What is so controversial about tax inversions in US?
President Obama and many congressional Democrats argue that US-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 US 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 US 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 US 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 US taxes?
Is it OK for US-based firms such as GE or Apple to use aggressive tax planning to minimize their worldwide tax liability, but unpatriotic for US drugmaker AbbVie to purchase the UK 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 US shareholders? Or US managers? Or US 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 US, it is subject to most of the same laws as GE. Yes, it even must pay tax on its US 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.
