What Works (3)

The Obama administration just keeps coming up with so many examples of its ill conceived “what works” approach that I am simply compelled to write again. If you are reading this third installment of this series on “What Works” I will dispense with the president’s quote from the town hall in Argentina.

Last week, the US Treasury announced new regulations governing corporate mergers known as inversions. Inversion are mergers of a US corporation with a foreign company where the merged company’s domicile will be outside the United States, usually in a country with a low corporate tax rate. Inversions have been labeled “treasonous” and the companies doing them as “Benedict Arnolds”.

Treasury’s new regulations were designed to block the proposed merger of Pfizer (an American company) with Allergan (an Irish company). The regulations were very effective (they “worked” as defined by President Obama) and the companies have dropped their plans to merge. The new regulations were not based on new law or on precedent, but were concocted to paper over the problem of a dysfunctional US tax system. They were based on administrative actions and reinterpretations that Treasury Secretary Lew had previously stated he couldn’t do (I guess President Obama enlightened him on “what works”).

It doesn’t matter whether you believe tax inversions are a good thing or a bad thing. Here is the problem. Both the New York Times and the Wall Street Journal report that these new regulations could be challenged in court. But that is not likely to happen. It would be immensely costly and time-consuming to attempt to challenge these rules in court (a federal court where judges are appointed by the administration). Any public company challenging these regulations would be betraying its duty to its shareholders by expending so much money and management time on an effort with such an uncertain outcome.

What has happened here is that the Obama administration has used the coercive power of the state to force these two companies to do what it desires without regard to the rule of law. What the companies were attempting to do was legal according to current law and precedent even if you don’t think it was the “right” thing to do. But from the government’s perspective the outcome is “fair” because it achieves the administration’s political objectives.

This is precisely the type of oppressive action the Founders feared when they drafted the Constitution. President Obama apparently believes that the lack of action by the legislative branch gives him de facto power to act. As a constitutional scholar and senior lecturer at the University of Chicago Law School President Obama surely understands the constitution very well. But he is using this knowledge to circumvent the Constitution in order to pursue his progressive agenda.

The Republican controlled Congress is not likely to pass any tax law specifically permitting inversions. This would be political suicide. Nor is it likely, to pass a major tax reform bill in the middle of a presidential election year. But Congress will need to assert its constitutional prerogatives soon as several of the current presidential candidates have endorsed the “what works” philosophy.