As an American citizen I think it is fundamentally un-American to short your country on tax dollars.
Furthermore, with all the services that America provides to large companies, I think it is not only un-American, but also unethical.
An inversion is when a U.S. company merges with another company, which is located in a low-tax country. The U.S. company then moves its headquarters to the new country to avoid the high U.S. tax rate.
The reason behind these inversions is that the U.S. operates on a “worldwide” tax system. This system requires American companies to pay the American tax rate on profits earned overseas in excess of what they have already paid to the country they are doing business in overseas.
This means that if you sell products or services in another country and that country has a lower tax rate, you owe that country their taxes and you owe the U.S. government the difference between our tax rate and the other country’s tax rate.
Companies that are based in other countries and do business overseas are only required to pay the taxes in the country they sold the product or service in. So relocation makes sense, in theory. Why would U.S. companies have to pay the difference when other countries don’t require you to make up the difference? This is the argument that many large companies take.
The flaw in this argument is that most U.S. companies who sell products and services in other countries haven’t paid U.S. taxes on profits earned abroad. This is because Congress enacted, and has repeatedly extended, a law that allows U.S. companies to hold onto foreign profits, without paying taxes, as long as the company doesn’t try to bring those profits back to the U.S.
This means that companies have billions of dollars being held overseas, with no incentive to bring that money back, because if they do they’ll have to pay taxes on it. With this law, companies have paid, on average, 12.6 percent taxes (according to the Government Accountability Office). However, to pay those low taxes they have had to stash billions of dollars overseas, which they can access if they were to perform an inversion.
This system is completely unfair. If companies are able to perform inversions, it follows that I should be able to become a citizen of another country, work for a foreign company online, stay in America, and pay the tax rate of my “home” country. This, of course, is completely ludicrous and the IRS would hunt me down and throw me in jail for tax avoidance, which is what should happen to U.S. companies that do the same thing.
Edward Klienbard, a professor at the Gould School of Law, supports this when he writes, “In the international arena, U.S. multinational firms have established themselves as world leaders in global tax avoidance strategies, through the generation of stateless income” (Klienbard, 1057). This “stateless income,” allows large companies to pay a lower tax rate (12.6% average) than someone who is in the $9,075-$36,900 a year 2014 tax bracket and pays a 15% marginal tax rate. In essence, American citizens are paying more than their fair share of the bill while American multinational companies are shirking their duties.
It becomes even more evident that companies that perform inversions are behaving badly when you consider how much more of the American infrastructure a company uses than a citizen uses. Large American companies use more than their fair share of America’s natural resources, generate more than their fair share of externalities, use American banks, patent laws, intellectual property rights, stipends for research and development, robust financial markets that can support their initial growth, and low borrowing rates (relative to other countries).
They take advantage of all of these opportunities that the government provides, but once they get large enough to expand into other markets they feel that they shouldn’t have to pay the high taxes that America accords to large multinational companies. It makes them “less competitive.” I argue that they wouldn’t be competing if it weren’t for the opportunities they were provided with by our nation.
As an American citizen I would ask CEOs that are looking into inversion to consider all of the opportunities that America provides to their companies, which they capitalize on and will continue to capitalize on. I would then ask them to implement a system that considers the American people as key stakeholders. American companies profits come from the American public and will continue to come from the American public if they create and maintain a mutually beneficial relationship.
To foster this relationship they should pay these “high” taxes, give back to the market that has funded their growth, employ the American people who have supported their growth, and even start goodwill initiatives to support disadvantaged Americans. This would do the most good for the largest number of key stakeholders. If they continue to be worried about competitiveness they should hire lobbyists to work with the government on an initiative that prohibits inversions through merger, unless the U.S. company accounts for half or less of the combined firm. This would benefit the American people, generate goodwill toward the company and make them more competitive.
Erb, Kelly P. (2013, September 13th) IRS Announces 2014 Tax Brackets, Standard Deduction Amounts And More. Forbes. Retrieved from http://www.forbes.com/sites/
Hallman, Ben. (2014, August 19th) New Study Debunks Big Corporations’ Argument About Taxes. Retrieved fromhttp://www.huffingtonpost.com/
Kleinbard, Edward D., ‘Competitiveness’ Has Nothing to Do With It (September 10, 2014). 144 Tax Notes 1055 (September 1, 2014); USC Legal Studies Research Papers Series No. 14-34; USC CLASS Research Paper No. 14-26. Retrieved from SSRN: http://ssrn.com/abstract=
Author: Samantha Cole-Johnson
Editor: Travis May