Inversion Acceleration, Part 1

Roger Bybee

Roger Bybee is a Milwaukee-based writer and activist who teaches Labor Studies at the University of
Illinois. This is the first part in a three-part article, originally appearing in the May/June issue of Dollars & Sense.

Corporate “inversions”—the fast-accelerating phenomenon of major U.S. firms moving their official headquarters to low-tax nations through complex legal maneuvers—are causing an annual loss of about $100 billion in federal tax revenues.

But new rules imposed in early April by the U.S. Treasury Department scuttled the mammoth $162 billion deal between pharmaceutical giant Pfizer and Allergan, based on relocating the official headquarters to low-tax Ireland. The Treasury rules are designed to inhibit “serial inverters”—corporations that repeatedly shift their official headquarters to cut U.S. taxes—and to discourage “earnings stripping,” where firms use loans between their American units and foreign partners to reduce U.S. profits subject to federal taxation. The collapse of the Pfizer-Allergan inversion suggests that the Treasury regulations may constitute a major barrier to some future inversions. However, with firms like Johnson Controls and Tyco moving ahead with their inversion plans, stronger measures will clearly be needed to halt the tide.

U.S. corporations have pulled off about 60 inversions over the last two decades, according to Fortune. In the last five years alone, corporations have executed 40 inversions, the New York Times stated.

This fast-rising dimension of corporate globalization has immense implications for Americans. The industrial powerhouse Eaton Corp. (#163 on the Fortune 500), Medtronic, Accenture (formerly the consulting wing of Arthur Andersen), Burger King, and AbbVie (the world’s 11th-largest drug maker) are among the firms that have repudiated their U.S. nationality and shifted their official headquarters to lowtax nations. The annual toll to the U.S. Treasury from corporate inversions is about $100 billion, based on the studies of Reed College economist Kimberly Clausing. This impact is likely to worsen significantly in the near future. Another dozen or more inversions are currently under consideration, according to conservative New York Times business columnist Andrew Ross Sorkin.

Fortune senior writer Allan Sloan, who has been outraged by inversions despite his overall pro-corporate stance, points to powerful vested interests who stand to gain: “There’s a critical mass of hedge funds, corporate raiders, consultants, investment bankers, and others who benefit from inversions.” (The collapse of the Pfizer-Allergan deal could cost just the major banks as much as $200 million, the New York Times reported.) These interests and their political allies have incessantly claimed that American-based multinational corporations are driven to repudiate their U.S. nationality in order to escape “burdensome” U.S. corporate tax rates that they call “the world’s highest.”

In reality, actual federal corporate taxes on 288 profitable corporations —as distinguished from the official 35% rate almost all firms easily avoid—were actually only 19.4% in the 2008-2012 period, a 2014 Citizens for Tax Justice (CTJ) report revealed. This placed the U.S. 8th lowest among the advanced nations in the Organization for Economic Cooperation and Development (OECD), the CTJ found.

A just-released CTJ study went further in its scope and included state and local taxes as well as federal levies in comparing the U.S. with other OECD countries. It found combined U.S. corporate taxes at 25.7%, ranking 4th lowest in the OECD, based on U.S. Treasury figures. The OECD average is 34.1%. Only Chile, Mexico, and South Korea had a lower total burden as a share of GDP.

Despite this reality of low corporate taxes, a growing number of large multinational firms have concluded that repudiating their U.S. “citizenship” and inverting is the most effective means of cutting their tax burdens, avoiding possible reforms that could potentially hike their tax bills, and most importantly, gaining direct and unregulated access to untaxed “offshore” funds.

The 35% Myth

The fundamental realities of U.S. taxes on multinational corporations are obscured by an elite debate fixated on the official statutory rate of 35%, which is relentlessly cited as a barrier to U.S. competitiveness.

House Republican James Sensenbrenner (R-Wisc.), for example, wrote in a recent Milwaukee Journal Sentinel opinion piece, “The current rate paid by American companies is 35 percent—the highest corporate tax rate among developed countries.”

This narrative—endlessly recited by leading corporate and media elites, along with virtually all Republicans and a number of Democrats, has come to dominate much of the national dialogue. Robert Pozen, a senior fellow at the liberal Brookings Foundation, urgently called for a sharp cut in the 35% statutory rate, claiming broad bipartisan support in Congress. “If there’s one policy agreement between Republicans and Democrats, it’s that the 35% corporate tax rate in the United States should be reduced to 28% or 25%,” he asserted. “The current rate, highest in the advanced industrial world, disincentivizes investment and encourages corporations to relocate overseas.”

Even President Barack Obama, while an outspoken foe of inversions, perversely weakened his own case against them by speaking of “companies that are doing the right thing and choosing to stay here, [and] they get hit with one of the highest tax rates in the world. That doesn’t make sense,” as he told a Milwaukee audience in a typical comment.

Obama has thus inadvertently reinforced the conventional wisdom among U.S. elites that is used to justify inversions, as outlined by John Samuels of the International Tax Foundation. “Today, with most of their income and almost all of their growth outside the United States, U.S. companies have a lot more to gain by relocating their headquarters to a foreign country with a more hospitable tax regime,” declares Samuels. “And conversely they have a lot more to lose by remaining in the United States and having their growing global income swept into the worldwide U.S. tax net and taxed at a 35% rate.”

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