Corporate Inversion

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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