Walgreens is reportedly among the companies considering an on-paper move abroad to avoid American corporate taxes. (Daniel Mears / The Detroit News)
In her 1989 tax evasion trial Leona Helmsley reportedly said: “We don’t pay taxes. Only the little people pay taxes.”
U.S. multinational corporations have adopted this anthem, inventing increasingly creative ways to avoid paying taxes. The latest dodge is called “inversion.” A large U.S. multinational company merges with a smaller company in a low-tax foreign country, then renounces its U.S. citizenship and becomes a citizen of that country.
The fear is that inversions could snowball, leading to a financial crisis. Sen. Ron Wyden, D-Ore., Senate Finance Committee chair, recently called inversions a “plague” and a “virus.” Inversions also threaten to weaken our nation’s social fabric. But sophisticated corporations using tax loopholes is nothing new, and the republic has survived. So why the alarm now?
The reason to be alarmed is that tax inversions are a different breed of cat. Wyden’s plague metaphor is apt: It is a rapidly spreading epidemic. When the shareholders of company B learn that company A has moved to Ireland and now enjoys a 12 percent tax rate instead of 39 percent combined federal and state rate, company B’s shareholders will clamor for B to do likewise. After all, inversions are legal and they increase profits. What CEO would choose less income?
As renouncing American citizenship loses its stigma (because everyone else is doing it), the movement could become a stampede. The immediate result would be a significant loss of tax revenue to the U.S. Treasury. Congress would then have to decide which services to cut, or which taxes to raise. If Congress failed to act swiftly and efficiently a fiscal crisis would result. When was the last time Congress acted swiftly and efficiently?
But the potential danger is not limited to a fiscal crisis. When ordinary people see companies and wealthy individuals profiting by renouncing their citizenship, yet remaining here, they will begin to question their own values. People might decide that values like patriotism, duty and sacrifice are for losers and “little people.” They might decide that they should adopt Leona Helmsley’s values instead and be governed by cynicism and naked self-interest. Our social fabric would be weakened.
What should we do? Congress should immediately pass the “Stop Corporate Inversions Act of 2014”. But that would only stop the immediate threat; it leaves us vulnerable to many other forms of abuse. We need fundamental reform. A reform that would defeat inversions and many other abuses is called Sales Factor Apportionment (SFA). This policy is in use today to apportion tax revenue among states in the U.S. It could be used in a similar fashion to apportion tax revenue among countries.
SFA works like this: If a company makes 43 percent of its sales in the U.S., then 43 percent of its worldwide pretax profits would be deemed to be in the U.S., and taxed here. Research shows getting multinational tax avoiders to pay their fair share would add more than $100 billion in annual tax revenue. That added revenue could lower tax rates or be used to meet our national needs.
Simplicity and transparency are the hallmarks of SFA. It would not matter whether a multinational company was a citizen of the U.S. or the Cayman Islands. The incentive to invert would disappear. The incentive to use other tax avoidance gimmicks would also disappear.
It is possible that we are wrong — that we exaggerate the danger. Perhaps our alarm over the risk of financial crisis and the undermining of our social fabric is an overreaction. But perhaps we are right. Should we play Russian roulette with our future?
Bill Parks is president of North River Supplies of Idaho.