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.

Just What is a Corporation: How Hobby Lobby may have Pierced the Corporate Veil

Corporations are people, my friend.

A few weeks back the Supreme Court dealt a largely symbolic blow to President Obama's signature healthcare reform bill by ruling that Hobby Lobby, as a legal person under the law, would have rights granted by the Religious Freedoms Restorations Act (RFRA) infringed by the Affordable Care Act's contraceptive mandate, which stipulated that employers must also cover the cost of contraception for their employees.  While it was definitely a setback for those who are pushing for healthcare reform, the bigger story that came out of the landmark ruling was the many questions it raised.  Between this and Citizens United, corporations increasingly seem like vehicles for those who control them to disregard laws that restrict their ability to unduly influence others.  

Firstly let us examine the "Corporate Veil", which was designed to shield shareholders of a company from personal liability (Hence the "Limited." suffix attached to the name of every corporation).  The foundation of this legal protection is the emphasis of a corporation as a seperate legal entity, independent of its shareholders.  Justice Samuel Alito, in writing the majority opinion, claimed that "allowing Hobby Lobby, Conestoga, and Mardel to assert RFRA claims protects the religious liberty of the Greens and the Hahns."  And yet just how is it that laws applicable solely to their corporate holdings also seemingly affect the Greens and Hahns?  When Hobby Lobby and other so called "religious corporations" were incorporated, their owners did so voluntarily, acknowledging that in exchange for shielding both themselves and their wealth from the company's liabilities, they were relinquishing absolute control over the company (Think Apple firing Steve Jobs), which would then become a legal entity of its own, independent of them.  Since then, David Green, CEO and founder of Hobby Lobby, has amassed a fortune (estimated at $4.5 billion by Forbes) in no small part thanks to the protections that the corporate veil has afforded him, including various tax benefits. David Green willfully and knowingly incorporated his picture frame business, and as a result has reaped the benefits of doing so.  With Hobby Lobby's Supreme Court case he now sought to ignore the legal seperateness of him and Hobby Lobby, for it was now personally convenient for him to do so.

"We're Christians, and we run our business on Christian principles."  That is how David Green describes Hobby Lobby's business model.  Setting aside the veracity of those claims, it's important to note that following "Christian principles" would be impossible in situations where it clashes with law because companies do not have religious freedoms.  The Supreme Court implied this by choosing not to rule on religious protections afforded companies under the First Amendment.  The court however also argued the RFRA stipulated that a person had to comply with a government law that violated their religious beliefs only if it was restrictive in the least possible way (held up under Strict Scrutiny) and that Hobby Lobby, as a person under the law, was protected under this law.  This becomes problematic when one attempts to determine where a corporation's religious beliefs come from.  The Supreme Court seems to believe that companies whose controlling shareholders possess devout religious views determine the religious views, if any, of their company.  

There are many worrying questions that arise from this, not only what constitutes "sincerely held beliefs", for Hobby Lobby engages in a few decidedly "un-Christian" practices, but also is the Corporate Veil maintained even while the religious views of a company and its shareholders are now synonymous?  Can companies now just claim a religious exception to any laws they do not like?  This will no doubt be clarified in the coming year as pending cases in the lower courts are ruled upon, but New York Times editor Dorothy J. Samuels captured the issue perfectly when she wrote "If owners indicate that they are not entirely separate from their corporation-by denying corporation employees' birth control coverage based on their personal religious beliefs-the case could be made in future state-court litigation that they have waived their right to be shielded from responsibility for corporate financial liabilities."  

Over the years the culpability of shareholders for the misdeeds of the corporations they helm has slowly increased, and may this be the final blow?  On the flipside, the current slate of Supreme Court Justices seem determined to hand corporations rights and protections normally only granted to humans without giving much consideration to how the sheer scale of the average corporation gives it a natural advantage in exercising those rights compared to the average American, and the subsequent impact that has.  A single person excercising their religious objection to contraception by refusing to shop at stores who sell it does not have the same outsized impact that a corporation denying its employees access to contraception has.  The recent SCOTUS decisions granting corporations various rights has eroded the seperation between a company and its owners, turning them into little more than vehicles which they can then utilize to influence national discourse.  This is a dangerous precedent and must be addressed quickly, lest the United States continue its trajectory towards what is increasingly looking like a corrupt kleptocracy where those who dictate policy are those who benefit from it the most.