America’s unrequited corporate love affair

If you’ve never seen an American-made automobile manufactured between 1942 and 1945, there’s a reason. Only 139 were built in that period for the consumer market. Automobile plants were retrofitted to build airplanes, tanks and weapons instead, under the supervision of the War Production Board. Automakers weren’t even allowed to inform the public about the patriotic work they were doing without clearing it first with the War department.

There are many reasons to doubt that such a large-scale mobilization would ever occur today. And for the most part, that’s something to be grateful for. But it’s also reflective of a larger, less positive shift in the civic relationship between corporations and the state. Today, U.S. corporations are much less likely to associate themselves, legally or otherwise, with the country in which they’re based. If corporations are people, as the Supreme Court wishes us to believe, they are stunningly unpatriotic ones.

“What we need is a new sense of economic patriotism,” Treasury Secretary Jacob Lew wrote in a July 15 letter, “where we all rise and fall together.”

In the letter, Lew urged the chairmen of the House Ways and Means Committee and the Senate Finance Committee to “prevent companies from effectively renouncing their citizenship to get out of paying taxes.” The transaction he referred to is inversion, in which a U.S. company merges with a foreign company, maintains its headquarters in the U.S., but reincorporates abroad to shift its principal tax liability to a country with a lower rate. Under current law, this is permissible only if the stockholders of the U.S. company end up owning no more than 80% of the merged entity.

The Obama administration would like to lower that ceiling to 50%. If more than half the “foreign” merged company were owned by the same people who owned the American company, it would be deemed an American company for tax purposes, no matter where it was incorporated. In addition, even if the legacy stockholders ended up owning less than half, the merged entity would still be deemed American for tax purposes if it continued to engage in “substantial business activities in the United States” and was “primarily managed and controlled” there.

Inversions are all the rage right now, particularly with drug companies. Pfizer tried to do it this past spring, but its merger with British-based AstraZeneca fell through. AbbVie and Mylan Laboratories announced imminent invesions just this past week. Chicago-based AbbVie will merge with Shire, a British drugmaker based on the island of Jersey. Mylan, based in Canonsburg, Pennsylvania, will acquire an overseas unit of Chicago-based Abbot Laboratories and reincorporate in the Netherlands—a variation known as a “spinversion.” Forty-seven companies have engineered inversions over the past decade, most since 2008. Over the next decade, inversions are projected to cost the Treasury $19.5 billion.

As Lew noted in his letter, these corporations “still expect to benefit from their business location in the United States, with our protection of intellectual property rights, our support of research and development, our investment climate, and our infrastructure, all funded by various levels of government.” Drug companies in particular rely on research and clinical trials performed by the National Institutes of Health.

They also can now be included in the Standard & Poor’s 500 index, which boosts share price. In 2008 and 2009, Allan Sloan reports in Fortune, the S&P 500 removed nine companies from the index because they inverted; only American companies were eligible for inclusion. But in 2010, S&P changed its policy, partly because it feared the establishment of a rival index. As a result, the S&P 500 now includes 28 non-American companies.

Consider Heather Bresch, the daughter of Democratic West Virginia Sen. Joe Manchin and the chairman of generic drug maker Mylan, who announced plans this week to reincorporate in the Netherlands. “Until now, Ms. Bresch ran an unabashedly proud American company based in a Pittsburgh-area suburb,” a July 14 New York Times story notes. In 2011, the Times points out, Esquire magazine named Bresch “Patriot of the Year” for her prominent role in promoting the Food and Drug Administration Safety in Innovation Act, passed in 2012, which tightened regulations on imported drugs.

Why would a U.S. industry executive be deemed patriotic for advocating a law that, however worthy, improved her company’s competitive position against foreign imports? Try not to be distracted by that excellent question. The salient point is that Bresch had a family connection in Congress and made effective use of it. Now she’s thanking the U.S. government by repatriating her company to the Netherlands to dodge taxes.

Bresch told the Times that she doesn’t want to play the inversion game, but has to because Congress won’t lower corporate tax rates. In fact, Obama’s proposed tax reform plan, currently stalled in Congress, would lower the corporate rate from 35% to 28%, and 25% for manufacturers. But as Bresch told the Times, Mylan already pays an effective tax rate of 25%. Reincorporating in the Netherlands will lower that to 21%, and eventually to the high teens.

At least Bresch was willing, before the proposed merger with the foreign Abbott Labs unit, to identify her company as American. In 1996, and again in 2013, Ralph Nader wrote to the CEOs of more than 100 corporations to ask them to “stand up at the annual shareholders meeting and, in the name of the corporation (not the Board of Directors), pledge allegiance to the United States and the Republic for which it stands … with liberty and justice for all.” Only one of the hundred companies — Federated Department Stores — endorsed the idea.

The online magazine Remapping Debate conducted a more modest survey in 2013, merely asking representatives from 80 corporations to define their obligations to the U.S. Sixty-five of the 80 declined to answer. Of the 15 companies that did reply, most said they did not have any obligations to the U.S., and a couple said they didn’t even consider their companies American. Notably, the spokesperson for U.S. Steel resisted characterizing the company as American, stating instead that it was “a company with headquarters in the United States and operations globally.”

When a corporation includes the words “United States” in its very name, and still resists calling itself American — especially when that company has itself been a significant player in U.S. history — the era of corporate patriotism is over.