Inversion Acceleration, Part 3

Roger Bybee

Roger Bybee is a Milwaukee-based writer and activist who teaches Labor Studies at the University of Illinois. This is the concluding part in a three-part article, originally appearing in the May/June issue of Dollars & Sense. Parts 1 and 2 are available here and here.

The Pushback

In an age of fast-eroding economic security, corporate inversions have stirred vast public anxieties and outrage over corporations that seem both rootless and ruthless. Public anger over inversions is mounting, as household incomes continue to fall for tens of millions of Americans and worry about the offshoring of capital and jobs becomes more widespread. An August 2014 poll by Americans for Tax Fairness revealed that more than two-thirds of likely voters disapprove of corporate inversions— 86% of Democrats, 80% of independents, and 69% of Republicans.

Surprisingly, one of the loudest voices to emerge against inversions has been Fortune’s Allan Sloan. Sloan penned a cover story titled “Positively Un-American,” warning, “We have an emergency, folks, with inversions begetting inversions.” Even though Sloan advocates long-term changes that would tilt the tax system further in a pro-corporate direction, he called for immediate action by the Congress and President Obama to stem the tide of inversions. “I still think we need to stop inversions cold right now,” he wrote, “to keep our tax base from eroding beyond repair.”

Besides the drain to the U.S. tax base, Sloan expressed concern about the impact of inversions on Americans’ view of corporate America: “It also threatens to undermine the American public’s already shrinking respect for big corporations.”

The recently announced Johnson Controls inversion dealt a major blow to public trust in America’s largest corporations, reflected in calls by Democratic presidential candidates Bernie Sanders and Hillary Clinton for stiff regulation on inversions.

Johnson Controls’ announcement gave Sanders and Clinton a chance to tap a strong vein of public sentiment. Lashing out at the company in a January 25 media release, Sanders called it and its new partner Tyco “corporate deserters.” Sanders declared, “Profitable companies that have received corporate welfare from American taxpayers should not be allowed to renounce their U.S. citizenship to avoid paying U.S. taxes.”

Clinton blasted Johnson Controls on January 27 at an Iowa campaign stop, stating “I will do everything I can to prevent this from happening, because I don’t want to see companies that thrive, use the tax code, the gimmicks, the shenanigans … to evade their responsibility to support our country.” She also began using a TV commercial aired in Michigan and elsewhere, showing her speaking in front of the Johnson Controls headquarters to denounce the corporation’s inversion.

A Cure Worse Than the Disease

Up until now, conservative Republicans’ control of the House of Representatives has blocked even modest legislation from gaining any traction, despite public outrage against inversions. Using the standard Republican soundbite about the high corporate tax rate driving U.S. firms and jobs overseas, Sensenbrenner, wrote in an op-ed in the Milwaukee Journal Sentinel: “Despite the negative effects the departures of these companies are having on the American economy, it is difficult to blame corporate leaders when you crunch the numbers.”

Similarly, influential hedge-fund tycoon Carl Icahn, although acknowledging the dislocation and insecurity generated by inversions, exempted corporations from any obligation to the United States and laid the blame at the feet of Congress for failing to cut corporate taxes. “Chief executives have a fiduciary duty to enhance value for their shareholders,” he argued in a New York Times opinion piece. “The fault does not lie with them but with our uncompetitive international tax code and with our dysfunctional Congress for not changing it.”

Icahn expressed hope that the public’s sense of urgency about stopping inversions could be shunted away from its current anti-corporate trajectory and instead stampede Congress into lowering corporate tax rates this year. He wrote in the New York Times, “How will representatives and senators, with an election year approaching, explain to their constituents why they are out of work because their employers left the country, when it could so easily have been avoided?”

In pressing for lower corporate taxes in the name of heading off more inversions, corporate and financial figures like Icahn and Republicans are backed by some influential Democrats and self selfdescribed liberals who share an elite consensus on corporations’ absolute “right” to switch their nationalities and to offshore jobs and capital. New York Times business columnist Jeffrey Sommer summarized this consensus in 2014, inadvertently illustrating the vast gulf between elite opinion and majority sentiment. “At this stage of globalization,” Sommer declared, “… most American consumers, investors and politicians have tacitly accepted that if a company is profitable, doesn’t violate the law and produces appealing products and services, it can operate wherever and however it likes.”

Treating corporate investment decisions as sacrosanct regardless of their impact on the public welfare, key Democratic figures like Sen. Charles Schumer (D-N.Y.) and Senate Minority Leader Harry Reid (D-Nev.) are calling for a “tax holiday” on the foreign profits of U.S. corporations. They essentially seek to replicate the holiday declared in 2004 to encourage corporations to “repatriate” foreign profits to the United States by giving them a radically discounted tax rate. The “tax holiday” idea is a particularly counterproductive measure. First, tax holidays reinforce corporations’ use of tax deferrals as they create an incentive for the companies to wait for Congress to capitulate and offer discounted tax rates.

Second, these top Democrats’ backing of a new corporatetax holiday is particularly indefensible given the disastrous outcome of the 2004 holiday. “Advocates said it would create 660,000 new jobs,” pointed out David Cay Johnston. “Didn’t happen. Pfizer brought home the most, $37 billion, escaping $11 billion in taxes. Then Pfizer fired 41,000 workers.”

A Real Solution

If corporate tax avoidance is to be stopped, the most immediate step is ending corporations’ ability to endlessly defer taxes on income which they claim to have generated overseas.

Offshore tax havens enable corporations to routinely engage in a practice called “profit stripping.” With this practice, taxable earnings in the United States are stripped—with costs allocated to the U.S. units and earnings attributed to firms’ foreign subsidiaries. “This kind of accounting alchemy actually works, turning the black tax ink of profit into red ink of debt,” Johnston explained. “You appear as a pauper to government but valuable to investors.”

“Most of America’s largest corporations maintain subsidiaries in offshore tax havens,” reported Citizens for Tax Justice. “At least 358 companies, nearly 72 percent of the Fortune 500, operate subsidiaries in tax haven jurisdictions as of the end of 2014.”

This means a loss of an additional $90 billion to the Treasury, according to Citizens for Tax Justice, apart from the cost of inversions.

It is relatively easy to envision reforms that would give the U.S. tax code a badly needed updating— suited to the current era dominated by the global operations of multinational corporations— to foreclose maneuvers like inversions and the deferral of taxes on foreign earnings.

But serious action on inversions and major loopholes will likely prove impossible as long as our political democracy continues to be eroded by a torrent of campaign contributions from the multinational corporations exploiting the existing tax system.

Until that link—between those who write the big campaign checks and those who write our laws and tax code—is irrevocably broken, our political system will remain impervious to majority sentiment for stiffer taxes and restrictions on corporations’ inversions and the offshoring of capital and jobs.

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