This Tax Dodge Should Be Made Illegal (Demo)

By Gary Reber Uncategorized August 5, 2014

Mylan’s headquarters in Canonsburg, Pa. The generic drug maker is acquiring a European firm and moving the tax base to Holland in what is known as an inversion. (Jeff Swensen, Getty Images)

On August 3, 2014, Michael Hiltzik writes in the Los Angeles Times:

It’s both endearing and infuriating to watch American corporate executives wring their hands about how the injustices of the U.S. tax code are forcing them — forcing them! — to reincorporate overseas through the procedure known as inversion.

Endearing, because one wants to sympathize with the pain felt by a homegrown CEO having to move a homegrown American company’s headquarters to Ireland, Switzerland or some other foreign clime, just to remain competitive.

Here, for example, is Heather Bresch, chief executive of the generic drug maker Mylan (and daughter of Sen. Joe Manchin III (D-W.V.), telling the New York Times, “You can’t maintain competitiveness by staying at a competitive disadvantage. I mean you just can’t.” The credulous Times quotes her as saying she entered into her inversion deal (by acquiring a European firm and moving the tax base to Holland) “reluctantly, and she genuinely seems to mean it.”

Uh-huh. Is Mylan uncompetitive? Over the last two years its sales have increased 12.7% and profits 16%; among its big competitors paying putatively lower taxes, British-based GlaxoSmithKline gained 3.14% in sales and 11.23% in profits, and Israel-based Teva’s sales gained 11% and its profits declined 54%. Israel’s top corporate tax rate is 26.5%, the equivalent top U.S. federal rate is 35%.

The use of inversions to avoid U.S. corporate taxes has moved onto the front burner in Washington in recent months. The wave seems to be picking up, and some of the candidates are very high-profile, including Walgreens and Pfizer. TheCongressional Research Service recently identified 47 such deals in the last decade, many of them in the pharmaceutical industry. In the previous 20 years there were only 29. Conservatives use the trend as an argument for cutting or eliminating the U.S. corporate tax: If ours were as low as those of other countries, no one would have to flee, they say.

The Obama administration has ramped up its efforts to put an end to the practice. In a letter to Congress a few weeks ago, Treasury Secretary Jacob J. Lew called inversions an offense against “economic patriotism.” He asserted that American companies fleeing these shores for tax havens “still expect to benefit from their business location in the United States, with our protection of intellectual property rights, our support of research and development … and our infrastructure, all funded by various levels of government.” They just don’t want to pay their share of the costs.

Let’s get a few things straight.

First, a definition. An inversion happens when a U.S. company merges with a smaller foreign firm and moves its official headquarters to the partner’s home, typically a lower-tax jurisdiction. Management stays in the U.S., the workforce doesn’t move and the company still sells as much as before to the U.S. market. But the tax treatment of some of its income changes. Walgreens, according to an estimate by the advocacy group Americans for Tax Fairness, could save $4 billion over five years by merging with the drug retailer and wholesaler Alliance Boots and reincorporating in Switzerland.

Defenders of inversions say they don’t really affect the American company’s U.S. taxes — that’s the claim made recently in the Wall Street Journal by Miles White, chairman of Abbott Laboratories, which is conniving with Mylan on its inversion deal.

But like much that’s said about inversions, that’s misleading, says Edward D. Kleinbard, a USC law professor whose role as a former chief of staff to the Congressional Joint Committee on Taxation certifies him as one of our leading experts on the corporate tax.

The claim that the corporate tax makes U.S .companies uncompetitive, he says, is “a complete red herring.”

Inversions aren’t about improving competitiveness, Kleinbard observes. They’re about making use of the huge cash hoards American companies have accumulated overseas. Kleinbard estimates this “stateless income” at roughly $1 trillion. It can’t be spent directly in the United States without incurring a steep tax, and it’s too large a sum to be profitably deployed outside the U.S.

Inversions allow companies to use these stockpiles in the U.S., at much lower cost.

Inversions also allow companies to use their overseas money as intracorporate loans to their domestic operations, charging the loan cost to their U.S. subsidiaries. This effectively pares down their U.S. domestic tax base, Kleinbard explains, which reduces their domestic taxes. Technically, the company’s U.S. tax rate doesn’t change, as White says. But it’s applied to a smaller amount of declared income.

Also, there’s no evidence that U.S. companies are hobbled by a higher corporate tax than their overseas competitors. U.S. companies are masters at reducing their effective U.S. tax rates to levels consonant with those in other big markets, such as Western Europe and Asia. (Tax warriors will cite statutory tax rates — where the U.S. is near the top of the list — but almost no one ever pays those.) And there’s no evidence that corporate growth rates or access to capital have any real correlation to domestic tax rates.

Inordinately loose rules on inversions are bad for the U.S. Skipping out on one’s domestic obligations means leaving others to pay for all the good things that come from U.S. corporate citizenship. It’s hypocritical for American CEOs to praise the U.S. as the greatest country on Earth while beating the bushes for legal tricks to avoid the bill.

Yes, inversions are legal. Congress needs to make some of their more profitable outcomes illegal, or at least less profitable.

Kleinbard proposes a three-pronged approach. First is to close a loophole allowing an American firm to declare itself foreign-owned if at least 20% of its post-merger shareholders are foreign. The threshold should be 50%, which would require inversions to be genuine foreign acquisitions. This would put the kibosh on many, if not most, pending deals. This change has been proposed by the Obama administration and introduced in Congress by Rep. Sander M. Levin (D-Mich.).

Kleinbard also advocates tightening up rules against earnings-stripping, largely by lowering the limit on how heavily a company can saddle its U.S. operations with debt. Finally, he suggests ending “hopscotch” maneuvers, through which an inverted company bypasses U.S. tax rules by advancing its offshore cash stockpile directly to the new foreign company.

The appeal to corporate morality is eye-catching enough. But rhetoric like this has limited effectiveness. The proper way to deal with corporate immorality is to wipe it out through the law.

In other words, the most effective comeback to “it’s legal” is this: “It was legal. But not anymore.”

This is a “big picture” problem that our nation and other nations face. Because the system facilitates non-human capital asset wealth being constantly monopolized by the wealthy ownership class, which is often referred to as “the 1 percent,” who are the primary owners of American corporations, without a stiff corporate income tax it will be virtually impossible to incentivize corporations to pay out fully their earnings to their stockholders, who would be ALL taxed at the personal tax rate. We should want to eliminate double taxation (at the corporate and personal levels) to incentivize corporations to issue and sell new stock to raise monies to invest in new plant and machinery capital assets to create economic growth. This is the pathway to creating new owners and broadening wealth-creating, income-producing capital ownership to EVERY child, woman and man. EVERY citizen should be empowered equally to have access to insured, interest-free capital credit loans issued by local banks backed by the Federal Reserve to acquire new stock issues in qualified corporations with the principal and insurance fee repayable out of the FUTURE earnings of the investment. This would provide American corporations with all the monies they would need to grow, which in turn would substantially accelerate the growth of the economy, create new capital owners who would benefit from a new income source, and create new job opportunities as the economy revs up to produce general affluence for EVERY citizen. These policies would create a nation of “customers with money,” who overtime can build substantial financial security and eliminate reliance on taxpayer-supported government.

If we further lower or eliminate corporate income tax rates we eliminate our ability to incentivize corporations to finance new growth by creating new owners, without taking away ownership from those who are already owners.

We need to define a foreign corporation with at least better than 50 percent ownership vested with foreign nationals and an American corporation with at least 50 percent American citizen ownership. We also need to look at tariffs on non-American corporations who would have tax advantages over American corporations.

We also need to condition awarding ALL taxpayer-supported federal contracts (corporate welfare) on the basis that EVERY company vying for a government contract demonstrate that they are broadly owned including ownership by their employees. We need to ensure that if a corporation wants the advantages of being an American company then they should not be able run away from America to avoid paying taxes. Either American corporations pay a stiff corporate tax and remain narrowly owned or they pay no corporate tax but are structured such that they are owned broadly and by their employees. Such policies will stimulate a new era in American technological innovation.

Support the Capital Homestead Act at http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-a-plan-for-getting-ownership-income-and-power-to-every-citizen/ and http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-summary/.

Support the Unite America Party Platform, published by The Huffington Post at http://www.huffingtonpost.com/gary-reber/platform-of-the-unite-ame_b_5474077.html as well as Nation Of Change at http://www.nationofchange.org/platform-unite-america-party-1402409962 and OpEd News at http://www.opednews.com/articles/Platform-of-the-Unite-Amer-by-Gary-Reber-Party-Leadership_Party-Platforms-DNC_Party-Platforms-GOP-RNC_Party-Politics-Democratic-140630-60.html.

http://www.latimes.com/business/hiltzik/la-fi-hiltzik-20140803-column.html#page=2

This Tax Dodge Should Be Made Illegal (Demo)

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