Tag: tax inversions

Truths About Tax Inversions

George Noga
Obama’s attack on tax inversions is nothing but liberal anti-business class warfare
and demagoguery that caters to widespread ignorance and causes economic harm.
By: George Noga – April 17, 2016

     A goal of the new MLLG blog is to be more responsive to current issues; in that spirit, this post addresses corporate tax inversions (such as the Pfizer-Allergan merger stymied by the Obama justice department) with a perspective you will not encounter elsewhere. Upcoming posts will focus on the $15 minimum wage and inequality in America including a comparison with Nordic countries – Sweden and Denmark.

     A tax inversion is the relocation of a US corporation’s headquarters to a lower tax nation (usually via merger with a foreign company) so that it “inverts”, i.e. becomes a foreign corporation for US tax purposes. The benefits to the inverting company are twofold: first, tax on income earned abroad is payable at the much lower foreign rate; second, foreign profits can be returned to the US without further taxation. Following are the principal truths you should know about corporate tax inversions.

  1. Tax inversions are an imaginary enemy! Progressives can’t solve real problems facing America such as terrorism, economic growth or failed schools. Instead, they pander to their base and to low-information voters by conjuring imaginary enemies such as tax inversions, climate change, institutional racism, campus rape culture, inequality and war on women. Yes, it’s really that simple.
  2. Corporations don’t bear the tax burden. Taxes may be collected from businesses but the burden (those who ultimately pay the tax) falls on all Americans via higher prices as corporate taxes are passed on to consumers. Business taxation is misdirection intended to beguile voters into accepting higher overall taxes.
  3. Taxation intentionally is opaque. Politicians make taxation opaque so Americans are fleeced with as little push-back as possible. It’s always in taxpayers’ interest for taxes to be direct and transparent. Liberals instead disguise tax collections, always preferring borrowing or stealthy tax increases to cutting spending or raising taxes directly. That’s why they strongly prefer business taxes.
  4. Inversions can be beneficial. Following an inversion, cash can be brought back to the US without added tax and invested to create American jobs. The increased productivity from this investment helps all Americans in the long run.
  5. The rule of law has been abandoned. In its place is retroactive, capricious, ad hoc and arbitrary imposition of political power. It is precisely this imperative of political dogma over the rule of law that is responsible for the economic malaise of the past seven years, creating slow economic growth and tiny wage gains.
  6. Inversions can be ended quickly and easily. The US corporate tax rate is the highest in the world at 41% (35% federal, 6% state). Everyone agrees it should be lowered and the $2+ trillion overseas should come home. A political solution is low hanging fruit; however, President Obama sees more value politically in keeping the issue alive for continued class warfare and demagoguery.

     As long as liberals remain in control, trillions of dollars will remain offshore and working Americans will continue to suffer low growth and wage stagnation. All this damage accrues solely because Obama chooses to flog imaginary enemies for perceived political gain while failing to deal with the real problems facing America.

The next post is April 24th and begins our series: Inequality in America.
MLLG

What You Should Know about Tax Inversions

George Noga
By: George Noga – October 24, 2014
      I had not planned a posting about corporate tax inversions but I am working this in because I believe you will read a perspective herein not to be found anywhere else and, as a CPA, I don’t need to invest a lot of time in research. To begin, a tax inversion is the relocation of a US corporation’s headquarters to a lower tax nation so that it “inverts“, i.e. becomes a foreign corporation for US tax purposes. The US, unique among developed nations, imposes taxes on income earned abroad by American corporations – but the tax is not payable until the income (cash) is repatriated, i.e. returned to the US from abroad. Although there often are crucial non-tax considerations involved in inversions, the main driver usually is avoidance of US tax on income earned abroad and the ability to repatriate such funds.
    Because US taxes are not due until the foreign-earned profits are repatriated, US corporations with foreign operations keep the money offshore. For perspective, 75% of US corporations’ cash is kept outside the US – about $2.1 trillion currently. For example, Microsoft has $70 billion but less than $10 billion is in the US. Money held outside the US can’t be used for investment in plant, equipment or training in the US or to hire Americans; instead, it stays abroad.
       The Obama administration rails against inversions because they assert it reduces the amount of corporate income tax collected. Bear in mind that most companies currently do not pay the tax anyway – that’s why they keep the $2.1 trillion overseas. Following an inversion however, profits (cash) can be brought back into the US without tax and be used to invest within the US to create new American jobs. The increased productivity from this added investment in capital goods, job training and hiring of new workers helps all Americans and increases their standard of living. Arguably, inversions are a net blessing to America in the long run even if corporate tax collections suffer in the short run.
       I return to tax inversions and repatriation infra, but inversions do not exist in a vacuum. They are but one part – and a rather small one at that – of the overall US tax scheme. To put inversions into a proper framework, we must step back, understand what is really going on and look at US tax policy from 30,000 feet.
Getting the Most Feathers from the Geese with the Least Amount of Hissing
       As described in the above aphorism from Louis XIV’s finance minister, Jean-Baptiste Colbert, politicians approach taxation as an art form in which they pluck the geese (taxpayers) to get the most feathers with the least hissing. The main alternatives (cutting spending or raising taxes directly) are anathema. Politicians always enact or raise taxes to make everything as opaque as possible to taxpayers. This, of course, is diametrically opposed to the best interests of taxpayers who should want all taxes to be as transparent and direct as possible. The best tax for taxpayers would be a tax on consumption or a flat tax on income with no deductions or exemptions whatsoever.
“Don’t tax me; don’t tax thee; tax the man behind the tree.” 
       Let’s postulate the US had a flat consumption tax of 19% with no other federal taxes, exemptions, or  deductions whatsoever and that 19% tax represented 100% of the revenue to the government. If politicians wanted to increase spending, the only alternative would be to raise the tax rate to 20% or higher. Such a tax increase would be 100% transparent to every American every time he/she purchased anything. Citizens would know the true cost of government and everyone would have an interest in keeping spending under control. The reason we have a corporate income tax (and are now discussing tax inversions) is because it is a tax that takes many feathers from the geese without the geese ever being aware they are missing feathers. This is an important concept and is explained below.
Corporations Never Pay Taxes – Only People Pay Taxes
        Wouldn’t it be nice if no homo sapiens ever again paid tax? Only artificial constructs like corporations, with no heartbeat or pulse, would be taxed. This is like the mythical Germanic kingdom where candy grew on trees, lemonade flowed in rivers and the fattest, ugliest and stupidest  man was king. Alas, non humans paying tax can’t happen even though politicians would like you to believe it. All taxes always are paid by real, living, breathing people; corporations never have, do not now and never will pay a penny of tax. If the government increases the tax on a company by “say” $1 gazillion, there are three, and only three, possibilities for bearing the burden of the tax.
       It is true that businesses may remit tax revenue to the government, but it is not their money; they are simply transmitting funds to the government they have collected from other people. If the business chooses to pay the tax by reducing its profits by $1 gazillion, the owners (stockholders) pay the tax via lower dividends and/or a lower stock price. Most stockholders are ordinary thinking, feeling Americans investing through mutual funds, IRAs or 401(k) plans. Second, the company can cut its costs $1 gazillion; this of course means firing employees –  again, very much alive ordinary Americans. Third, the company can increase its prices by $1 gazillion (and this is what happens 90% of the time) meaning consumers, again scient, feeling ordinary Americans, are paying the tax in the form of higher prices.
       In reality, unlike in the mythical German kingdom, corporations don’t pay income taxes; there are only real-life human beings paying taxes; but politicians want to beguile you into believing fat-cat corporations are somehow not paying their fair share. Politicians want you to buy into their class warfare canard and they are counting on keeping you ignorant. In reality, the issue of tax inversions is moot and is a contrived tempest-in-a-teapot. Moreover, as observed supra, inversions in the long run may be a net benefit to ordinary Americans as it enables more money to be repatriated which can be used in America for capital investment to increase productivity and to employ more Americans.
       Now that we all understand just how inconsequential inversions are, we still are faced with a political issue searching for a solution. The US corporate tax rate is the highest in the world at 35% federal and 6% state for a total of 41%. Everyone, including President Obama, agrees it should be lowered. Everyone also agrees the $2.1 trillion being kept abroad should be repatriated. A reasonable compromise would be to lower the US tax rate to 20% for a combined federal/state rate of 26% even though this still is higher than many countries that are between 12.5% and 20%. This should be combined with a tax holiday for companies to bring home the $2.1 trillion being held offshore by paying a nominal one-time tax. This was done in 2004 and 800 companies participated, repatriating over $300 billion in overseas profits.
       In any other time with any other president, a compromise would be easy. However, President Obama, is intransigent; he will only compromise to lower the tax rate and to repatriate the funds if new and highly punitive corporate tax measures are part of the deal. Consequently, nothing will happen while Obama remains president. Inversions will continue; trillions of dollars will remain offshore; and ordinary Americans will suffer the consequences. Obama is banking that these same ordinary Americans will succumb to his anti-business, class warfare narrative that corporations pay tax and that inversions are a manifestation of corporate greed. In short, he is demagoguing the issue to death.