By now you may have heard of tax inversion; if not, you’re not alone. Most people have not. It’s an expression that’s used mostly in the financial and the corporate sectors. In its most simplistic form, Tax Inversion is a scheme used by corporations to avoid paying corporate taxes in the United States; the scheme consists in moving – usually symbolically – its headquarters to another country. Most of the time, the top brass (CEO, CFO, COO, Board Members, etc.) live and work in the United States and occasionally travel to the new headquarters for a day or two meeting every so often in order to generate activity log to provide to IRS if it comes to that.
Arguments have always been made that the US Corporate tax rate is too high. According to a December 25, 2012 article in the Los Angeles Times newspaper, the United States has the highest nominal top corporate tax rate in any of the world’s developed economies at 35%. Be as it may, during the recession period, most corporations have paid an average tax rate of less than 15%, a percentage that’s equivalent to a married couple earning between $17,400 – $70,700 according to IRS 2012-2013 published tax table .
Despite the outcry that US corporate tax rate stifles business growth, an argument that is completely baseless, US companies have enjoyed growth and profits for the past few years. According to a May 2014 list released by Forbes (The World’s Biggest Public Companies), out of the 100 largest and profitable companies in the world, the United States is home to 37; China (no surprise here) that comes second only has 10. US does not just generate large and profitable companies; it is also home to most of the richest people in the world. According to the list released by Forbes (The World’s Billionaires), out of the 100 richest moguls in the world, US is home to 37; Germany that came second only has eight (8). Here is below how US fares in both categories:
So, whenever any CEO, CFO (or others) of any organization makes any argument regarding moving his organization to another country, listen between the lines; he is making a case to avoid paying the US corporate taxes. As illustrated above, those profitable companies and those wealthy individuals have accumulated their wealth here in the United States. Their argument in regards to high corporate tax rates in US is baseless.
A couple of weeks ago, Burker King was in the spotlight to have announced its headquarters will be moved to Canada. Burker King’s CEO Daniel S. Schwartz did his best tap dance to explain away the move. While it’s understandable that for-profit organizations try to maximize their profits, it’s downright unpatriotic, greedy and callous for any CEO to justify moving his organization in order to avoid paying taxes to the very country that has facilitated its growth. Any such decision is unbridled greed. It is rather ironic that after the Wall Street debacle which had brought the country to its knees, those same large companies that are now contemplating moving their offices overseas were constantly urging Washington (read us, the taxpayers) to rescue their organizations from financial ruins they caused. It’s no different than being pricked by a tarantula after saving it from drowning.
Should you care that organizations move their headquarters to another country to avoid paying US Corporate taxes? Imagine that your cousin Vinny or your friend Joe was down on his luck; after graduating from College, Joe was having a hard time getting a job. He asked whether it could stay with you for a couple of months; being the good friend that you are, you agreed. The first day Joe moved into your place, you set the ground rules: Joe will contribute weekly towards food shopping; Joe will contribute monthly towards electric bills; Joe will contribute monthly towards water bills; Joe will dispose of the trash every other week and so on. Since Joe was not working, any contribution that required disbursement of cash was on hold until such time that Joe would find a job or move out whichever would come first. Joe agreed. Six months later, Joe was still with you; you supported Joe because you understood. In the ninth month Joe was with you, one afternoon you came back from work and found Joe sitting in the living room, smiling. Joe was excited; he finally landed a job. You both jumped up and down. You congratulated Joe; you drank to that new page of his life. A month later, when you reconvened with Joe to go over the rules of contribution for his stay, Joe found it too expensive to contribute towards food, electricity, water – notice you didn’t even ask for lodging – Joe’s solution was to leave your place instead of contributing to anything.
While Joe’s attitude seems odd, selfish and ungrateful, we seem to condone businesses that are worse. After enjoying years of tax breaks, a stream of consumers with cash in hand, paved roadways, well administered airports and a peaceful political environment, not to forget having been rescued by the taxpayers of their greedy behavior, those same businesses are now threatening to leave the United States for another country that contributed nothing to their growth.
Do you think Joe’s attitude was okay?
Follow Mike Ducheine on Twitter: @mducheiney