Are Tax Inversions Really Unpatriotic?

By :: July 29th, 2014

President Obama and many congressional Democrats argue that U.S.-based multinational firms are being unpatriotic by moving their corporate addresses overseas in order to reduce their taxes. Obama even implied they are “corporate deserters.” These are powerful, emotionally-charged allegations. But are they fair?

Is it unpatriotic to maximize tax savings? After all, companies and individuals do it all the time. Or is it only unpatriotic to reduce taxes by shifting your legal headquarters to a low-tax country?

Obama is mostly engaging in election-year demagoguery. The U.S. does a remarkably poor job taxing multinational corporations, but Obama is over the top when he claims that certain firms that manipulate the tax code are unpatriotic.

This is what Obama said in his radio address last Saturday:

A small but growing group of big corporations are fleeing the country to get out of paying taxes. They’re...basically renouncing their citizenship and declaring that they’re based somewhere else, just to avoid paying their fair share.

In an op-ed column in The Washington Post on Monday, Treasury Secretary Jack Lew refined the argument a bit:

There is nothing wrong with cross-border merger activity; our economy is stronger for our investment overseas and for foreign investment in the United States. But these activities should be based on economic efficiency, not tax savings.

Let’s start with the subtext: Is it unpatriotic to avoid paying U.S. taxes if you can legally do so?

Inevitably, that debate is framed by two of the most famous quotes in tax law. The first, by Supreme Court Justice Oliver Wendell Holmes, Jr.: “Taxes are what we pay for civilized society.”

The second, by the influential 20th century judge Learned Hand:

There is nothing sinister in so arranging one's affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.

It would be foolish for me to say you are being unpatriotic by maximizing your 401(k) contributions or that a firm is un-American if it accelerates its purchase of some capital equipment to take advantage of a tax preference. How about taxpayers that go one more step, and take advantage of an unintended loophole in the law?

Which brings us to corporate inversions. If we agree that it is OK for a business to legally minimize its taxes as long as it remains a U.S. resident, what about a company that incorporates overseas? Does that cross a line, as Obama believes? Is it equivalent to an individual who renounces her citizenship to avoid paying U.S. taxes?

Is it OK for U.S.-based firms such as GE or Apple to use aggressive tax planning to minimize their worldwide tax liability, but unpatriotic for U.S. drugmaker AbbVie to purchase the U.K. firm Shire to minimize its worldwide tax liability? Obama sees a difference. I don’t.

These firms may face different business circumstances and may use different tax avoidance techniques but they all are doing the same thing. They are “keeping taxes as low as possible.”

Besides, what does it mean for a firm to be American? Is the test the number of U.S. shareholders? Or U.S. managers? Or U.S. employees? In the complex world of multinational corporations, the legal location of the firm seems least important in many respects. When German-based Siemens does business in the U.S., it is subject to most of the same laws as GE. Yes, it even must pay tax on its U.S. income.

Of course firms (or their managers) can be unpatriotic. Selling war material to an enemy or financing a terrorist organization is unpatriotic—and illegal. Using legal avoidance strategies to reduce taxes may be distasteful or unseemly, but it is not unpatriotic.

If Congress and the President find this behavior outrageous, they can stop it. And perhaps they should. But name-calling doesn’t help.

 

3Comments

  1. Michael Bindner  ::  2:24 am on July 30th, 2014:

    I suspect the name calling is meant to try to stop these inversions and it helps the meme that those who fail to do so in Congress are putting the needs of the wealthy above the needs of the country. It only doesn’t help if it doesn’t work in Novemeber. It would be nice if Congress could do something to get more taxes here, such as corporate tax reform up to and including shifting from taxing corporate profits to shifting both corporate and individual income taxes to a consumption tax, so that the profits on US sales are taxed before they get to a foreign headquarters (and a varient, a net business receipts tax – which is a VAT with deductions, exclusions, credits and ll those things that drive Maya MacGuiness crazy). A higher dividend and capital gains tax on high income earners would also help.

    The reason for this reaction is that someone in the tax advisory community has convinced big firms that any day now US companies with a post office box headquarters overseas will soon forced to discontinue that strategy – and that the cure is inversion. There was never any possibility that the Congress would really do that, but I am sure those setting up the inversions are getting rich off the deal. This may also make it harder for the IRS to track down rich investors and even US citizens who owe on income earned overseas. The IRS is making great progress in taking dow people who abet tax avoidance, probably to the delight of the President. Companies don’t like that, however, which is a bit unpatriotic. Indeed, its aiding and abetting.

  2. Can Obama take the juice out of corporate inversions? – News  ::  4:17 am on August 19th, 2014:

    […] can debate whether corporate tax inversions are “unpatriotic” or simply a legitimate technique to reduce taxes–and commentators can argue over whether […]

  3. Arnoldo Godbold  ::  2:50 pm on October 31st, 2014:

    go to my site