Campaign Finance Reform May Hold the Key to Slowing Corporate Inversion

While corporate inversion is by no means a new phenomena (McDermott International reincorporated in Bermuda in 1982), recent comments by prominent figures in government characterizing such actions as "unpatriotic" have thrust the issue back into the spotlight.  With pressure increasingly on Congress to close the tax loopholes that allow such moves, the GOP stance on only doing so in tandem with cutting the effective corporate tax rate means that a solution may not be forthcoming anytime soon.  And as such, that leaves us with plenty of time to think of equally improbable but decidedly more creative solutions to this latest issue.

 Although technically donations to political campaigns made by foreigners are illegal, ever since 2010's Citizens United decision greatly reduced limits on political contributions, companies based outside the US have been able to effectively circumvent such laws  (I talk about just how murky US laws governing corporations have become here).  In the last full election cycle, the first since the landmark ruling,  foreign controlled subsidiaries contributed over $12 million to Super PACs on both sides, and that's just what was able to be traced.  Due to Citizens United and other subsequent rulings, political action committees (PACs) that do not coordinate with campaigns and their donors are afforded great latitude when it comes to contributions, with no limits to how much can be given to such PACs, and little in the way of disclosure laws on the part of these committees.  Major corporations didn't miss a beat, creating PACs through their American subsidiaries, and then drawing contributions from employees.  This allowed them to influence U.S elections while at the same time shielding themselves from any chance of prosecution,  But what if we could curtail foreign influence in the American electoral process while at the same time slowing or even stopping the exodus of American businesses and their tax revenues abroad?

Currently the American subsidiaries of foreign companies may make political contributions so long as the subsidiary in question is able to prove that it has funds drawn from domestic operations that equal or exceed the donated amount, as per this FEC advisory opinion (AO 1992-16):

FEC, AO 1992-16: The [U.S.] subsidiary must be able to demonstrate through a reasonable accounting method that it has sufficient funds in its account, other than funds given or loaned by its foreign national parent, from which the contribution is made.

As such when we examine recently "inverted" corporations, we see that the value of their American operations generally represent a disproportionate percentage of their total global revenue.  For example Burger King, who recently announced a merger with Canadian coffee chain Tim Hortons in order to relocate to Canada, earned less than half (48%) of revenue in 2013 from territories outside of the United States.  Burger King conducts the majority of its business in the United States through its Miami based subsidiary, and yet since its newly founded "parent company" will be based in Canada, it will only have to pay 26% income tax on revenue earned in Canada, and a rate consistent with the tax code in the country where any income that is repatriated was generated.  While robbing the federal government of tax revenues, due to a very profitable US operation Burger King, should it be so inclined could spend millions on donations to PACs supporting candidates it likes.

While Burger King remains at its core essentially an American fast food company, it's unlikely it would feel the need to drastically influence policy, aside from more favourable tax laws (nothing seems to satisfy them nowadays) and looser labour regulations.  But such loopholes present an opportunity to companies whose fortunes are largely tied to government spending and/or policy.  The defence, (which currently has strict export regulations in place) education, health, food, pharmaceuticals industries have in the past tried to influence policies that would adversely affect them (See Pfizer's own proposed inversion via merger, or the HMOs' opposition to the ACA) and if they were to merge with foreign companies, what checks would be in place to limit their influence in American politics?  By preventing subsidiaries wholesale from making political contributions, it effectively ices these "tax emigres" out of the legislative process, and helping determine where tax dollars they did not proportionally contribute go.  American corporations and the people who benefit from them the most may not have the same interests as the vast majority of Americans, but they still live and work in the country, and as such do have a stake in a healthy and robust consumer base and economy.

Preventing the American subsidiaries of foreign companies from making political contributions will not definitively solve the problem of money in politics, nor will it stop the most determined of companies from relocating abroad.  But it will make the decision a tougher one, unlike the no-brainer that it is.  Admittedly, with Republicans currently likening these companies to "economic refugees" (but judging from their response to the influx of children from Central America, they really couldn't care less about actual human refugees), the chances of anything that makes life harder for the Burger Kings and Pfizers of American commerce being passed by this Congress is infinitesimal at best.  Perhaps a more comprehensive solution including both cutting the corporate tax rate and closing these ridiculous tax loopholes would do better in coaxing businesses to return home.  Maybe recognizing the sheer size of a corporation allows it to exercise its freedoms as a person much more effectively than a single American, and putting limits on that freedom would  better check undue commercial influence in the legislative process.   But in the meantime, piecemeal legislation such as this will have to do.

Lose the Countdown: Why the talk about the "Fiscal Cliff" is overblown

One only has to look at CNBC or CNN to see these apocalyptic "Countdown to the Fiscal Cliff" timelines that pretty much distort the picture.  What should have been a simple re-adjustment of fiscal goals in light of economic conditions has suddenly turned into a giant proverbial partisan volleyball game, with the President and Democratic Senate pitted against the Republican-filled house, lobbing the ball of public opinion into the others' corner.  Last night's dramatic finish saw the Senate passed an emergency set of laws to sort of delay the fiscal cliff and soften the landing should they go over. There wasn't much anyone could do except sit close to their T.V and pray that Speaker Boehner would cut the brinkmanship and actually work towards avoiding plunging the United States into what could be a long and protracted recession, and an extended period of slow growth that could put a cap on the economy for years.  But the vital thing to keep in mind here is that this whole circus is a MANUFACTURED crisis, and really is only a a question because of the partisan bickering of both houses in the wonderful Bicameral system the United States has been blessed with.  What should have been a simple fiscal decision to stagger spending cuts and lower taxes has been hijacked by ideology and a certain pledge named after the always charming Grover Norquist.    

To understand the Fiscal cliff one must roughly understand the economy.  A rough but easy way to look at it would be to visualize the economy as a bucket, with taps injecting water, or economic activity into the economy, and drains, leaking economic activity out of it.  The "injections" would basically include investments, exports, consumer spending and the golden ticket in our case, government spending.  On the flip side, there's savings, imports, and the other key word, taxes.  In biology they teach you about an ecosystem's "carrying capacity", or just how much a population it can hold.  Well the economy works in a similar way.  There's an equilibrium where economic growth is sustainable and that is where fiscal and monetary policy combined come together to strive for this equilibrium.  The "Fiscal Cliff"  has the potential to be a destabilizing force in the economy because now government injections in the economy because what it would've done was hiked taxes, "draining" more economic activity, and lowered government "injections" into the economy moving the economy below the desired equilibrium.  But in economics everything is related, and  this would have the effect of curtailing business investment as profits are squeezed which would spin-off into other business sectors that rely on corporate investment which would cause layoffs reducing consumer spending as purchasing power declines, etc.  As you can see, the ripple effect could have serious effect on the economy that Ben Bernanke and the Fed would be pretty much useless to try and stop, considering the huge balance sheet it's accumulated through previous stimulus measures.

So things seem pretty dire judging from the economics of it all, and as a result CNN wouldn't be too far off the money with that countdown to the cliff would they?  Nope.  Congress had the option, not to mention the time to deal with this all the way back since they, characteristically like the 112th Congress, they agreed to raise the debt ceiling in yet another 11th hour deal.  And keeping with the indicators, Congress did not disappoint.  They had about a year and a half to talk about an important issue that would effect possibly millions of Americans.  Instead they resorted to a policy of brinkmanship, confrontational showdowns and concocted dumb rules they ended up breaking anyways like the unrealistic "Boehner Rule".  Not to mention making pledges that then held them hostage to the whims of one very partisan group, something that runs against the very nature of democracy itself.  Those countdowns served no purpose other than to panic political pundits and the general public, and maybe expose just how gridlocked Congress is.

At midnight when the ball dropped in Times Square there wasn't a magic switch that went off that all of a sudden plunged the United States into a recession and wiped out trillions of dollars from the global economy.  Only when businesses and people would be forced into paying more taxes and the government tap squeaked shut would we have seen any substantial real reaction.  That would've given Congress about a month to hammer out a deal. The important thing to note is that they should not have needed a month, as this was something that could have been solved by the time the Republican caucuses were taking place.  Things that had been politicized heavily such as a tax hike on the top 2% and defense and medicare spending held up negotiations and negotiations are still ongoing as the relatively over hyped sequesters, which don't cut spending but decrease projected increases in spending and find savings through "inefficiencies".  The deficit is still projected to increase by a large amount, although this is a good start.  It's been more than a decade since America has seen a surplus, and years of fiscal irresponsibility and financial imprudence have taken their toll on the country.  Of course markets may have dropped should Congress have failed to reach an agreement by the time markets had opened on the 2nd, but that's controlled by two of the worst  human emotions:  Fear and Greed.  The stock market cannot be used as a barometer of the health of the economy immediately following an event of mass economic hysteria.  Last night the Nasdaq Futures index was up around 400 points, an indicator of the bull market that took hold today.  And yet the American and global economy are not in much of a safer position now than they were 72 hours ago.  So CNN, lose the hysterical pundits and doomsday clocks, because sure catastrophe is fully possible, but this isn't the Dark Knight Rises.  There's no nuclear bomb sitting in the back of a truck with a timer saying when it's going to go off.