Finance

Obama’s legacy-defining week with business

The past week has arguably been one of the most significant in burnishing President Obama's legacy in the business world.

The administration took its toughest actions yet against tax deals known as "corporate inversions," and finally pushed through strict new rules on retirement investment.

Those initiatives came about despite intense opposition from the business community, which criticized both sets of proposals.

"I don't think you can overstate the importance of both regulations," said Dennis Kelleher, head of the Wall Street reform group Better Markets.

The rules on inversions had an immediate impact, as the U.S. drug company Pfizer said it would pull out of its plan to merge with Ireland-based Allergan.

The Treasury Department's rules target companies that seek to reduce their tax burdens by merging with smaller companies and moving their headquarters overseas. The rules were seen by some observers as targeting Pfizer's move specifically.

Obama signaled how important he believes the rules are by appearing at the White House press room to tout them.

"It sticks the rest of us with the tab, and it makes hardworking Americans feel like the deck is stacked against them," Obama said of the business practice.

The actions harkened back to Obama's efforts to win congressional approval of the Dodd-Frank financial reform law.

"The fact that he personally engaged in a tax issue I think it pretty important," said Steven Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center. "It signals the significance the president attaches to this issue."

Obama's Wall Street law is under attack by Congress, where Republicans have offered a number of bills that would undo his work.

Whether the law stands will largely depend on which party wins the White House, though Obama, in the meantime, is using his executive powers to get as much done as he can. 

The other big action this week came Wednesday, when the administration finalized new rules on retirement investment advisers. Under the so-called fiduciary duty rules, investment advisers are required by law to act in their clients' best interests when suggesting retirement investments.

While seemingly technical, the rules had been hugely contentious for years, and blocking them became a top priority for the financial sector. Rule backers argued the initiative could help Americans save billions of dollars by barring bad financial advice, but Wall Street contended it could eradicate the availability of financial advice for less wealthy Americans.

"The new rule is a watershed moment," said Cristina Martin Firvida, director of financial security at AARP, backers of the new rule. "This was a legacy moment."

While supporters of Obama's actions argue his moves will polish his legacy, critics in the GOP and on Wall Street argue they are just another example of the president's penchant to overstep his authority when he cannot bend Congress to his will.

"Even after Secretary Lew's admission that Treasury has no authority to stop inversions on its own, this administration has reverted to its default stance: attempting to make law by executive action," said Rep. Charles Boustany (R-La.), chairman of the House Ways and Means Committee's tax policy subcommittee.

Speaker Paul Ryan (R-Wis.) blasted the fiduciary effort in the days leading up to the administration finalizing the rules. And after they came out, he made clear the GOP-led Congress would be taking steps to challenge it.

"We will continue to look at every avenue to protect middle-class families and small businesses from government overreach," he said in a statement.

Many expect there will be some form of legal challenge to the fiduciary rule.

The conservative American Action Forum determined that the final rule could cost up to $31 billion in compliance costs over the next decade, making it the most expensive rule, proposed or final, offered up in 2016.

"This rule is clearly one of the most burdensome rules in recent years, and likely one of the most expensive DOL regulation ever," the group said.

Business groups have also been critical of the inversions guidance, saying they will deter foreign investment in the United States and are not a substitute for tax reform.

Additionally, a part of the guidance could hurt large U.S. companies with multiple subsidiaries that are trying to restructure, giving companies less flexibility to restructure for both tax and nontax purposes, said Stefan Gottschalk, a senior director in RSM Consulting's Washington National Tax team.

"These regulations would be a significant disruption for tax planning for large corporate groups," he said.

Two important parts of the inversions actions were temporary rules that limit the tax benefits for "serial inverters" and proposed rules that take aim at one of the major tax benefits of inversions, called "earnings stripping." This is the third round of guidance Treasury has issued to try to curb inversions, and it is seen as the most consequential.

The guidance on "earnings stripping" is likely to have a broad impact and will likely affect companies other than just those involved in inversions.

"I think this set of guidance is the most far-reaching we've seen and will have spillover effects on noninversion transactions," said Phil West, chairman of Steptoe & Johnson and a tax partner at the firm.

The directions aimed at limiting earnings stripping were released as proposed rules, and a 90-day comment period was provided. A Treasury spokesperson said the department intends to finalize that guidance quickly after considering comments. Once final, the rules would apply to debt issued on or after April 4.

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