The myth of 'economic patriotism'

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CEOs get paid (very well) to deal with every challenge that pops up. Now there’s a new one: Proving they practice “economic patriotism.”

This new form of patriotism has become an issue now that several big U.S. companies have decided to relocate their headquarters to other countries, in order to lower their tax bill. These so-called “tax inversions” require a merger with a foreign company, a strategy big firms such as AbbVie (ABBV), Mylan (MYL), Walgreen (WAG), Medtronic ( MED), Chiquita Brands (CQB) and others have been pursuing. Since the U.S. corporate tax rate is one of the highest in the developed world, moving overseas can save a bundle of money.

Reforming and simplifying the U.S. tax code might solve the problem, except a fitful Congress obsessed with political spitball fights is unlikely to take that up anytime soon. In a July 15 letter to Congressional leaders pleading for some kind of action, Treasury Secretary Jack Lew proclaimed, “What we need as a nation is a new sense of economic patriotism, where we all rise or fall together.”

Some tax inverters are more susceptible to charges of sedition than others. Since Walgreen, Mylan and AbbVie are in the healthcare business, for instance, they earn considerable revenue from taxpayer-funded programs such as Medicaid and Medicare. So they’re seeking to slash their own obligations to Uncle Sam while benefiting directly from the payments of others — a contrast the New York Times described as “morally disconcerting.”

A political stunt?

While other patriotic calls have unified the nation, however, Lew’s plea for economic patriotism has provoked political opponents. In a rebuttal to Lew’s letter, the conservative editorial page of the Wall Street Journal characterized the letter as a political stunt while declaring that “Mr. Lew doesn’t know much about economics …. Mr. Lew's letter shows that the White House now wants to exploit the inversion flurry as an election year opportunity to demagogue business.”

Political infighting over the mercenary behavior of corporate America raises an intriguing new question: What is economic patriotism, anyway? Lew, in his “rise or fall” remark, seems to suggest U.S. companies ought to align themselves with the fortunes of the American middle class, and go down with the ship if that’s where the middle class is heading.

But Lew, who was a senior Citigroup executive from 2006 through 2009, surely knows that is not how public companies operate. The main job of a CEO is to optimize the return to shareholders, period. It’s nice when that primary mission coincides with feel-good national policies, but when it doesn’t, shareholders come first. And with nearly half of all revenue for America’s big firms coming from foreign sales, it’s imperative for those firms to remain competitive against rivals in other nations that face a lower tax burden and are eager to exploit any cost advantage they can.

Corporate behavior obviously affects a company’s image, which can, in turn, affect profitability. But a company taking perfectly legal steps to minimize its tax bill isn’t likely to generate enough outrage to impact its bottom line. Americans are ambivalent about taxes, at best, and they tend to believe the government is a voracious money eater that wastes a lot of the tax revenue it brings in, anyway. So even if U.S. consumers are uncomfortable with the idea of companies dodging taxes, they’re not likely to resort to boycotts or other measures typically reserved for firms caught discriminating, trashing natural resources or blatantly cheating.

If there are any economic traitors in this story, in fact, it’s not U.S. companies but the politicians who have left them with a booby-trapped tax code that creates powerful incentives to pay taxes someplace else. Republicans and Democrats agree the tax code has become a porous mess riddled with loopholes only high-priced tax experts can comprehend. President Obama wants to fix it, but hasn’t pressed for tax reform because other priorities seem to have a better chance of getting somewhere. Republicans want to fix the tax code too, but are waiting for some future date at which they hope to have more leverage in Congress and a better chance of enacting the tax changes they prefer.

Businesses, meanwhile, must pay taxes in real time and can’t wait for theoretical reforms from a legislative body with a response time of a decade or two. So business leaders are doing what’s pragmatic, even if it’s objectionable — maintaining their edge through whatever legal means are available.

So this might be a reasonable way to way to define economic patriotism: Pay what you owe and nothing more, while finding other ways to show support for your nation and your countryfolk. If you’re a businessperson who profits by operating in America, set up mentoring programs to help young people get ahead, or go out of your way to hire the underprivileged, or find some other way to give back. If you’re a corporation, abide by the letter of the law, be honest with your shareholders about how you’re making your money and accept the consequences if American customers punish you for expediency. And if you’re an ordinary voter, you can show your economic patriotism by demanding the government adopt policies that make America indisputably the best place to start and run a business, instead of a winded giant that seems unable to keep up with the rest of the world.

Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.

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