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Press Center

 Remarks of Secretary Lew at the Urban Institute


9/8/2014
WASHINGTON - Thank you, Sarah Rosen Wartell. Thank you to the Urban Institute for having me here this morning.  For nearly half a century, the Urban Institute has applied rigorous research and analysis to help advance our understanding of the public policy challenges facing our nation.  And we will keep looking to your work—and to the work of the Tax Policy Center—as we continue to move forward and make progress on behalf of the American people.
 
Let me start by talking about the economy, which continues to strengthen, thanks to the incredible resilience of the American people, our unique capacity to innovate, and the bold, effective policies put in place by the President to bolster our response to the financial crisis and lay a foundation for the future.  GDP posted a robust gain in the second quarter of this year, and our economy is now 6.6 percent larger than when the recession began in 2007.  Private sector economists expect this trend to continue, with healthy growth in the second half of this year and through the end of 2015. 
 
In addition, our private sector has created 10 million new jobs over the past 54 months.  That is the longest stretch of job growth in our nation’s history.  The auto industry is thriving, manufacturing is rebounding, and the housing market is recovering.  We sell more goods around the world than ever before.  We produce more oil at home than we import, and we are now the world’s leading producer of petroleum and natural gas.  Household wealth is at an all-time high.  With the Affordable Care Act in place, millions of Americans no longer have to worry that an illness will force them into bankruptcy, and health care costs have risen at the lowest rate in nearly 50 years.  Financial reform has not only made our financial system stronger and more resilient, but consumers now have a watchdog in place that is looking out just for them.  On top of that, over the last four years, the government’s finances have improved markedly and our budget deficit has been cut by more than half.
 
We have more work to do to keep this progress going and to make sure the benefits of growth are broadly shared, and the President has put forward specific strategies to help grow our economy even faster and reduce unemployment even more.  One important strategy is business tax reform. 
 
It is clear that our business tax code has become more and more distorted. The United States is an attractive place to do business in spite of our tax code, and that is something we know how to fix. Today, the United States has the highest corporate tax rate in the developed world, but because of inefficiencies and special-interest loopholes, some businesses pay the full rate and others pay nothing at all.  More than two years ago, the President put forward his framework for business tax reform to level the playing field, and he has consistently called on Congress to get this done.  We want to eliminate wasteful and inefficient carve-outs and tax expenditures, broaden the base, and establish a top rate of 28 percent.  This will simplify the code and make the United States an even more attractive place to invest.
 
When we reform our broken tax code, there will be one-time transition savings.  The President’s plan would use these savings to invest in America.  We want to make critical repairs and upgrades to our country’s roads, bridges, tunnels, airports, and ports.  By making job-creating investments in our nation’s infrastructure, we can propel our economy forward today and far into the future. 
 
The truth is, the need for infrastructure improvements has never been greater, and tomorrow, Transportation Secretary Foxx and I will hold a summit with investors, business leaders, and government officials to help increase private sector investment in infrastructure and expand public private partnerships so we can begin to clear out the backlog of work needed to keep our economy competitive in the future.    
 
The guiding principle of our framework for business tax reform is to create an environment where businesses decisions are made for business reasons—not for tax purposes.  And both Democrats and Republicans agree that the ultimate goal of reform should be to increase America’s competitiveness and that the path to get there is by closing unfair loopholes that do not help our economy.  Earlier this year, Chairman Camp put out a tax reform proposal, and there are key areas of overlap with our business tax plan—including using one-time savings from tax reform to invest in infrastructure.
The administration is committed to completing pro-growth business tax reform, and there is strong support across the business community for getting this done.  Still, it is going to take more time for Congress and the administration to complete tax reform, and while that happens, there is one loophole that should be shut down immediately. 
Right now, our tax system rewards U.S. corporations when they buy foreign companies and then declare that they are based overseas.  This practice of corporations acquiring foreign businesses and then switching their citizenship outside the United States is known as inversions.  And the pace of these deals has accelerated in recent months, with an increasing number of corporations on the verge of completing such mergers and many more, across a variety of industries, in the works.
Make no mistake, there is nothing wrong with genuine cross-border mergers—our country is better off when companies can invest overseas and when foreign investment flows into the United States.  But these transactions should be driven by genuine business strategies and economic efficiencies.
The problem is, with many inversions, the change in residence is done primarily for tax purposes, and the new entity is, for all intents and purposes, effectively just changing its address.  This practice allows the corporation to avoid their civic responsibilities while continuing to benefit from everything that makes America the best place in the world to do business—our rule of law, our intellectual property rights, our support for research and development, our universities, our innovative and entrepreneurial culture, and our skilled workforce.  This may be legal, but it is wrong, and our laws should change.
By effectively renouncing their citizenship but remaining here, these companies are eroding America’s corporate tax base.  That means all other taxpayers—including small businesses and hardworking Americans—will have to shoulder more of the responsibility of maintaining core public functions that everyone, particularly U.S. businesses, depends on.  We are talking about our national defense, education, medical research, courts and vital infrastructure such as roads, bridges, and airports.  And if we allow the incentives to pursue these deals to remain in place, we run the risk of undoing the progress we have made to reduce our federal budget deficit.  
The best way to address inversions is through comprehensive business tax reform that includes specific anti-inversion provisions.  These provisions will need to be in place even after we move to a reformed business tax system because there will always be countries with rates lower than ours where corporations can establish residences for tax purposes. 
 
At the same time, we cannot wait to complete business tax reform before taking action to fix this problem.  That is why the President laid out a legislative plan in his budget to end the incentives that encourage inversions.  Under his proposal, a company would not be able to claim foreign tax residence if it is still managed and controlled in the United States, does a significant amount of its business here, and does not do a significant amount of its business in the country it claims as its new home.
On top of that, to make sure the new company is truly a foreign-based entity, the original shareholders of the foreign firm would now have to own at least 50 percent of the merged company, rather than only 20 percent, which is the current legal standard. 
Now, I have been urging Congress to move forward with legislation to rein in these transactions.  And members of Congress have taken action to combat the problem, including Chairman Wyden, who has been a leader on this issue, and Senator Levin and Congressmen Levin and Van Hollen, who have put forward strong legislation that incorporates elements of the President’s plan.  Lawmakers on both sides of the aisle have expressed their dissatisfaction with the recent spate of inversions, so the proposals currently circulating on the Hill should have bipartisan support.  Keep in mind, it was President George W. Bush who signed the first anti-inversion legislation into law in 2004 to keep companies from setting up residences in places like the Cayman Islands strictly for tax purposes, and this bipartisan legislation was championed by senior Republicans in Congress. 
Moreover, when this 2004 law established the current anti-inversion regime, it also worked retroactively.  In other words, the legislation was signed into law in October of 2004, but it had an effective date of March 2003.  This is a critical point. The same principle is true today.  To prevent a rush of corporate inversions to get in under the wire before a change in the law, legislation should work retroactively, applying to any deal after early May of this year. 
I want to emphasize once again how important it is for Congress to solve this problem.  It is imperative that lawmakers get this done.  Still, the administration is clear-eyed about the possibility that Congress may not move as quickly as necessary to respond to the growing wave of inversions.    Given that, the Treasury Department is completing an evaluation of what we can do to make these deals less economically appealing, and we plan to make a decision in the very near future.  Any action we take will have a strong legal and policy basis, but will not be a substitute for meaningful legislation—it can only address part of the economics. Only a change in the law can shut the door, and only tax reform can solve the problems in our tax code that leads to inversions.
 
In closing, let me thank everyone for being here.  Tax policy has serious consequences, and it highlights the important choices we face as a nation.  That is, whether we have the resources to make the investments that will make our economy more competitive.  Whether we make it possible for more businesses to grow, innovate, and hire.  And whether we make sure everyone has a fair shot at success.  Getting this done will require tough decisions, but if we move in the right direction, I am confident we can make enormous progress. 
 
Thank you.
 
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