Friday, July 18, 2014

Corporate inversions: the facts

Those who claim that companies seeking to reincorporate overseas in order to reduce their tax burdens are "unpatriotic" are not only ignorant of the law but also ignorant of how businesses operate. If there is any one message that should be making the headlines, it would be "Companies seek to escape insane U.S. tax code." When companies vote with their feet, it's a good sign that something is wrong here in the U.S. 

In case you've missed them, here are three short essays, with brief excerpts, that clarify the issues surrounding corporate tax "inversion."

Miles D. White, "Ignoring the Facts on Corporate Inversions:"

... inversion is legal. Period. It's allowed in the tax code. The tax code even specifies the terms and conditions under which it may be done. 
Inversion doesn't change a company's tax rate. A company pays the same tax rate in the U.S. after inversion as it does before inverting. A company also pays the same tax rates in foreign domiciles before and after inversion. 
Inversion does not relieve any pre-existing tax burden. It does not reduce the tax that any company would ultimately have to pay on past earnings overseas that have been deferred under the U.S. tax system. 
What does change after inversion is a company's access to its future foreign earnings generated outside of the U.S. tax system. Those future earnings may be used for any capital allocation purpose the company may have, including investment in the U.S., without the additional U.S. repatriation tax. 
The U.S. is among only a handful of countries, and the only one in the Group of Seven, that taxes companies on world-wide earnings rather than the earnings in their home domiciles. It's a double whammy: the highest rate, by far, and it's applied worldwide.
Legislation to block inversion is not tax reform. It would make the U.S. even less competitive globally. It would not stimulate economic recovery.

The pace of inversions has been picking up as more CEOs conclude that President Obama isn't serious about tax reform. These executives have a fiduciary duty to their shareholders, and they can't cede a permanent tax advantage to their global competitors. So they decide to move. 
Mr. Lew doesn't know much about economics or he'd realize that his rush to block these inversions will have the perverse effect of driving even more deals in the coming months. If CEOs think Congress will close the inversion possibility, and that tax reform is dead until Mr. Obama leaves office, more of them will decide to move while they still can. 
A real agenda for "economic patriotism" would support a tax policy to make America competitive again as a destination for global investment and job creation.
Michael J. Graetz: "Inverted Thinking about Corporate Taxes:"

Inversions by U.S. companies to take advantage of more favorable corporate tax laws abroad are nothing new. Of the more than 25 U.S. companies that inverted between 1982 and 2002, more than 20 made Bermuda or the Cayman Islands their home.

To ask, "How do we stop American companies from leaving for more favorable tax jurisdictions?" is asking the wrong question. The right question is "How do we make the United States a more favorable location for investments, jobs, headquarters, and research and development activities?" That will require genuine tax reform. The U.S. is the only OECD country that doesn't have a national tax on consumption. Relying, as we do, so heavily on individual and corporate income taxes to pay for federal expenditures hobbles us in today's global economy.
I would add that, in the 12 months ended June, 2014, the federal government received a total of $303 billion in corporate income tax payments. That represented only 10.3% of total federal revenues over the same period. Eliminating that source of revenue entirely would increase the federal deficit from its current 3.1% of GDP to 4.9%, all else remaining equal. This would not be an earth-shaking loss, and it would very likely be offset to a significant degree by increased corporate investment, more hiring, more incomes, and lower prices to consumers.

Corporate tax reform is a matter requiring urgent and thoughtful attention. Let's do it right, please.


William said...

The Conference Board Leading Economic Index® (LEI) for the U.S. increased 0.3 percent in June to 102.2 (2004 = 100), following a 0.7 percent increase in May, and a 0.3 percent increase in April.

“Broad-based increases in the LEI over the last six months signal an economy that is expanding in the near term and may even somewhat accelerate in the second half,” said Ataman Ozyildirim, Economist at The Conference Board. “Housing permits, the weakest indicator during this period, reflects some risk to this improving outlook. But favorable financial conditions, generally positive trends in the labor markets and the outlook for new orders in manufacturing have offset the housing market weakness over the past six months.”

William said...


Weekly 07/16/2014

Equity Fund Inflows $4.3 Bil;

Taxable Bond Fund Inflows $2 Bil

xETFs - Equity Fund Outflows -$70 Mil;
Taxable Bond Fund Inflows $2.6 Bil

WeeklY 07/09/2014

Equity Fund Inflows $3.7 Bil;

Taxable Bond Fund Inflows $1.5 Bil

xETFs - Equity Fund Inflows $1.5 Bil;
Taxable Bond Fund Inflows $2.2 Bil

Benjamin Cole said...

Cut corporate income taxes and dividend taxes to zero. Offset by cutting "national security" (federal waste) outlays by equal amount. Corporations are not patriotic or moral---they are by charter amoral (not immoral) organizations with fiduciary obligations to shareholders. They do not recite the Pledge of Allegiance at annual shareholder meetings.
With corporate taxes at zero, more money in the private sector, the USA would boom---well if the Fed didn't asphyxiate the economy fighting the robust demand.

Benjamin Cole said...


What is the meaning of the xETFs number? I assume an ETF is an exchange traded fund.

Is there a problem of double-counting? That is, some mutual funds are buying ETFs?

William said...

Hello, Benjamin -

For each reported week, the first two lines are a total of flows into mutual funds plus ETF funds.

The xETFs lines are the results of flows minus the ETF flows. In other words, lines 3 and 4 are mutual fund flows only. "xETFs" is confusing term I admit.

William said...

NYT: In a Subprime Bubble for Used Cars, Borrowers Pay Sky-High Rates

Rodney Durham stopped working in 1991, declared bankruptcy and lives on Social Security. Nonetheless, Wells Fargo lent him $15,197 to buy a used Mitsubishi sedan.

Mr. Durham’s application said that he made $35,000 as a technician at Lourdes Hospital in Binghamton, N.Y., according to a copy of the loan document. But he says he told the dealer he hadn’t worked at the hospital for more than three decades. Now, after months of Wells Fargo pressing him over missed payments, the bank has repossessed his car.

steve said...

scott, first time I've seen a well argued defense if inversions and I couldn't possibly agree more. the entire tax code is a byzantine nightmare badly in need of overhaul. unfortunately, it has morphed into nothing more than a political football to be kicked hither and thither by pols uncaring of what this country and her citizens really need to prosper to their fullest.

Hans said...

Nice post, Ben Jamin! Sorry but we should no longer call it a tax code, but rather redistribution and an influence scheme.

Your points are well taken, with an acceptation; - the days of "please" are over and only tough talk and demands will suffice.