Friday, July 25, 2014

Inverted Thinking

The Democrats are correct in saying we need comprehensive immigration reform.  The Republicans are correct in saying we need comprehensive tax reform, especially reform of the corporate income taxes.

If you doubt the need for tax reform, consider the increasing number of "tax inversions" over the last three years  The U.S. has one of the highest tax rates on corporate income in the world.  Making a dollar's worth of profit in this country is worth less here than in other nations, because you're paying more in taxes here.  If you want to make your company more profitable, you can do so by paying less in corporate income taxes, and you can do this by doing a tax inversion, which means you buy a smaller company in Europe or anywhere with lower marginal corporate income tax rates.  Then, you make that foreign company your corporate headquarters and begin paying corporate income taxes to that nation, instead of paying taxes to the U.S.  One day, you're an American company.  The next day, you're a European company.  Nothing else changes.  You just change your corporate home-country on paper and begin paying the lower corporate income taxes in that country and stop paying higher corporate income taxes in the U.S.  That leaves you more money to pay dividends or pay employees or to invest in factory equipment or to buy another company.

The United States is expected to lose $20 billion in tax revenues over the next ten years from tax inversions. Want to increase the value of stocks by $300 billion?  Just cut expenses by $20 billion (assuming a price-earnings ratio of 15 times).  Don't forget -- the primary job of CEOs is to increase value.

Corporate income taxes are just another expense of doing business.  Businesses have an obligation to minimize expenses.  That includes all expenses, including energy costs, employees costs, occupancy costs, AND tax costs.  Any CEO who voluntarily pays higher costs will have to answer to his shareholders.

Are those corporations un-patriotic?  The Treasury Secretary said so at a conference in New York a week ago.  Yesterday, the President agreed.  I totally disagree!