Obama's tougher approach to corporate America may reshape his presidency
By Don Lee and Jim Puzzanghera
Apr 15, 2016 | 9:40 AM
It sounds as if President Obama lately has been listening to Bernie Sanders’ tough talk on business.
From expanding overtime rules for employers to imposing stricter corporate tax regulations and fiduciary responsibilities on stockbrokers, Obama is using his executive power to demand greater accountability and contributions from American firms.
Whether the policies are being pushed by Sanders’ anti-business campaign rhetoric, as some believe, or represent the culmination of years of getting nowhere with recalcitrant congressional Republicans, Obama’s harder line on corporate interests has been met with howls from business chiefs and may mark a kind of makeover of the president’s legacy.
In Obama’s first term, with the nation reeling from the financial crisis and the public fuming at government bailouts of big banks, some in the Democratic Party shook their heads at what they regarded as the president’s failure to match his tough talk on Wall Street and corporate excess with equally strong action. Although Obama pushed through the sweeping Dodd-Frank overhaul of financial regulations, legislative compromises and long delays in following up with regulations blunted its impact.
Obama hasn’t exactly dropped the gloves since then, but the recent regulations unveiled by the White House — with more to come, analysts say — reflect a sense of urgency in the waning months of his administration. They come as the 2016 presidential candidates and ordinary Americans voice frustrations that the U.S. economy remains stacked in favor of corporations and the well-to-do.
“This is an administration under attack from the left for not being sufficiently anti-business,” said Robert J. Shapiro, an economic advisor to former President Clinton and chairman of consulting firm Sonecon Inc. “There is a real consensus across the Democratic Party that you have to go after aspects of inequality and aspects of corporate abuse.”
Obama gets tough on businesses
Corporate inversions: Makes it harder for companies to avoid U.S. taxes by moving headquarters abroad
Retirement savings: Requires investment advisers to put clients' interests first
Overtime: Extends overtime benefits to an estimated 5 million people
Climate change: Sets state-by-state targets for reducing greenhouse gases from power plants
Bruce Josten, the top lobbyist at the U.S. Chamber of Commerce, said, “They’ve made it perfectly clear they’re going to try to push out as many of these regs as they can, as fast as they can.” The sheer amount of new regulations, he argued, is “driving the business community crazy.”
Josten accused Obama of helping make business-bashing “acceptable in political discourse,” as demonstrated in the presidential campaign, with his own sharp rhetoric.
In highlighting this month’s new rules to rein in corporate inversions — the most significant of the recent administration actions — Obama called it an “insidious” tax loophole that multinationals have been irresponsibly exploiting at the expense of U.S. workers. “It sticks the rest of us with the tab,” the president said. “And it makes hardworking Americans feel like the deck is stacked against them.”
The corporate inversion regulations are aimed at stopping firms from moving their headquarters overseas to avoid U.S. taxes, often by merging with smaller companies in lower-tax countries. Two earlier sets of Treasury rules on inversions, in 2014 and last year, were seen as weak and had little effect, but this third round was much more expansive with the potential for eliminating tens of billions of dollars of tax reductions by multinationals.
Just two days after the new rules were issued, the New York-based pharmaceutical giant Pfizer nixed its $150 billion merger deal with Allergan, a former Irvine-based company one-twelfth of Pfizer's size that came to be headquartered in Ireland after multiple transactions.
Allergan's chief executive, Brent Saunders, called the Obama administration’s action capricious and complained it had taken aim at the Pfizer-Allergan deal. Treasury officials denied that they had targeted any specific transaction.
But the new regulations extended far further than most initially believed. The tax rules not only make it harder for deals like Pfizer-Allergan, involving what Treasury called “serial inverters,” but also limit a much more widely used practice in which multinational firms make loans or shift finances between affiliates to strip out earnings in higher-tax countries or take advantage of tax breaks such as interest deductions.
“There’s a sense [the rule on “earnings stripping”] is not just targeted at abusive situations, but rather ordinary inter-company transactions that have been blessed for decades,” said Lee Morlock, an international tax partner at Mayer Brown’s law offices in Chicago. He and other tax experts said multinational firms would now have to take a second look at any planned transactions involving inter-company debt and equity.
“It’s a little bit of a blunt instrument,” said Eric Toder, co-director of the Urban-Brookings Tax Policy Center at the Urban Institute, who like others was surprised by the Treasury action. “It is somewhat of a departure in policy.” Companies have been using earnings stripping more aggressively over the years as the economy has become more global and tax planners have gotten more sophisticated in employing such techniques, said Kimberly Clausing, an economics professor at Reed College who has written extensively on the subject. Clausing estimated that earnings stripping accounts for at least 30% of the more than $100 billion in corporate tax revenue lost annually by the U.S. government because of overall profit-shifting maneuvers.
Treasury Secretary Jacob J. Lew, in announcing the inversion regulations, did not rule out taking other steps on the issue in the final months of the Obama administration. Although Obama and others agree that overall corporate tax reform is needed — the U.S. business tax rate is the highest among advanced economies — there is almost zero chance of any legislation this year, and many doubt it could happen even in the next three years.
Earlier this month, the Obama administration also issued regulations aimed at protecting retirement savers from being hurt by conflicts of interest and some other agents who sell stocks, bonds and other investments. While consumer groups and Democratic lawmakers cheered the rules, the financial industry, GOP leaders and other critics argued that they would drive up the cost of investments for average investors.
The administration’s proposed change in overtime, meanwhile, would more than double the threshold for white-collar workers exempted from overtime pay, to $50,440 from the current amount of $23,660. The White House also is expected to issue more health and safety, and environmental regulations affecting corporations.
Jared Bernstein, chief economist for Vice President Joe Biden during Obama’s first term, disputed that the administration had suddenly cranked up its efforts to get tough on businesses. He noted that some of the policies issued, such as the overtime rule, had been in the works for some time, before the political campaigns began.
At the same time, he acknowledged that the administration had not done enough to bring Wall Street to heel, particularly in the White House’s reluctance to criminally prosecute those who had clearly engaged in financial misbehavior before the Great Recession. Nor could Bernstein account for why the Obama administration didn’t issue the tougher inversion rules earlier when it had the chance.
“Many of us were scratching our heads why the first two efforts on tax inversion didn’t have sharp teeth,” said Bernstein, who is a senior fellow at the Center on Budget and Policy Priorities.
If Obama was too soft on business, part of that can be explained by the top advisors who surrounded him earlier, said Dean Baker, co-director of the Center for Economic and Policy Research. They include former chiefs of staff Rahm Emanuel and William M. Daley, who are seen as centrist and business-oriented, as well as confidants like former Treasury Secretary Timothy F. Geithner, who some saw as sympathetic to the financial industry during his tenure and now serves as president of Warburg Pincus, a Wall Street private equity firm.
“I think part of the story [of Obama’s stronger hand with businesses] is that some of the people pushing him toward the center are gone,” Baker said.
Still, like many Democrats, he said what ultimately has pushed Obama to implement stiffer regulations on businesses was the realization, however slowly, that his efforts to compromise and get changes through legislation would never happen in the current partisan climate in Congress.
Geoff Garin, a Democratic strategist and president of Hart Research Associates, argued that history would show that Obama struck a healthy balance in his dealings with businesses.
“It’s hard to argue he’s anti-corporations in as much as he’s invested a lot of political capital negotiating the Trans-Pacific Partnership,” he said, referring to the pending Pacific Rim free trade deal that many Democrats have bitterly opposed. “It’s clear that people like Bernie Sanders would like Obama to be a lot tougher on corporations, but the thing about Obama is he’s not knee-jerk pro-business or knee-jerk anti-business.”