Corporate Inversions-It’s Just Math

This year, we have seen the stock market open up down 8.2%.  It won’t be coming back anytime soon.  Not only have all the Herculean Keynesian efforts by governments failed, but government policy is creating a climate where it’s very tough for any meaningful business large or small to get going.

Want to solve income inequality?  Give people a chance to make some income.

Last night in the Democratic interview-not debate, every candidate talked about increasing taxes or fees in some way.  Want less of something, tax it.  Charge for it.  Startups learned long ago if they wanted to build their user base, the freemium model offered the best chance to grow a network.

Socialist Senator and Democratic Presidential candidate Bernie Sanders railed against the Johnson Control/Tyco merger.  If they didn’t do a corporate inversion, Johnson Control would contact it’s investment bankers and find a company outside of the US to buy them.  The reason for the move isn’t business strategic.  It’s to avoid $150M per year in taxes.

Executives and boards of companies have to act in the best interests of shareholders.  This is a decision that helps shareholders.  I don’t want to hear people invoke “the patriotism” defense.  American based corporations don’t have to stay in America because they started in America.   People emigrate from country to country, so can companies.

Corporations exist and strive to solve pain points by providing goods and services to customers at the point where marginal revenue equals marginal cost.

It’s no secret that American corporations have squirreled away billions in cash in places like Ireland, Belgium and other corporate tax havens.  It’s not the fault of the corporations-it’s poor tax policy.

Politicians and regulators have used a centralized bureaucracy to decide “what’s fair” in Washington.  Corporate subsidies and welfare go to some companies, and are denied others.  Some industries get subsidies(wind, solar), others get regulated out of existence (coal).  This has screwed up the marketplace.

You reap what you sow and Washington is experiencing the harvest of a poorly sown crop.

The penalty for bringing the cash back into the US is prohibitive.  It just sits in foreign banks, benefitting them.  If we want to change it, we have to change corporate tax policy.  That’s hard, because most people don’t understand how cash flows through a corporation, and there are often strong emotions tied up with corporations.

The reality is, corporations don’t pay taxes at all.  They aggregate them.The optimal corporate tax rate would be 0%.  The customers of the corporations are the ones that actually pay the tax.  Corporations do three things to respond to taxes and tax increases.

  1. They lower their dividends
  2. They lay off employees
  3. They raise prices and pass the tax along to customers

If we want more business creation, more economic growth, and more opportunity for American people we ought to change corporate tax policy tomorrow.

UPDATE

On cue, Northern Trust hiring 1000 people.  In Ireland.  If the US would have reformed corporate tax policy, 1000 people would have had the opportunity to get a job.  Actually working and earning income does a lot more to solve income inequality than a government check.

But, Obama would veto any corporate tax reform, and the Democrats would filibuster it in the Senate.

  • Alex_P

    Jeffrey, you hit the nail to the head with “That’s hard, because most people don’t understand how cash flows through a corporation, and there are often strong emotions tied up with corporations.”
    The bottom line is – these people vote and make decisions for the rest of us. It seems to me that democracy (or republic for that reason) as a political arrangement is not suited for free market and individual freedom.

    I will just repeat the famous words of Alexander Fraser Tytler:
    “A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship. The average age of the world’s greatest civilizations has been 200 years. These nations have progressed through this sequence: From bondage to spiritual faith; From spiritual faith to great courage; From courage to liberty; From liberty to abundance; From abundance to selfishness; From selfishness to apathy; From apathy to dependence; From dependence back into bondage.”

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  • zorgparts

    I got here via Danny Crichton’s blog; I look forward to reading through your articles. While I take your point that corporations are taking advantage of tax law you are leaving out the part that corporate interests via lobbying, post-political jobs etc. essentially control what becomes law.

    • Thanks for stopping by and I look forward to your comments. Unions lobby too! There are lots of entities that lobby. It’s really impossible to get the money out of politics. I agree with Instapundit.com, Glenn Reynolds. His idea is to have a revolving door tax on government employees (50% top line revenue minimum) that take jobs in the private sector to lobby. Corporate employees get jobs in the bureaucracy; and go regulate, design regulations, then get jobs back in the corporate sector! The less regulation, the less control corporations can have over competition. Lower taxes are also key because people have more money to startup businesses, grow businesses and compete.