Inflationomics

Still Waiting for Signs of Intelligence

I just read in The Wall Street Journal, “The boom in ‘inversion’ deals, in which a U.S. firm buys a foreign company and moves overseas, has raised the ire of President Barack Obama, who has said the practice is ‘wrong.’”

Of course, the reason President Obama finds this practice “wrong” is that the newly formed company acquires the foreign company’s domicile and lower tax rates thus depriving the United States (and therefore Mr. Obama) of tax revenues.  Of course, tax avoidance using foreign entities, which is legal, has been going on for some time.  Apple Computer reportedly saved $74 billion between 2009 and 2012 by operating its foreign operations out of low-tax Ireland.  And why shouldn’t it?

The United States has the Organization for Economic Cooperation and Development’s (OECD) highest corporate income tax rate (federal and state combined) at 39.1%, while Ireland, for example, has a corporate income tax rate of 12.5%.  Is it any wonder that U.S. companies  move?  Why don’t more?

For U.S. companies that earn a majority of their income outside the United States, or that earn a large percentage of their income from intellectual property rights, it makes sense (and is relatively easy) to arrange their affairs so they are taxed in a low-tax jurisdiction.  By paying less in taxes, they can become more competitive by reinvesting their profits in productive pursuits or by paying a greater return to their shareholders.  And, in any event, by keeping their capital, they can surely find a more productive use for it than any government can.  (Think about what governments do with the money they seize!)

In the long run, if a country raises its taxes high enough, people/businesses will leave. And if the business is large enough, it will negotiate a better tax rate with another government.  I’m reminded of the recent French tax law changes where the top tax rate was raised to 75%.  Not surprisingly, a number of rich French taxpayers left.  Gerard Depardieu, who was wooed to Russia by Mr. Putin, was the most notable.  Of course, the socialist French prime minister called him “unpatriotic” on his way out the door.  Never mind that the government simply treats its citizens like so many milk cows to be milked as it pleases.  At what point do the taxpayers say, “Enough?”

What has this world come to when you have to negotiate with governments over how much of your own money you can keep?  When you only get to keep what the government says you can keep…there are no rights anymore.

The United States, of course, is following in France’s footsteps.  Consider the case of Facebook cofounder Eduardo Saverin who moved to Singapore to avoid a $67 million tax bill shortly before Facebook’s IPO.  He was bad-mouthed, too, by American politicians.  And then there’s Tina Turner, who relinquished her U.S. citizenship and became a Swiss citizen, and Denise Rich who moved to London with her Austrian passport.

Clearly, the United States is chasing companies and wealthy individuals away with its tax laws.  It’s chasing U.S.-dollar users away with its economic sanctions and military interventions (not to mention FATCA).  And it’s chasing savers away with its zero interest policy.  It’s a new world of competition among the various countries around the world.  I’m still hoping the U.S. government will wake up in time (and see the new world order) to “invert” its attitude and stay competitive enough to become prosperous.

So far, however, I haven’t seen any signs of intelligence. I’ll let you know if I do!

Robert Jackson Smith

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