Allan Sloan, editor-at-large for Fortune magazine, is angry.
And with good reason: He is upset at a lot of U.S. corporate executives who are engaging in "inversion.” This is the process of moving the location of incorporation to a tax haven and skipping out on paying U.S. taxes (short list here). Even though the company is still headquartered in the U.S. and derives much of its revenue and profits here, the company becomes a foreign entity.
In a cover story this month titled "Positively un-American tax dodges," he writes: “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.” He is as angrier at corporate America than he has been any time since the financial crisis, and you should be too. “The spectacle of American corporations deserting our country to dodge taxes while expecting to get the same benefits that good corporate citizens get” is unacceptable.
Some estimates are that these tax maneuvers have cost the U.S. taxpayer almost $20 billion over the past 10 years. I suspect that number is off by an order of magnitude. Just two companies, Apple and Google, with their variations of the Double Irish With a Dutch Sandwich, could account for that much in forgone tax revenue. Everyone else’s taxes go up accordingly when these companies skip out on what they owe.
There are several benefits these freeriders get but don't pay their fair share to shoulder. They include:
1) Deep financial markets
2) Rule of law
3) Military protection
4) Physical infrastructure
5) National research programs
6) Terrific places for employees and their families to live
And of course, access to the wealthiest consumer market in the world.
There are a variety of solutions to this, none of which stand much of a chance with our do-nothing Congress. So a major problem continues and builds, even as our decrepit infrastructure decays further day by day.
Note that buried in the Republican-sponsored Tax Reform Act of 2014 -- it went nowhere fast -- were the following fixes to inversion: An annual tax of 8.75 percent on cash (and equivalents) held offshore, plus 3.5 percent 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 other locality, be it Ireland or the Cayman Islands.
Beyond the punitive tax increases, there are several things that the U.S. could do to reduce or stop future inversions. I would suggest a package of both carrots and sticks that reduce the incentives to move incorporation overseas:
1. Kick them out of U.S. stock indexes: Bar inclusion in broad indexes such as the Standard & Poor's 500 Index for non-U.S.-domiciled companies. This could have a significant impact on these companies share prices. (The S&P 500 now has 28 former U.S. companies in the index).
2. Tax holiday: Create a one-time tax holiday that allows companies to repatriate off-shore cash at a reduced tax rate of 15 percent.
3. Tax disclosures: Sloan wants to require “publicly traded U.S. companies and U.S. subsidiaries of publicly traded foreign companies to disclose two numbers from the tax returns they file with the IRS: their U.S. taxable income for a given year, and how much income tax they owed.” I am not sure if this would do anything other than shame the companies and enrage politicians.
4. Lower corporate tax rates and close tax loopholes: At 35 percent, the U.S. corporate tax rate is higher than a lot of nations. But according to the Government Accountability Office, the U.S. tax code comes with so many deductions and loopholes that companies pay an effective rate of between 13 percent and 17 percent. A revenue-neutral reform that lowered the tax rate to 25 or even 20 percent along with killing the loopholes and deductions would be appealing.
5. Stop single-company legislation: The last item on my wish list is indeed a fantasy: Stop writing tax legislation for specific companies. Thanks to K Street’s army of lobbyists, tax legislation, loopholes and giveaways are concocted that benefit single industries or companies. Until this practice is halted -- a pipe dream, I know -- we should expect an endless stream of loopy tax legislation that benefits almost nobody except the specific company involved.
The U.S. provides an outstanding place for these companies to operate and for their employees and executives to live and work. They should pay their fair share.
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Barry L Ritholtz at email@example.com
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