Corporate inversion was a debate that saw it’s peak in September of last year then fizzled in the same manner as ebola, mad-cow disease, and MH370. However the pressures of tax reform and corporate transparency are still hot topics on the political agenda. Corporate inversion hasn’t gone away, even though it isn’t making headlines anymore; but what is the real issue with corporate inversion?
Across the board, economists and policy makers are steadfast on it being a matter of evading US taxes. Saying that multinational corporations are leaving to avoid the 35% tax rate imposed by the outdated US tax code and that it is as simple as that; to lower their overall tax burden. I can agree with that statement, but I don’t believe it’s that simple. Shareholders are seeing lowered dividends and it effects the long-term risk and transparency associated with their stock. Leaving the US tax system for more favorable taxes elsewhere also makes a company look like it is unstable and unable to compete without absconding (for lack of a better term) to Europe or elsewhere. Systematic risk cannot be avoided entirely but moving overseas adds a lot of unknowns to the diversified portfolios of these corporations.
Even with the published 35% tax bracket, many companies in the gambit of industries are receiving tax breaks that ultimately enable them to pay (reportedly) 17% of tax on their current domestic and international revenue streams. The tax brackets for the incoming countries that they are emigrating to are either on par with the US or cannot beat the 17% tax bracket. In addition to shareholders losing confidence and losing face with international investors seeing them as unstable; why trade the devil you know for the devil you don’t know especially when the cost of doing business is fractions of percentages and the risk of investors losing faith?
Repatriation of revenues is also said to be a reason for inversions. Many US based multinational corporations have revenue from foreign investments that are subject to US taxes, inversion creates a tax wall that enables them to not pay US taxes on those dividends. It is in the United States best interest to get this money back into the economy for domestic investment instead of having the existing barrier where companies are unwilling to pay the 33% repatriation tax on foreign money. There was talk of a tax holiday, shown in the article below from the Economic Policy Institute, where companies could repatriate funds at a pittance or no taxes at all. The goal would be to get this currency and investment back into the American economy. This is, naturally, caught up in the political tug-of-war that most good ideas see once they get to capitol hill. Why are companies voting with their feet and expatriating overseas? Why the inability to reach common ground to keep the money and corporations within the United States?
Maybe they’re unhappy with the current anti-business climate of the United States. Maybe they find it is easier and healthier for their bottom-line to relocate elsewhere. Or maybe it’s something entirely different that economists aren’t seeing. The idea that this phenomenon is occurring because companies simply do not want to pay taxes is a simple answer and would require a simple solution. The fact that this has been a trend over the past few decades and there are several companies in talks to invert in the coming years shows that this is not going away and not as simple as avoid tax liabilities.
The US has offered more than generous tax breaks to certain industries, the lobbying industry is healthier than ever, and companies will historically listen to the demands of their shareholders; yet still companies are inverting. This shows a social and political issue bigger than simply lowering tax liabilities. I believe more research needs to be done in order to understand what is really going on. Maybe we aren’t asking the right questions…
Some helpful articles and sources: