A Philosopher's Blog

Corporate Inversion

Posted in Business, Ethics, Law, Philosophy by Michael LaBossiere on August 13, 2014
Taxes

Taxes (Photo credit: Tax Credits)

Corporate inversion is a strategy in which a corporation (usually one located in the United States) merges with a foreign corporation and then shifts its income from its original country.  The usual purpose of this strategy is to reduce taxes and this is done by shifting the income from the higher-tax country to the lower tax country. While this strategy has been used for quite some time, it started attracting media attention in the summer of 2014.

Those who defend tax inversion point to the obvious fact that it is currently legal. As such, the strategy is exempt from legal criticism as long as it is legal. Of course, the fact that something is legal does not entail that it is morally right or even that it is pragmatically prudent. A quick glance at history will show an abundance of practices that were legal (such as slavery) yet morally repugnant. A similar look back will also reveal laws that turned out to be bad ideas on pragmatic grounds. Thus, the actual dispute about corporate inversion is not a matter of whether it is legal or not. Rather, the substantial dispute is whether it should remain legal or not. Interestingly, opposition to corporate inversion is not limited to the left and avowed capitalists have been critical of the practice (usually as part of a general criticism of the tax laws of the United States). There is also the fact that the practice is legal because the corporate lobbyists ensure that is legal. To use an analogy, it would be like a person claiming it is not cheating that they are winning because she is following the rules when she is the one who writes the rules.

One obvious moral concern regarding the practice is that the corporations that invert are able to reduce their tax burden (which tends to already be quite low in practice, despite the relatively high tax rate that exists in theory) while still enjoying the support of the United States. These corporations still utilize the physical infrastructure of the United States, they still benefit from the legal system (which often serves their interests quite well), they still benefit from United States foreign policy and military operations, and they still enjoy the usual corporate welfare, and so on. In short, they contribute less while still receiving the same. If one believes that people should not be takers and should contribute fairly in return for what is received, this tactic would seem wrong. To use an analogy, it would be somewhat like eating a meal at one table and then relocating oneself to another table with a smaller bill so as to avoid paying what one actually owes. While some might see that as brilliant, it does seem rather morally dubious to use such a shift to avoid responsibility. Then again, it could be argued that this is brilliant and there is nothing wrong with eating one meal while paying for a cheaper one. There is, however, the fact that the rest of the folks at the original table will be stuck with the bill—but perhaps they deserve it for being too stupid (or moral) to ditch the table for a cheaper bill. Some might wonder what would happen if everyone jumped tables—but obviously enough not everyone will or can, so there will always presumably be fewer people stuck with more of the bill.

A second stock defense of corporate inversion is that corporations are obligated to make a profit for their shareholders. On the face of it, this inversion would do just that. After all, if the corporation is taxed less, that entails more profits and thus larger payouts to the shareholders. Interestingly, though, the Wall Street Journal notes that this corporate inversion strategy could result in the shareholders paying more taxes—thus perhaps resulting in a somewhat ironic shift of the tax burden. This dispute is a factual matter rather than a matter of value: if the justification of corporate inversion is the benefits to the shareholders, then it certainly matters whether the shareholders benefit from this or are harmed by it. There is also the matter of value. Justify inversion on the grounds of increasing profits is to hold that what matters in terms of what should be done is profits, rather that other factors such as fairness, morality and so on.

While thinkers like Thomas Hobbes would agree that “profit is the measure of right” in the state of nature, there is a reasonable moral concern that gain is not the standard of right. If profit trumped everything, then corporations should engage in such practices as slavery, organ harvesting, prostitution, drug dealing and so on—provided that such endeavors were profitable. This principle would allow a drug cartel to justify its practices—as long as it kept its books in the black (though the streets might be red). It might be countered that these practices are illegal (in some places)—but changing that is just a matter of lobbying or relocation. After all, if a company can relocate to avoid a tax burden so as to maximize profit on the grounds that profit is what matters, it could make the same appeal to relocating so it could deal in slaves or cocaine.

The obvious counter is to say that corporate inversion is not really comparable to engaging in slavery or organ harvesting. The easy reply is that this is true.  But if the principle is that profits are the measure of what one should do, then it follows that as long as the wicked is profitable, one should do it.

Another approach to the matter of warranting actions in terms of profit is to consider the matter from another angle. To be specific, consider the ethics in regards to an individual taking the same view. For the sake of the example, imagine a fellow (a California surfer, perhaps) who follows the principle of profit. That is, he aims to get as much as he can for as little cost to himself. Imagine that he finds that there is a perfectly legal system that will provide him with goods and services at no cost to himself. Given that his goal is profit maximization, this would be a good system for him—he profits at no apparent cost to himself. This scenario seems to nicely work in the two stock justifications for corporate inversion, namely that it is legal and it is profitable. So, if it is acceptable for a corporation to invert because it is legal and because doing so is profitable, then it is acceptable for the California surfer to do the same thing on an individual level. However, if the surfer is in the wrong because he is a taker (that is, he is getting without contributing his fair share), then it would seem that the corporation is also in the wrong.

It could be countered that the corporation is at least employing some people and making profits for the shareholders, etc. However, the surfer can counter that he is making profits for himself and also contributing to employment. After all, someone has to make and sell the sushi he eats, so he is also a job creator.

 

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4 Responses

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  1. T. J. Babson said, on August 13, 2014 at 11:23 pm

    “One obvious moral concern regarding the practice is that the corporations that invert are able to reduce their tax burden (which tends to already be quite low in practice, despite the relatively high tax rate that exists in theory) while still enjoying the support of the United States.”

    Mike, the US tax rate is obviously not that low or else why bother with the corporate inversion?

    Have you considered that the advantages of having the corporate headquarters in the US may not be worth all the extra taxes? People talk about roads and bridges, but–be honest, now–that is not where the tax money goes.

    • Michael LaBossiere said, on August 19, 2014 at 10:52 am

      Good points.
      The US has a high tax rate on paper, but in practice it is much lower (some corporations actually end up with a negative tax burden-the state gives them money). But, the practical tax rate is not always the lowest in the world so corporations can find better rates by shopping around.

      I agree that tax dollars are wasted (the useless walls being built on the border with Mexico is an excellent example of money being thrown away). However, the solution here would not be to avoid taxes, but for the state to be less wasteful. Since corporations have massive influence on the state, they could use their influence to change spending to better match their needs. One obvious problem, is that it is often corporations that benefit from what others might regard as wasteful spending (like those walls).

  2. Glen Wallace said, on August 14, 2014 at 8:55 pm

    As I argued in a comment on one of your previous posts (http://aphilosopher.wordpress.com/2014/07/25/the-sharing-economy-ii-taxes/) I think it is inaccurate to think of the government as the vendor that provides services to its citizen and business customers. The government is not the vendor because the government is supposed to of, by and for the people — that is, indistinguishable from the citizens it serves. When a client or customer enters into an agreement with a vendor, then the goal is to come to an agreement that is mutually beneficial to both parties. But it is still the responsibility of both parties to look after their own financial interests, and if each party has good counsel and good business sense and knowledge then they will likely come to a mutually beneficial understanding. However, there are some circumstances where one party may be less knowledgeable of what is in their best interests compared to the counterparty, and as a result enter into an agreement that is only to the benefit of one party and not the other. However, the government is always supposed to be looking after our interests because we, the citizens belong to the same organization — in our case the USA. So what are taxes if they are not payments to a vendor for services, I would argue that taxes are just one way that our government collects revenue for the goods and services it provides as dictated by the laws written by our supposed representatives. Given that we are allegedly living in a democracy then decisions about how our government collects revenue might be comparable to members of some club voting on different ways to fund their organization and deciding on membership dues as being the funding means comparable to taxes. Settling on membership dues might make sense for a small club with few other alternatives for fundraising, but it doesn’t make a whole lot of sense for relying on membership dues in the form of worker income tax as being the primary means of fundraising for a nation as economically bountiful as the United States. Instead of asking if it is morally ok for a corporation to avoid taxes through inversion, the question should be is it morally ok for the citizens to tax the profits of a corporation at say, 99 percent, so that income taxes for workers no longer becomes necessary. I do think elements of fairness need to be taken into consideration when the club members, the citizens, decide on how revenue for their organization, America, is generated. It seems like it would be only fair to tax a one person home business at a rate similar to an employee that is generating a similar income. However as a small business turns into a mega corporation then it seems like the tax rates should correspondingly increase. But still, there are a host of other potential revenue sources outside of taxes that are not being maximized, that I think if the citizenry ever gave any serious thought to, would quickly jump on and maximize. I’m especially thinking of tariffs and maximizing revenue from natural resource extraction from federal lands (something that is not even close to being done currently). The citizens do not give much though to alternative revenue sources because, it is rarely presented to them because the large financial interests that own the mainstream media and do the most lobbying and campaign contributing would be the ones forking over the most money to fund those alternative streams. In other words, the plutocracy, wants the citizens to funding the government largely through individual membership dues paid by the plebs, while the bourgeoisie live the high life.

    • T. J. Babson said, on August 14, 2014 at 10:34 pm

      “However as a small business turns into a mega corporation then it seems like the tax rates should correspondingly increase.”

      Why?


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