WaPo: Tax the Shareholders of Tax-Dodging Corporations

Tuesday, 05 Aug 2014 10:40 AM

By Michael Kling

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U.S. corporations are reincorporating overseas to dodge taxes in a process know as inversion, prompting a groundswell of outrage.

While many support reforming the tax code to end the practice, The Washington Post is instead pressing for increasing taxes on shareholders of these firms.

In an inversion, a U.S. corporation merges with an overseas corporation and moves its official headquarters overseas in order to pay the other country's lower tax rates. Inversions don't involve moving actual assets. The move is strictly on paper.

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"If ever a tax loophole were designed to provoke inflammatory rhetoric, this is it," notes The Post's editorial board, saying that "it takes chutzpah for U.S. corporations to claim foreign identities."

Calling for corporations to show "economic patriotism," Treasury Secretary Jacob Lew says he wants to require corporations seeking inversions to have foreign ownership of at least 50 percent.

It won't work, The Post argues. In an unintended consequence, it could decrease the number of mergers while increasing their size.

"The key to genuinely resolving the inversion problem, as opposed to patching it up — or exploiting it — in an election year, is to shift the focus of corporate taxation to the people who actually own a given company: shareholders," the editorial board asserts. "It's harder for individuals to 'reflag,' so it’s more efficient to tax their dividends than it is to chase corporate income streams around the globe."

The Post likes a proposal from Columbia Law School Professor Michael Graetz that calls for slashing the corporate tax rate to 15 percent and taxing dividends at the higher ordinary income rate.

Tax reform must encourage U.S. corporations to remain in the U.S. rather than prohibit them from leaving, The Post stresses.

However, other commentators argue for closing the tax loophole.

The corporations' argument that high U.S. corporate tax rates make them uncompetitive is infuriating, writes Los Angeles Times columnist Michael Hitzik. "Infuriating because they're so full of it."

The CEO of Mylan makes that argument, but the generic drug maker has seen its sales increase 12.7 percent and profits increase 16 percent the last two years.

"There's no evidence that U.S. companies are hobbled by a higher corporate tax than their overseas competitors," Hitzik argues. "U.S. companies are masters at reducing their effective U.S. tax rates to levels consonant with those in other big markets, such as Western Europe and Asia.

"They just don't want to pay their share of the costs" of using the resources of the United States.

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