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The Attempt to Invert Inversion

As the recovery, to put it generously, from the 2008 economic crisis continues to sputter along, Wall Street and corporate America have once again become quite creative in their attempts to speed up said recovery. As is their want, the Street and corporate boardrooms seem to continuously find intelligent, aggressive ways to increase their bottom lines and spur growth, regardless of the economic or regulatory hurdles they may be facing. The latest trend, some derogatorily say fad, is the practice of inversion. 

   Inversion is a corporate tax strategy whereby company A merges with company B, whose legal headquarters are in another domicile. After the merger, Company A moves its legal entity to the domicile of company B, thereby enabling it to pay the lower corporate tax rate in the country it has moved to, as opposed to the higher corporate tax rate of the country it is incorporated in. 

   Since the United States has one of the highest corporate tax rates in the world at 35%, numerous companies domiciled in the United Sates have made use of this strategy. A significant number of others are in the process of attempting to do so.

   When looked at more closely, the benefits of such a strategy can be quite significant. For starters, relocating one's legal entity from the United States (35% tax rate) to Great Britain (19% corporate tax rate as of 4/1/17), or Ireland (tax rate of 12.5% for trading income, 25% for non-trading income), can save a company a tremendous amount of money. If a U.S. company with taxable income of $10B were to merge ("be purchased" - the effect of an inversion), with a company in Great Britain, it could save $1.6B in taxes. If the same company were to be purchased and merge with a company in Ireland, it could save between $2.25B and $1.0B in taxes, depending on the income source. In the above examples, at a salary of 100k plus 25k in benefits per job, 12,800 jobs could be created in Great Britain. In Ireland, between 8,000 to 18,000 jobs could be created. Correlated across any industry, and extrapolated to the entire workforce, the potential increase in jobs is staggering.

   If a company were to use only half of the tax savings on new jobs, the increase in employment would still be significant. In addition, the proceeds from tax savings not used to increase employment could be put towards an increased dividend to shareholders, donated to charities, or put into a company in the form of research and development. Since corporate America is one of the more generous contributors to charities, the world would greatly benefit. Pharmaceutical or software companies putting the funds into research and development could lead to greater innovation. 

   If the U.S corporate tax rate were to be lowered to levels comparable to, or lower than, most of the world, the practice of inversion by corporations domiciled in the U.S. would by and large cease and desist. Not only would U.S.-based companies not look to merge with foreign corporations, companies domiciled in countries whose corporate tax rate would now be higher than the U.S. might examine the benefits of inverting with U.S.-based entities. The effect of such a shift in U.S. tax policy would have a tremendous effect on GDP and the unemployment rate. It could produce an economic resurgence the likes of which we have not seen since the post-WW II era. Or ever, for that matter.

   The shame of it all is that instead of seeing inversion for what it is, a call for help by corporations who feel overtaxed, and embracing the opportunity to reign in corporate taxes to jump start the U.S. economy, Washington D.C. has attacked the practice. Most of the talk out of the capital centers around threats to change tax law to make it tougher, or next to impossible, to benefit from inversion. The practice of inversion is being called "unpatriotic", with the usual "not paying their fair share" being thrown in for good measure. In addition to being short-sighted as to the number of jobs a lower corporate tax rate could create, the multiplier effect to the economy that would be brought on through supply side economics is an added gain that is being ignored. The positive economic impact would also trickle down to small businesses, which are mostly made up of the middle-class Washington D.C. constantly reminds us they are on the side of. Clearly, a great opportunity is being squandered.

 

 

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