Inverting the Logic on Inversions


Inverting the Logic on Inversions

By Alton Cogert

And now for something completely different…

Why tax inversions – the practice of a US company merging into a non-US company to lower/avoid income taxes – could ultimately produce different, better results for the economy.

First some interesting reactions and ideas:

From Andrew Ross Sorkin of the New York Times, a look at how Wall Street banks are profiting from advising companies on taking advantage of this tax maneuver.   We’re talking over $200 billion in fees…for Goldman Sachs alone…while these ‘too big to fail’ banks preach the importance of investing in America.

Let’s not forget that America (that’s we the taxpayers) bailed out those same banks who are now advising companies to merge and redomesticate for tax purposes to lesser taxing shores.

Meanwhile, the famous hedge fund investor, Stanley Druckenmiller, says the debate over inversions gives the U.S. a chance to debate tax policy from an investor’s perspective. He correctly notes that inversions have produced a windfall in capital gains for shareholders.  And, since shareholders ultimately benefit, they should see their taxes rise (via a capital gains or dividend income tax increase) to offset the lost tax revenues. 

Of course, raising capital gains taxes on all investors just to offset inversions that benefit a few does seem a bit self-serving in favor of investors who benefit from inversions.  But, I suppose the venerable Mr. D believes he can ferret out those inversion candidates better than most.

Now, let’s put this discussion in perspective and provide a modest proposal:

First, Wall Street advising their clients to take advantage of loopholes in the tax code is as old as…the tax code.  One wonders if this dates back to one Babylonian advising another how to get around one of Hammurabi’s codes.  So, this is truly a ‘dog bites man’ story.

Second, Wall Street banks acting in their own self-interest is probably as old as, well, humans.  Have you heard any Wall Street CEO even say ‘thank you, fellow taxpayers, for supporting your local too big to fail bank?’ 

Meanwhile, Mr. D does say that inversions have raised talk of changes in the tax system.  So, why not consider something completely different?

How about treating corporations like people?  You know, people like you and me, who get to pay tax US tax on income earned anywhere – probably even Mars, if the government had its way.  So, invert away, Mr. and Ms. Corporation, but you will still be paying US income tax.

And, what of those who have already inverted?  Or, companies holding cash overseas because bringing it to the US would incur US income tax?  Work out a gradual payment plan…just like the government would do with any debtor…to get those taxes paid.

But, let’s treat corporations like people and tax universal income, only if this is specifically tied to lower corporate tax rates for all corporations – large, medium and small.  The net impact to Federal revenues would be zero, and, with a lower tax burden on all the Mr. and Ms. Corporations, we might even see a better uptick in economic activity.

So, under this modest, simplistic proposal, corporate tax rates go down, which may lead to improved economic results, and Wall Street banks have to find new ways to game the tax code.

But, they will always find new ways of doing that.  We should expect nothing less.

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