How many of
you vote yes for inversions? What? What the hell is an inversion? I looked at
Wikipedia and found that inversions occur in music, arts, natural sciences,
mathematics, and just about everything. Typically it means you have turned
things backwards or stood things on their heads. For example, the air nearest
to the earth’s surface is warmer because solar radiation warms the earth’s
surface. In a temperature inversion the air gets warmer, instead, at higher levels. When
temperature inversions occur we get a lot of awful things like smog entrapment
and freezing rain.
As such it
seems almost obvious that the President would want to halt business inversions
going on today. In a business inversion a successful domestic company decides
it wants to move its headquarters to a foreign country. Imagine if GM decided
it wanted to move its headquarters to Cuba! Now that would be an inversion! One
way to conduct an inversion is to merge or be acquired by a foreign company.
Suppose Toyota bought GM. In that case GM’s productive and other activities
would continue in America – but GM America would become a subsidiary of a Japanese
company.
Why would a
US company do such a thing? According to the President the reason is taxes.
Where a company like GM pays its taxes is an important issue. Many American
companies are global and increasingly so. This means they have international
activities all over the world. Important for the inversion issue is where they
sell their goods. If GM sells cars in Hungary – then the sales revenue flows
directly to a GM subsidiary in Hungary. The subsidiary is technically a
Hungarian company because the Hungarian government licenses it to do business
within Hungarian borders – but it is run by GM.
So American
companies have sales in many different countries. The sales revenue goes to pay
for business costs. Typically the American companies will report
and pay profits taxes in those countries. If there is anything remaining after
all that the rest of the revenue flows back to America. When and if it flows
back, it is taxed again by the USA. According to an Economist Magazine article
(http://www.economist.com/news/leaders/21608751-restricting-companies-moving-abroad-no-substitute-corporate-tax-reform-how-stop ) , the US is the only large rich
country to tax these repatriated earnings. And since the US has the highest
corporate tax rates of most major countries, US companies feel put upon and
dislike the extra taxes they have to pay. An inversion, accordingly, feels good
to these companies. Becoming a foreign company means they no longer have to pay
the extra taxes. According to the article, most large countries have gone to a
territorial tax system and few pay double taxes as in the USA.
Please
notice one thing that is often not said or written adequately in inversion
discussions. This has nothing to do with corporate taxes paid or earned on
sales within the USA. With or without an inversion, US sales and operations
will be taxed as usual. Inversions only have to do with repatriations of the
already-taxed profits in other countries.
One more
thing. Most mergers and acquisitions are notoriously difficult, complicated,
and uncertain endeavors for large corporations. Most of them fail. Companies
spend huge sums of money trying to predict the many impacts of corporate
marriages. Just like in human marriages much is unknown about your partner in a corporate
marriage. Despite sometimes spending billions most of these corporate marriages
fail. It is not reasonable to conclude that any of the high profile large
company inversions causing the President’s concern were solely done to reduce
US taxes. Taxes might matter, yes, but the overwhelming reasons for inversions
are for strategic reasons.
And why not
for strategic reasons? It is no secret that business is increasingly global. As
the President acknowledges, he would love to increase US export sales. This is
because few serious companies can be profitable without taking advantage of a
huge world marketplace. He wants to find ways to encourage US companies to seek
out and successfully enter these international markets. He wants to do this
because more profitable US companies hire more workers, pay better wages, give
more to charity, and more. So why does he say he wants to motivate more exports
one day and then the next day penalize the profits of these same companies with
an extraordinary corporate tax system?
I vote for
inversions. If the President wants more tax revenues, let him try another way
that doesn’t damage the competitiveness of US companies and US exports in
general. Focusing on tax loopholes and tax reform might be a place to get started.
Nothing like stomping on the "P" ants while the elephants are stampeding in the zoo. What a way to govern!
ReplyDeleteDear LSD. Inversions are OK in the sense that capital should be able to flow freely to generate the best return for stockholders. That makes sense with or without regard to current U.S. taxes—assuming agreement with capitalism. But current U.S. corporate taxes reward inversion so naturally some large companies invert. A no-brainer.
ReplyDeleteYour reference to Obummer’s/govomit’s/(and, though not mentioned Regressive’s) perverse inversion of logic states the obvious. Much—if not most—of their rationale across the board is perverse. You’d think that by reducing corp taxes to encourage companies to return to the U.S. to add jobs that Obummer/govomit/Regressives would see the benefit. Without conducting my super-duper Excel discounted-cash flow analysis I think tax revenues from corp, personal income, and payroll would overall increase should corps invert their inversions.
Regarding Obummer’s desire that exports increase. I think the unsaid context is larger companies—e.g. 1,000 employees+, mostly publicly traded. That is because smaller companies—e.g. Sub S, family-privately owned and operated—don’t have the resources/competitive advantage to export as a mainstay strategy. According to my research/experience, many simply don’t even know enough about their own domestic customers/markets let alone try to understand overseas markets. Ninety-eight percent of U.S. manufacturers have 100 employees or less (national avg. ≈ 60) and average less than $10 million sales annually. Given the risks/constraints associated with credit and finding overseas customers/markets, these smaller companies would be better off further penetrating U.S. customers.
Obummer/govomit/Regressives continue their perverse logic, continue to shoot themselves in the feet, and with Moe, Larry, and Curly and the Keystone Kops running the shop it’s like a 24/7 Chinese fire drill. Only it’s not funny.
Good points all Charles. The unspoken truth is that Obama is very much wedded to easy stories that solidify the idea that he is tough on corporations and in favor of helping out the little guy. Pointing his finger at corporations about inversions fits perfectly into that fairy tale.
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