Monday, August 11, 2014
The Insidious Inversion Perversion: An Exercise in Economic Ignorance
The 2014 Democratic mid-term election strategy seems to be based on the two “I’s:” Impeachment and Inversion. “Don’t impeach the President” is the rallying cry of an otherwise idea-bankrupt campaign. “Don’t let the Tea Party impeach President Obama.” The only ones talking impeachment are Democrats to gin up their base. Their new word is “Inversion,” the details of which are obtuse to most Americans. The democrats and some media claim inversion is unpatriotic. Treasury Secretary Jack Lew said “What we need is a new sense of American patriotism.” President Obama calls for ”economic patriotism’ and claims companies that move overseas through inversion are “corporate deserters.” Boswell wrote that Johnson said “Patriotism is the last refuge of scoundrels.” Patriotism is too hallowed a phrase to throw around in a tax controversy, but that’s what the Democratic demagogues are doing in their latest example of class warfare. It’s an attack on corporations. Inversion is a corporate restructuring in which a United States corporation acquires a foreign corporation and then adopts that company’s legal domicile as its new legal headquarters. The favorite countries for inversion are Bermuda, the Cayman Islands, Ireland and Great Britain. The reason is simple – to avoid the high corporate tax rates of the United States – the highest in the developed world. The federal corporate tax rate is 35%, while states can impose their own corporate taxes. For example, California’s corporate tax rate is 8.8%. Sometimes I wonder why any major non-Silicon Valley corporation remains headquartered in California. In addition, the United States, unlike other countries, tax American companies on foreign profits repatriated to the United States. Thus, corporations like Apple park billions of international profits offshore. Businesses normally try to increase profits by raising sales and lowering costs. That’s a basic rule of economics. Taxes are an expense. A decrease in taxes can boost earnings. High tax rates are a drag on economic activity and give rise to relocations. Thus, when England’s individual income tax rate went up to 90%, many athletes, actors, and singers move their domicile out of England. Great Britain is lowering its corporate rate to 20%. Ireland is down to 12.5% Capital moves to where it is welcome. Over 50 companies have engaged in inversion over the past decade – 15 since 2013. Inversion is becoming an economic stampede. One of the companies currently engaged in inversion is the generic drug manufacturer Mylan. It is acquiring the European operations of Abbott Drugs and will be based in the Netherlands. The CEO of Mylan is Heather Bresch, the daughter of West Virginia Senator Joe Machin. Congress’ Joint Committee on Taxation estimates the federal treasury will lose $19.5 billion over the next decade through inversion. The Joint Committee did not estimate how much would be lost if Congress enacted an effective means to shut down inversions. A closure of inversion will result in an increase in the number of foreign companies buying American businesses. These companies will not pay United States income taxes on off-shore income. Here is a partial list of the brands and companies owned by foreign entities: Alka Seltzer AMC Theaters Arrowhead Ben & Jerry’s Birds Eye Breyers Budweiser Carnival Cruise Lines Chrysler CITGO Dreyers Entenmanns Eskimo Pie Frigidaire Garmin Gerber Goodrich Firestone Frigidaire Gerber Giant Food Stores Good Humor Haagen Daas Helene Curtis Hellman’s Holiday Inn Hoovers Hot Pockets John Hancock Life Insurance Lucky Strikes Mack Trucks PIMCO Poland Springs Ponds Cream Popsicles Purina Ragu 7 Eleven Smithfield (pork) Stop & Shop Trader Joe’s Uniroyal Vaseline The once great American steel industry has seen most of the American companies disappear, enter bankruptcy, or be acquired by foreign companies. Among the disappearing companies are Armco, Bethlehem, Inland, Jones & Laughlin, Kaiser, Republic, and Youngstown. The solution to inversion is to lower corporate tax rates, but that is anathema to many Congressional Democrats. Thus, they sit by as corporations economically leave the United States, either by inversion or selling out.