Should Companies Do What’s Best for Government, or Workers, Consumers, and Shareholders?

Townhall.com ^ | April 22, 2014 | Daniel J. Mitchell

[Kaslin]

I’m in favor of free markets.

That means I’m sometimes on the same side as big business, but it also means that I’m often very critical of big business.

That’s because large companies are largely amoral.

Depending on the issue, they may be on the side of the angels, such as when they resist bad government policies such as higher tax rates and increased red tape.

But many of those same companies will then turn around and try to manipulate the system for subsidies, protectionism, and corrupt tax loopholes.

Today, I’m going to defend big business. That’s because we have a controversy about whether a company has the legal and moral right to protect itself from bad tax policy.

We’re dealing specifically with a drugstore chain that has merged with a similar company based in Switzerland, which raises the question of whether the expanded company should be domiciled in the United States or overseas.

Here’s some of what I wrote on this issue for yesterday’s Chicago Tribune.

Should Walgreen move? …Many shareholders want a “corporate inversion” with the company based in Europe, possibly Switzerland. …if the combined company were based in Switzerland and got out from under America’s misguided tax system, the firm’s tax burden would drop, and UBS analysts predict that earnings per share would jump by 75 percent. That’s a plus for shareholders, of course, but also good for employees and consumers.

Folks on the left, though, are fanning the flames of resentment, implying that this would be an example of corporate tax cheating.

But they either don’t know what they’re talking about (a distinct possibility given their unfamiliarity with the private sector) or they’re prevaricating.

Some think this would allow Walgreen to avoid paying tax on American profits to Uncle Sam. This is not true. All companies, whether domiciled in America or elsewhere, pay tax to the IRS on income earned in the U.S.

The benefit of “inverting” basically revolves around the taxation of income earned in other nations.

But there is a big tax advantage if Walgreen becomes a Swiss company. The U.S. imposes “worldwide taxation,” which means American-based companies not only pay tax on income earned at home but also are subject to tax on income earned overseas. Most other nations, including Switzerland, use “territorial taxation,” which is the common-sense approach of only taxing income earned inside national borders. The bottom line is that Walgreen, if it becomes a Swiss company, no longer would have to pay tax to the IRS on income that is earned in other nations.

It’s worth noting, by the way, that all major pro-growth tax reforms (such as the flat tax) would replace worldwide taxation with territorial taxation. So Walgreen wouldn’t have any incentive to redomicile in Switzerland if America had the right policy.

And this is why I’ve defended Google and Apple when they’ve been attacked for not coughing up more money to the IRS on their foreign-source income.

But I don’t think this fight is really about the details of corporate tax policy.

Some people think that taxpayers in the economy’s productive sector should be treated as milk cows that exist solely to feed the Washington spending machine.

…ideologues on the left, even the ones who understand that the company would comply with tax laws, are upset that Walgreen is considering this shift. They think companies have a moral obligation to pay more tax than required. This is a bizarre mentality. It assumes not only that we should voluntarily pay extra tax but also that society will be better off if more money is transferred from the productive sector of the economy to politicians.

Needless to say, I have a solution to this controversy.

…the real lesson is that politicians in Washington should lower the corporate tax rate and reform the code so that America no longer is an unfriendly home for multinational firms.

For more information, here’s the video I narrated on “deferral,” which is a policy that mitigates America’s misguided policy of worldwide taxation. And you’ll see (what a surprise) that the Obama Administration wants to make the system even more punitive.

President Obama's Deferral Proposal: Hamstringing American Companies, Reducing American Jobs

P.S. On this topic, click here is you want to compare good research from the Tax Foundation with sloppy analysis from the New York Times.

P.P.S. Many other companies already have re-domiciled overseas because the internal revenue code is so punitive. The U.S. tax system is so bad that companies even escape to Canada and the United Kingdom!

P.P.P.S. It also would be a good idea to lower America’s anti-competitive corporate tax rate.

[amnestynone]

I am not going to be ding anything for big business as long as they are supporting amnesty, waging war on the tea party and printing their pathetic liberal lies in the corporate media. As far as I am concerned they deserve to pay more taxes because what is happening in this country is largely their fault.

[uncitizen]

For shareholders.

[Billthedrill]

It isn’t a moral decision. The board acts in the interests of its shareholders or it’s fired. Those interests may or may not be purely economic - they can be whatever is on the shareholders’ minds at the moment, and it is the duty of the board to determine what they are. But the shareholders own the company.

[Vigilanteman]

Some think this would allow Walgreen to avoid paying tax on American profits to Uncle Sam. This is not true. All companies, whether domiciled in America or elsewhere, pay tax to the IRS on income earned in the U.S.

I work for a multinational and can tell you that there are plenty of ways to transfer profits earned in America to other countries with saner tax systems. These methods include, but are not limited to, sales of equipment, machinery or semi-finished goods at inflated rates, shipments to third countries where the company unit booking the sale is not the same as the country unit fulfilling it, and more. These are just for starters.

Sane tax policy recognizes the reality which is why most of them don't even think about collecting taxes on profits earned outside their borders.

[DannyTN]

Companies should do what’s in the shareholder’s best interest.

But Government should set the rules so that what’s in the company’s best interests is in the country’s best interest.

That doesn’t mean necessarily abandoning taxes on companies just because another country offers lower taxes. But it does mean structuring those taxes so that company pays it’s fair share regardless of where it locates it’s headquarters. Or where it makes it products.

We should be restoring the import tariffs and lowering the income taxes.

[DannyTN]

Companies should do what’s in the shareholder’s best interest.

But Government should set the rules so that what’s in the company’s best interests is in the country’s best interest.

That doesn’t mean necessarily abandoning taxes on companies just because another country offers lower taxes. But it does mean structuring those taxes so that company pays it’s fair share regardless of where it locates it’s headquarters. Or where it makes it products.

We should be restoring the import tariffs and lowering the income taxes.