By IPI President Tom Giovanetti.
One of the key characteristics of a functioning constitutional republic is the rule of law which is a consistent and certain application of laws to everyone. The opposite of rule-of-law would be arbitrary decisions made by individual government agents according to their own preferences.
How then should we categorize the decree on Monday that the Treasury Department is changing the rules to kill Pfizers merger with Allergan a merger that was announced five months ago? Is that certainty and consistency in the application of laws? Or is that more like arbitrary decisions by government agents according to their own preferences?
In a rule-of-law environment it frankly doesnt matter what the president Congress or Treasury Department think about corporate inversions. Their opinions and preferences are irrelevant--it is the law that matters. The question is what are the laws in force at the time and is the transaction legal under those laws? Politicians and bureaucrats dont get to arbitrarily change the rules outside of the democratic process in order to kill a deal they dont like.
The federal government has taken yet another giant step toward abandoning the rule of law. Once again the Obama administration has operated by simple fiat rather than through legal means of changing policy. Its also true that these new rules will cascade throughout the economy in ways unanticipated by Treasury.
Its further true that this act leaves Pfizer trapped paying higher taxes than its global competitors which means less capital available to invest in research and innovation toward new cures. Patients will all pay the price for that.
But heres the worst thing: The U.S. government is sending very negative signals to capital and investors. We will tax you at extraordinary levels that are out of proportion with every one of our international competitors. We will not act to reduce this high level of taxation. We will take for granted that the US is the best environment for investment in part because of our predictable rule of law but we will arbitrarily violate that rule whenever we feel like it. If you try to flee these high taxes and arbitrary application of law we will erect new barriers to restrict how you deploy your capital.
Why would investors continue to invest in a country under these circumstances?
They wont. Nestle has already told the
Financial Timesthat the new rules will have a chilling effect on jobs and investment in the U.S.
It doesnt take much to tip a mediocre economy back into recession. Threats of tariffs backtracking on free trade eroding the rule of law and holding U.S. companies hostage should be more than enough to do it.
Todays TaxByte was written by IPI President Tom Giovanetti.
