By Roger Bybee, a three-part article, originally appearing in the May/June issue of Dollars & Sense. Parts 1 and 2 are available here and here.
The Pushback
In an age of fast-eroding economic security, corporate inversions have stirred vast public anxieties and outrage over corporations that seem both rootless and ruthless. Public anger over inversions is mounting, as household incomes continue to fall for tens of millions of Americans and worry about the offshoring of capital and jobs becomes more widespread. An August 2014 poll by Americans for Tax Fairness revealed that more than two-thirds of likely voters disapprove of corporate inversions— 86% of Democrats, 80% of independents, and 69% of Republicans.
Surprisingly, one of the loudest voices to emerge against inversions has been Fortune’s Allan Sloan. Sloan penned a cover story titled “Positively Un-American,” warning, “We have an emergency, folks, with inversions begetting inversions.” Even though Sloan advocates long-term changes that would tilt the tax system further in a pro-corporate direction, he called for immediate action by the Congress and President Obama to stem the tide of inversions. “I still think we need to stop inversions cold right now,” he wrote, “to keep our tax base from eroding beyond repair.”
Besides the drain to the U.S. tax base, Sloan expressed concern about the impact of inversions on Americans’ view of corporate America: “It also threatens to undermine the American public’s already shrinking respect for big corporations.”
The recently announced Johnson Controls inversion dealt a major blow to public trust in America’s largest corporations, reflected in calls by Democratic presidential candidates Bernie Sanders and Hillary Clinton for stiff regulation on inversions.
Johnson Controls’ announcement gave Sanders and Clinton a chance to tap a strong vein of public sentiment. Lashing out at the company in a January 25 media release, Sanders called it and its new partner Tyco “corporate deserters.” Sanders declared, “Profitable companies that have received corporate welfare from American taxpayers should not be allowed to renounce their U.S. citizenship to avoid paying U.S. taxes.”
Clinton blasted Johnson Controls on January 27 at an Iowa campaign stop, stating “I will do everything I can to prevent this from happening, because I don’t want to see companies that thrive, use the tax code, the gimmicks, the shenanigans … to evade their responsibility to support our country.” She also began using a TV commercial aired in Michigan and elsewhere, showing her speaking in front of the Johnson Controls headquarters to denounce the corporation’s inversion.
A Cure Worse Than the Disease
Up until now, conservative Republicans’ control of the House of Representatives has blocked even modest legislation from gaining any traction, despite public outrage against inversions. Using the standard Republican soundbite about the high corporate tax rate driving U.S. firms and jobs overseas, Sensenbrenner, wrote in an op-ed in the Milwaukee Journal Sentinel: “Despite the negative effects the departures of these companies are having on the American economy, it is difficult to blame corporate leaders when you crunch the numbers.”
Similarly, influential hedge-fund tycoon Carl Icahn, although acknowledging the dislocation and insecurity generated by inversions, exempted corporations from any obligation to the United States and laid the blame at the feet of Congress for failing to cut corporate taxes. “Chief executives have a fiduciary duty to enhance value for their shareholders,” he argued in a New York Times opinion piece. “The fault does not lie with them but with our uncompetitive international tax code and with our dysfunctional Congress for not changing it.”
Icahn expressed hope that the public’s sense of urgency about stopping inversions could be shunted away from its current anti-corporate trajectory and instead stampede Congress into lowering corporate tax rates this year. He wrote in the New York Times, “How will representatives and senators, with an election year approaching, explain to their constituents why they are out of work because their employers left the country, when it could so easily have been avoided?”
In pressing for lower corporate taxes in the name of heading off more inversions, corporate and financial figures like Icahn and Republicans are backed by some influential Democrats and self selfdescribed liberals who share an elite consensus on corporations’ absolute “right” to switch their nationalities and to offshore jobs and capital. New York Times business columnist Jeffrey Sommer summarized this consensus in 2014, inadvertently illustrating the vast gulf between elite opinion and majority sentiment. “At this stage of globalization,” Sommer declared, “… most American consumers, investors and politicians have tacitly accepted that if a company is profitable, doesn’t violate the law and produces appealing products and services, it can operate wherever and however it likes.”
Treating corporate investment decisions as sacrosanct regardless of their impact on the public welfare, key Democratic figures like Sen. Charles Schumer (D-N.Y.) and Senate Minority Leader Harry Reid (D-Nev.) are calling for a “tax holiday” on the foreign profits of U.S. corporations. They essentially seek to replicate the holiday declared in 2004 to encourage corporations to “repatriate” foreign profits to the United States by giving them a radically discounted tax rate. The “tax holiday” idea is a particularly counterproductive measure. First, tax holidays reinforce corporations’ use of tax deferrals as they create an incentive for the companies to wait for Congress to capitulate and offer discounted tax rates.
Second, these top Democrats’ backing of a new corporatetax holiday is particularly indefensible given the disastrous outcome of the 2004 holiday. “Advocates said it would create 660,000 new jobs,” pointed out David Cay Johnston. “Didn’t happen. Pfizer brought home the most, $37 billion, escaping $11 billion in taxes. Then Pfizer fired 41,000 workers.”
A Real Solution
If corporate tax avoidance is to be stopped, the most immediate step is ending corporations’ ability to endlessly defer taxes on income which they claim to have generated overseas.
Offshore tax havens enable corporations to routinely engage in a practice called “profit stripping.” With this practice, taxable earnings in the United States are stripped—with costs allocated to the U.S. units and earnings attributed to firms’ foreign subsidiaries. “This kind of accounting alchemy actually works, turning the black tax ink of profit into red ink of debt,” Johnston explained. “You appear as a pauper to government but valuable to investors.”
“Most of America’s largest corporations maintain subsidiaries in offshore tax havens,” reported Citizens for Tax Justice. “At least 358 companies, nearly 72 percent of the Fortune 500, operate subsidiaries in tax haven jurisdictions as of the end of 2014.”
This means a loss of an additional $90 billion to the Treasury, according to Citizens for Tax Justice, apart from the cost of inversions.
It is relatively easy to envision reforms that would give the U.S. tax code a badly needed updating— suited to the current era dominated by the global operations of multinational corporations— to foreclose maneuvers like inversions and the deferral of taxes on foreign earnings.
But serious action on inversions and major loopholes will likely prove impossible as long as our political democracy continues to be eroded by a torrent of campaign contributions from the multinational corporations exploiting the existing tax system.
Until that link—between those who write the big campaign checks and those who write our laws and tax code—is irrevocably broken, our political system will remain impervious to majority sentiment for stiffer taxes and restrictions on corporations’ inversions and the offshoring of capital and jobs.
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What is to really stop CA independence, Texas independence, Northwest independence, Midwest independence, etc., when people really feel that
dogpatch DC is nothing but buggery for the poor fools left holding the bag?
Nada!
And it’s one way to a debt jubilee, too.
Ah, but if you stopped tax inversions the “capitalist class” will start screaming that you’re implementing capital controls and it’s a only a hop skip and a jump to communism.
So? If they keep up the shenanigans the American people will start to like the word communism more ans more, on the simple theory that if the thieves hate it, it must be good.
It’s probably just a typo, but the actual report says it’s 76% of democrats, not 86%.
These numbers are “impressive” so to speak, but I find the wording of the question rather misleading, effectively to the benefit of inversions:
“Do you approve or disapprove of tax inversions, a practice where one company becomes a subsidiary of another company in a foreign country for the purpose of reducing its tax rate?”
Yes, “reducing its tax rate” is in fact the purpose, but that phrasing is way too polished for what’s actually going on. A more straightforward way of asking it would be “Do you approve or disapprove of tax inversions, a practice where a US company circumvents paying US taxes by becoming a subsidiary of another company in a foreign country with a lower tax rate?”
The numbers are already high, but they would have been 100% with the more correct wording.
The question is on page 5 of the pdf:
http://www.americansfortaxfairness.org/files/Tax-Fairness-Briefing-Booklet.pdf
Good to know that business titans Schumer and Reid are on top of making sure that large American corporations can ‘innovate’ via tax holidays. Woohoo.
No wonder Congress’s approval rating is below 10% and sliding.
But will those who disapprove of Congress vote against their incumbent Congresscritter, either in the general election or the primary? People who don’t vote are really voting for the incumbent.
They’ve been going around spouting off about how perfect greed leads to optimal outcomes (“they” being neo-classical economists, mainstream politicians, MSM pundits, and their parrots amongst the population) but now they’re upset by tax inversions? Are we being led by a bunch of friggin’ morons???? Answer: Yes. Yes, we are.
Will nobody bring this up? Will no one ask Hillary or any economist who’s pedaled the “shareholder value” myth, why this isn’t really for the best, since they are transparently doing this out of sheer greed, which is what we’re always told they are ethically obliged to do?
You think unencumbered greed and a war of all against all is sure to lead to an optimal situation, as if “guided by an invisible hand?” Then how can you possibly complain about inversions? Surely they are for the greater good! Where’s Ayn Rand when you need her? Say what you will, at least she was consistent in her insanity, whereas all these elite hand-wringers back away as soon as something unpopular, like a few tax inversions, happen. Rand would have told them what’s up. If you try to stop this you are impeding the great from pursuing and increasing their greatness.
Everything a rich man does is right by definition. The fact of his being rich proves that he has done the right things in the past and excuses all things he may do in the future. And what is true for the individual is also true a fortiori, for the mass. If it is good for one rich man to be allowed to do what he pleases, then it is excellent for groups of rich people to do what they please. Anyone who says otherwise is a collectivist commie. A little consistency people! As Kierkegaard said, let’s have the courage to think our thoughts through to the end. I feel like a lot of neo-classical economists and mainstream politicians are being pretty half-hearted about this whole “invisible hand” thing….just sayin’.
Yves: Given the bipartisan consensus that nothing can be done, which I note in the Icahn Reid Schumer babbling above, inversion is a feature not a bug. It just happens to have gotten embarrassing in the last few months (and Icahn Reid Schumer are undoubtedly willing to wait it out). Question: Won’t TTP and TISA make inversions even easier? The virtual corporation can be virtually incorporated anywhere?
My eyes well up with tears for Delaware.
Sure, anybody who wants to sue the government for any reason whatsoever only has to incorporate themselves on a foreign country and go through ISDS.
. . .“I still think we need to stop inversions cold right now,” he wrote, “to keep our tax base from eroding beyond repair.”
. . .“At this stage of globalization,” Sommer declared, “… most American consumers, investors and politicians have tacitly accepted that if a company is profitable, doesn’t violate the law and produces appealing products and services, it can operate wherever and however it likes.”
Too late. What would fix it in a hurry is import tariffs particularly anywhere from Asia and a steeply progressive personal income tax with all income, no matter how ‘earned’ treated exactly the same.
Fat chance of that happening either, with a totally corrupt system and big money equaling big speech.
. . .But serious action on inversions and major loopholes will likely prove impossible as long as our political democracy continues to be eroded by a torrent of campaign contributions from the multinational corporations exploiting the existing tax system.
A step in the right direction is to make political contributions non tax deductible. Fat chance there too.
“Dollar Bill Clinton’s” NAFTA and China Most Favored Nation trade policy was loudly supported by Hillary, along with the T.P.P. and now “she’s against the very policies that she promoted? What a nauseating hypocrite. Lots of talk about psychopaths in the media. You don’t have to look far to see one on the national stage.
Has anyone trademarked
“Don’t blame me, I voted for Bernie”
bumper stickers yet?
They will be more popular than Obama’s after President Trump is sworn in.
Unless President Trump pulls the plug on NAFTA and China and TPP thanks to Bernie.
Notice that this piece of B.S. from Icahn went unchallenged:
“Chief executives have a fiduciary duty to enhance value for their shareholders,”
Show me the contract that states this.
Yves has debunked the myth of shareholder value many times (1, 2, 3, 4, 5)
Talking Point #1 for any grasping smarm-lord is to portray greed as an inherent law of the universe we are helpless to change, as opposed to being the product of a system explicitly created by loutish human beings and changeable at will. Take their money, send them to prison. It’s the only way they’ll learn!
Shareholders are last in line in bankruptcy proceedings, after whoever the corporation owes money to and its own employees. Then there’s the nation itself and its citizens who allow corporate charters to exist in the first place. What is given can be taken away.
Amazing how many news stories I read where every quote from an elected official makes me mutter “a**hole” under my breath.
Good article. I broke down & subscribed to the mag. I think we can only hope that as the economy craters the next time, the troops will actually vote & demand some change.
Publicizing the inverters and then boycotting their products and services may be one way that the average person can express displeasure. While it may take some research to find out if one is purchasing something from Johnson Controls, it becomes easier with other businesses that practice a flexible notion of patriotism. Those such as Apple and others that use Irish or Double Dutch or similar structures should be avoided when possible.
Bonus demerits: Apple’s big section of tax lawyers for innovation in tax avoidance
Apple pioneered post-dating stock options or at least Steve Jobs got ’em in the news. Not to mention not expensing ’em (general around the time in Tech and loudly defended by California’s senators).
Silicon Valley also gets huge demerits for losing the collusion law suit, agreement to not poach each others’ top workers (so much for the meritocracy hee-haw).
Corporate execs talk loudly about merit pay. For themselves. In practice they conspire to prevent meritocracy from ever reaching employees. High tech worker? Your pay has been artificially suppressed.
These are the darlings of the Valley… the supposed “best” places to work.
Hooray for Eric Schmidt. . . on down the line.
accidental duplicate…
If you don’t want tax inversions (‘financial gineering’) ….then make it less enticing to do by putting a tax on it through taxation. Tarr iffy do not work.