A reader requested that I explain the controversy about "tax inversions" but without wading through a bunch of numbers. That's a tough assignment, but here goes:
A tax inversion occurs when a large company in a high tax nation buys a smaller company in a low tax nation and changes their headquarters to the low tax nation. (They don't actually move their headquarters, just formerly declare it is located in the low tax nation.) The larger company saves a great deal of money in taxes by doing this. Just as the CEO is obligated to reduce his interest costs, rental costs, labor costs, and all the other costs, they are also obligated to reduce their tax cost. After all, it is just another cost. That's the Republican side of the controversy. The Democratic side is that these fat, over-paid CEOs enjoy all the benefits of America but are too selfish to pay their fair share of the costs.
Frankly, that is the wrong argument. The problem with tax inversions merely reflects of the problem of the corporate tax code. We should be talking about updating that thirty-year-tax code to the modern economy. Republicans argue our stated corporate tax rates are the highest in the developed world, and they are right. Democrats argue that the corporate tax code has so many tax breaks in it that no corporation pays the highest marginal tax write. In aggregate, Democrats argue that the effective tax rate for corporations is really about half the published tax rate, and they are right. I'm inclined to agree with the Republican argument, because the success of tax inversions clearly validates their argument. The good news is that both political parties agree the corporate tax code needs to revamped for the modern economy.
The bad news is that they don't agree on anything else. Assuming we can "wade through" a grand total of two numbers, here they are: 25% and 28%. Republicans argue the highest marginal tax rate for corporations should be 25%, while Democrats argue it should be 28%. Since they are so close, a reasonable person would think they could compromise at 26.5%, but that involves a "compromise" - yuck!!
The real conflict revolves around the infamous tax breaks for corporations. The Republicans want to preserve those breaks, while the Democrats want to abolish them. I'm inclined to agree with the Democrats on this.
So, what's going to happen? In an election year, that's a silly question!
A tax inversion occurs when a large company in a high tax nation buys a smaller company in a low tax nation and changes their headquarters to the low tax nation. (They don't actually move their headquarters, just formerly declare it is located in the low tax nation.) The larger company saves a great deal of money in taxes by doing this. Just as the CEO is obligated to reduce his interest costs, rental costs, labor costs, and all the other costs, they are also obligated to reduce their tax cost. After all, it is just another cost. That's the Republican side of the controversy. The Democratic side is that these fat, over-paid CEOs enjoy all the benefits of America but are too selfish to pay their fair share of the costs.
Frankly, that is the wrong argument. The problem with tax inversions merely reflects of the problem of the corporate tax code. We should be talking about updating that thirty-year-tax code to the modern economy. Republicans argue our stated corporate tax rates are the highest in the developed world, and they are right. Democrats argue that the corporate tax code has so many tax breaks in it that no corporation pays the highest marginal tax write. In aggregate, Democrats argue that the effective tax rate for corporations is really about half the published tax rate, and they are right. I'm inclined to agree with the Republican argument, because the success of tax inversions clearly validates their argument. The good news is that both political parties agree the corporate tax code needs to revamped for the modern economy.
The bad news is that they don't agree on anything else. Assuming we can "wade through" a grand total of two numbers, here they are: 25% and 28%. Republicans argue the highest marginal tax rate for corporations should be 25%, while Democrats argue it should be 28%. Since they are so close, a reasonable person would think they could compromise at 26.5%, but that involves a "compromise" - yuck!!
The real conflict revolves around the infamous tax breaks for corporations. The Republicans want to preserve those breaks, while the Democrats want to abolish them. I'm inclined to agree with the Democrats on this.
So, what's going to happen? In an election year, that's a silly question!
