President Barack Obama said Thursday that American companies performing tax “inversions” are not doing right by their country.
Obama said that these companies, which buy foreign firms to technically change their tax domicile to a country with a lower tax rate, benefit from America’s university system and infrastructure, but then turn around and “game the system.” He told CNBC exclusively that, despite the legality of this corporate practice, inversions are not fair.
“You are an American company. You continue to benefit in all kinds of ways from being an American company,” the president said. “It is true that there are a lot of things that may be legal that probably aren’t the right thing to do by the country.”
“There are a whole range of benefits that have helped to build companies, create value, create profits,” he added. “For you to continue to benefit from that entire architecture that helps you thrive, but move your technical address simply to avoid paying taxes, is neither fair, nor is it something that’s going to be good for the country over the long term.”
Obama also said that “now is the time” for his administration to tackle corporate tax reform.
Blaming Congress for being “just not real productive,” the president said the White House has submitted “very specific proposals” toward passing corporate tax reforms, but that time is of the essence.
“Invariably it takes some time to work through a big tax reform piece of legislation,” Obama said, citing President Ronald Reagan’s 1½-year process for a similar bill. “So now is the time for us to get started, and I think that people should expect that this administration will be four-square behind it.”
Addressing the economic issues facing Main Street, Obama said he is “always bullish on America over the long term,” but that there are some things holding the country back. Citing stagnant median family incomes, the president reiterated his calls to increase the minimum wage and invest in infrastructure.
When asked about the surging U.S. stock markets, Obama said he avoids “commenting on day-to-day trends,” but that he recognizes that the Federal Reserve’s focus on bringing down unemployment levels by keeping interest rates low means “there’s a lot of money looking for returns.”
“You’ve got a lot of savvy investors out there. You’ve got people who recognize that what goes up can come down as well,” he said. “I’ll leave it up to them to make determinations about whether valuations and stock prices are too high.”
Obama also reflected on the conflict in Ukraine, saying that the apparent shooting down of Malaysia Airlines Flight MH17 “may stiffen the spine of our European partners moving forward” with sanctions against Russia.
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Despite Obama’s focus on tax inversions, the economic significance of the practice is not clear: Michael Feroli, JPMorgan Chase’s chief U.S. economist, said he did not see inversions as a macroeconomic issue, but Joel Naroff, president of Naroff Economic Advisors, said the practice could hurt small businesses.
“There’s no such thing as a free tax break,” Naroff said, explaining that these large corporations have exploited a loophole in the tax code to the same effect as a legislature-granted break. “If someone doesn’t pay what their fair share of taxes should be, someone else will have to.”
Obama’s other economic push, to address the U.S. unemployment rate, is a major concern for many in the country. A Gallup poll from July found that 14 percent said they think unemployment and jobs issues are the most important problems facing the country, although they were less worried than in previous months.
Despite these concerns, Feroli said he sees a promising employment picture. Jobs growth “seems to be doing as well as one could hope,” he said. Last week’s initial unemployment benefits claims fell to the lowest level in 8-1/2 years—a seasonally adjusted 284,000—the Labor Department said on Thursday.
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Some worry, however, that strong jobs numbers—U.S. companies gained 288,000 nonfarm payrolls as the unemployment rate dropped to 6.1 percent in June—are masking less rosy economic trends. Not only are marginally attached workers still a significant part of the “regular” employment figure, but many Americans have become discouraged and disappeared from the workforce altogether.
But as employment figures continue positive trends, wages have remained stagnant, and this is “the missing link in this whole economic recovery,” said Naroff. He predicted that the economy will begin to reach full employment in about nine months, and this will force employers to increase pay to attract the best workers.
If this turning point comes, the Obama administration may see some alleviation of one of its major economic concerns: income inequality causing weak economic growth. As companies are forced to increase compensation, Naroff said, middle- and lower-class workers should begin to drive consumption growth.