Comments Guidelines

All comments are pre-moderated. No spam, slurs, personal attacks, or foul language will be allowed.

Saturday, July 19, 2014

Corporate "Inversions" Shift the Tax Burden to Us

Corporate "inversions" are back in the news again, as multinational corporations try every "creative" way they can to get out of paying their fair share of taxes for being located in the United States. With inversions, the idea is to pretend to be a foreign company even though it is physically located and the majority of its shareholders are in the U.S.

"What's that?" you say. At its base, what happens with an inversion is that a U.S. corporation claims that its head office is really in Ireland, the Cayman Islands, Jersey, etc. Originally, all you had to do was say that your headquarters was abroad. Literally.

Now, the rules require you to have at least 20% foreign ownership to make this claim, but companies as diverse as Pfizer, AbbVie, and Walgreen's are set to run rings around this low hurdle. The basic idea is that you take over a smaller foreign company and pay for it partly with your own company's stock to give the shareholders of the foreign takeover target at least a 20% ownership stake in your company.

Thus, with pharmaceutical company AbbVie's takeover of the Irish company Shire (legally incorporated in the even worse tax haven Jersey), Shire's shareholders will own about 25% of the new company, thereby qualifying to take advantage of the inversion rules. It expects that its effective tax rate will decline from 22.6% in 2013 to 13% in 2016. Yet nothing will actually change in the new company: it will still be headquartered in Chicago, and the overwhelming majority of shareholders will be American.

As David Cay Johnston points out, even some staunch business advocates like Fortune magazine are calling this tax dodge "positively un-American." Further, as he notes, Walgreen's wants to still benefit from filling Medicare and Medicaid prescriptions even if it ceases to pay much in U.S. corporate income tax. In other words, it will get all the benefits of being in the U.S., including lucrative government contracts, without paying for the costs of government.

As I told The Fiscal Times, if companies like these get their tax burden reduced, there are only three possible reactions that can occur: someone else (i.e., you and me) will pay more taxes; the government must run a higher deficit; or government programs must be cut. Of course, there is a limitless number of combinations of these three changes that can result, but one or more of them has to happen.

What can we do about this? One obvious answer to to raise the bar for foreign ownership to at least 50%+ to call a company foreign. Even more comprehensive, as reported by Citizens for Tax Justice, would be to continue to consider a company "American" for tax purposes as long as it had "substantial operations" in the United States and was managed from the United States. Furthermore, the Obama Administration has proposed limiting the amount of deductions American companies can take for interest paid on loans "from" their foreign subsidiaries, thereby preventing what is often called "profit stripping." Another idea, from Senator Bernie Sanders, would be to bar such companies from government contracts.

The whole concept of "inversions" no doubt sounds very arcane to the average person. But one of the bills to rein them in is estimated to raise $20 billion in tax revenue over the next 10 years. The stakes are substantial, so we need to take a minute to wrap our head around it if we want to head off yet another way in which the tax burden is shifted to the middle class.

Cross-posted at Angry Bear.


  1. A fourth option is to lower the corporate tax rate so not only do we keep US companies paying taxes on their international profits to us; and, in addition, we also attract *real* foreign companies to move here and pay us on their foreign profits.
    1) The $20 that inversion is estimated to cost us in lost revenue is spread out over 10 years. In other words - it isn't that much money lost at all. $2 billion a year...$1 billion every 6 months. $500 million every 3 months. That is practically pocket change. For comparison Russia, when they host the 2018 World Cup, is planning on spending: $20 billion! (See:

    2) To begin with - our corporate tax collection is relatively low, $274 billion in 2013. See:

    In total, for 2013, the US government collected 2800 billion dollars in tax revenue. For every $1 collected less than 10 cents comes from corporate income taxes.

    Because the number is so tiny (it's not like half our revenue comes from corporate taxes) might as well simplify it and drop it.

  2. Nathan, 9%+ isn't nothing. And remember, it is only so low because past policy made it that way.

    But the critical issue is that the corporate income tax is a crucial backstop to the individual income tax. Without the CIT, people would fictionally reclassify a lot of their income as "corporate" when it would be subject to lower tax.

    I should note that OECD statistics ( give corporate taxes at 22.3% of federal taxation in 2012. I'm not sure what accounts for the discrepancy with the CBO numbers.