tax purposes. That lets companies move some of their profits to their new homeland and pay less in taxes to the U.S. Treasury. Nothing else moves; it’s business as usual for their American operations, employees and customers.”
So how do these inversions relate to economic patriotism? Well, for one, a way for a country to practice economic patriotism is to engage in financial protectionism or the enactment of policies and engagement in activities hostile to financial activities (including, but limited to M&A arena) that are deemed to threaten the national economic interests.
Usually this is accomplished by governments preventing foreign companies from acquiring those domestic ones considered to be of strategic economic value (e.g., the Pepsico-Danone, Mittal-Arcelor, and GDF-Suez affairs in France). But in the case of corporate inversions, we’re seeing something similar to the flip side; the concern is that by changing their status from “domestic” to “foreign” by merging with and/or acquiring foreign companies, larger multinationals are deemed to be threatening to the domestic economic interests of a country. The logic, as articulated by many American political leaders, is that by allowing corporate inversions the U.S. is losing vital economic revenue (achieved through corporate taxation) and thus U.S. economic interests are being “jeopardized”.
Secondly, is the consideration of what it really means for a corporation to be an “American corporation”? The United States, after all, provides an environment where corporations have access not only to one of biggest and most advanced marketplaces for goods and services, but also well-developed infrastructure and legal systems. Much of this is provided at very little to no cost to the corporations, themselves, proponents of economic patriotism in the U.S. argue. Therefore, shouldn’t an American corporation have responsibilities to the country as well?
If we accept that an American company does have responsibilities to the country as well, then it’s easy to see the relationship between inversions and economic patriotism; for when a company engages in a corporate inversion, it avoids one of its civic responsibilities to the U.S. (spec. fully paying its corporate tax share) while continuing to enjoy the same benefits as before.
This issue of tax inversion has gained media presence in large part due to the POTUS’s vocalilty on the subject. In an appearance at a technical college in Los Angeles (Thursday July 24th, 2014) President Obama called for “economic patriotism” from companies and urged Congress to eliminate tax benefits that have encouraged a wave of corporate inversions (see related Bloomberg and New York Times articles and the video links below).
President Obama has not been alone. Earlier, Secretary of Treasury Jacob Lew penned a letter (July 15) to congressional leaders calling for the same (see related Los Angeles Times article). And outspoken celebrities (e.g., Mark Cuban), have taken to social media to express their concern/outrage on corporate inversions as well (see “Mark Cuban: Companies moving overseas will raise everyone’s taxes” and tweet string below):
The Bigger Picture.
As you’ve probably noticed, the recent discussion surrounding economic patriotism is, in reality, a microcosm of the larger ones taking place in economic, business, and political circles regarding as to how the U.S. Tax Code (spec. with regards to corporations) should be reformed and what exactly are/should be the responsibilities of multinational corporations in this global economy.
Therefore it is imperative for each of us to educate ourselves on these issues and look skeptically at the various points of views in the discussion.
If you should be interested in reading about some of these different perspectives, I’d recommend the following as a good starting place:
- “Retroactive Tax Provisions, a “Quite Common” Practice” by Mark Mazur, the Assistant Secretary for Tax Policy at the U.S. Department of the Treasury and blogger for Treasury Notes, the official Treasury Department blog.
- “The Myth of Economic Patriotism” by Rick Newman, columnist for Yahoo! Finance, former Chief Business Correspondent for U.S. News & World Report, and frequent commenter on CNN, MSNBC, and Fox.
- “Economic Patriotism? That doesn’t quite fly” by Andrew F. Puzder, CEO of CKE Restaurants and frequent author on economic and legal issues in CNBC commentaries, Human Events, Politico, and the Orange County Register.
- “Why Obama’s ‘economic patriotism’ is bunk” by Ben White, Chief Economic Correspondent for Politico, author of the “Morning Money” column at CNBC, and former Wall Street reporter for the New York Times.
- “What They’re Saying About Corporate Inversions” by Erin Donar, Spokesperson for Tax and Economic Policy at the United States Department of the Treasury and blogger for Treasury Notes, the official Treasury Department blog.
- “Dozens of Companies Admit Using Tax Havens” by Citizens for Tax Justice Citizens, a 501(c)(4) public interest research and advocacy organization focusing on federal, state and local tax policies and their impact upon our nation.
- “Tax Avoidance and Havens Undermining Democracy” by Anup Shah, creator and editor of globalissues.org, a website dedicated to providing holistic and unbiased coverage and discussion of global affairs.
(Disclaimer: The views expressed by authors in the above list of linked articles are in no way, shape, or form representative of this blogger’s or the Economics Society at UCI’s views on the “economic patriotism”, corporate inversions, U.S. tax reform, or any other economic or political subjects discussed in those articles. They are merely provided for further educational purposes and should as any reading material be subject to objective scrutiny)