The Wrongologist

Corporate America knows it has a problem when Fortune Magazine calls them out. Fortune has an article by Allan Sloane called “Positively un-American tax dodges.” The headline shows their opinion about large US companies who are moving their “headquarters” overseas to dodge billions in taxes, meaning the rest of us will have to pay their share. From Sloane: (brackets by the Wrongologist)

[There is] a new kind of American corporate exceptionalism: companies that have decided to desert our country to avoid paying taxes but expect to keep receiving the full array of benefits that being American confers, and that everyone else is paying for

One of the companies that is moving offshore is Medtronic, a Minnesota-based medical device manufacturer that is heading to Ireland. But only for tax purposes. The Irish Independent quotes Medtronic’s CEO:

Some people have misinterpreted the recent announcement that we are acquiring an Irish company and declaring our principal executives’ offices in that country to mean that we are leaving Minnesota… Nothing could be further from the truth. The Medtronic operating headquarters where I go to work every day will stay right where it is in Fridley, MN

This is called “Inversion” in tax law circles. Companies buy a foreign-headquarted firm and then make it the parent company for tax purposes. In their quest to maximize shareholder value, multinational companies have outsourced labor to lower-wage countries and shifted profits to subsidiaries in lower-taxed countries. If inversion mergers take hold, it will make matters worse. More from Fortune:

All of this threatens to undermine our tax base, with projected losses in the billions. It also threatens to undermine the American public’s already shrinking respect for big corporations

Here is a picture of how US after-tax corporate profits have grown over the decades:

Since the start of the Reagan era, except for the 2008 recession, it’s been a ride into the stratosphere for Corporate America. Corporations have successfully lobbied Congress for endless deductions and loopholes. From 2009 to 2011, the 280 most profitable companies paid just 18.5% in Corporate Taxes, about half the 35% statutory tax rate. In 1952, corporate taxes accounted for fully one-third of federal revenues, but in 2013 amounted to just under 10%.

And these guys think more is never enough. French economist Gabriel Zucman observes that:
• 20% of all corporate profits in the United States have moved offshore
• Tax avoidance costs the government one-third of the tax revenue it should be receiving from corporations

Zucman also found that $7.6 trillion of personal wealth is hidden in tax havens, which amounts to 8% of the world’s total personal wealth. He estimates the global tax revenues would increase by more than $200 billion if these tax avoidance practices were ended.

The issue is: (h/t Steve Pearlstein) Companies moving their tax jurisdiction want all the rights and privileges of being an American company without paying for the full complement of services that come along with doing business in America.

They want the security that a big military makes possible, one that allows them to operate in all of the advanced economies of the world. They want the world’s most enforceable patent system to protect their intellectual property. They want a fair and efficient judicial system to enforce contracts.

They want a well-educated workforce to design their products, often relying on basic research often done through an extensive network of government-funded institutes and laboratories. They want modern ports and highways and airports to ship products to market.

They require an efficient financial system to provide cheap and plentiful capital. They demand professional, credible regulatory agencies that can expeditiously evaluate products and ensure customers that they are safe and effective.

All of that takes lots of tax revenue. It has to include revenue from corporate income taxes that these firms think is their fiduciary duty to avoid.

It was bound to happen: The government that Corporate America bought for their exclusive use, just isn’t doing a good enough job, so the Corporatists are gonna leave.

Our tax systems must be reformed. We need to take the job of tax reform away from corporate lobbyists. We must make it harder for companies to use internal (“transfer”) pricing to avoid taxes. Companies should be made to book activity where it actually takes place. Barry Ritholtz mentions an idea in the Republican-sponsored Tax Reform Act of 2014 that “fixed” inversion: An annual tax of 8.75% on cash (and equivalents) held offshore, plus 3.5% a year on all other retained offshore earnings. The idea was to reduce the incentive to incorporate offshore by charging taxes on top of the charge by the other locality, be it Ireland or the Cayman Islands. It went nowhere.

Any new system needs to ensure that change results in corporations paying more in taxes with less collection/compliance expenses. The new system must be simpler than today’s.

As Jacques Leslie writes, “there is no economic, political or moral justification for tax evasion.”