How Is Inversion Different From Evasion?

If you're talking taxes, the answer's easy: Inversion is legal, evasion is not.

But if you're talking the morality of tax-avoidance... well, I think it gets a lot murkier.

If you've read this blog even casually, you know that one of my favorite quotes is from the great American jurist, Oliver Wendell Holmes: "Taxes are the price we pay for a civilized society." (Last used, I think, here when I was also talking about sleazy tax-avoidance schemes)

And if you've been following the business news lately, you've seen a lot of talk about inversion deals. (If you, like me, are not a tax accountant / lawyer, the short definition is: Moving out of the US and establishing your corporate "headquarters" in a country with a lower corporate tax rate than ours.)

And the more I've been reading about these deals, the madder I've gotten. Clearly, if the Supreme Court is right, and Corporations Are Persons, then way too many of them are sociopaths.

The current poster child for inversion is Minnesota-based Medtronic and its acquisition of Massachusetts-based-but-Ireland-headquartered Covidien (14 June 2014 New York Times article detailing the deal, here). But it's hardly the only such company making this move. Today's Times, for example, carries a David Gelles article (here) about the anticipated acquisition of Ireland-based pharmaceutical giant Shire by Chicago-based even-bigger pharmaceutical giant AbbVie.

Lawmakers may be starting to pay attention. Treasury Secretary Jacob Lew sent a letter to Congress Tuesday (as reported in today's New York Times by David Gelles, here), urging it "to take immediate action to halt the rush of companies abroad." Lew and some lawmakers are concerned about the significant reduction in tax receipts; I'm outraged by the immorality.  Especially as many of the pharma companies that are moving abroad receive substantial payments from the federal government through Medicare and Medicaid.

Thankfully, I'm not alone in my outrage.

Fortune senior editor at large Allan Sloan has written an excellent, blistering cover story (here; long but absolutely worth reading; if you're an audio person, Sloan gave a great interview to WNYC's Leonard Lopate yesterday, available here) on the fiscal and philosophical damage that mass inversion can / will cause. Sloan fairly presents the argument for moving "headquarters" abroad:

The U.S. tax rate is too high, and uncompetitive. Unlike many other countries, the U.S. taxes all profits worldwide, not just those earned here. A domicile abroad can offer a more competitive corporate tax rate. Fiduciary duty to shareholders requires that companies maximize returns.

But, Sloan argues, if your taxes are too high, you shouldn't desert the US: You should stay and fight for tax reform. Moreover:

I define “fiduciary duty” as the obligation to produce the best long-term results for shareholders, not “get the stock price up today.” Undermining the finances of the federal government by inverting helps undermine our economy. And that’s a bad thing, in the long run, for companies that do business in America.

Yes. I have written before that "shareholder value" is too often used to justify really questionable behavior (example: here).

The simple solution, many are saying, is to cut the US corporate tax rate. But would that work? Sloan believes (and I agree), that it wouldn't:

In the widely hailed 1986 tax reform act, Congress cut the corporate rate to 34% (now 35%) from 46%, and closed some loopholes. Corporate America was happy–for awhile. Now, with Ireland at 12.5% and Britain at 20% (or less, if you make a deal), 35% is intolerable. Let’s say we cut the rate to 25%, the wished-for number I hear bandied about. Other countries are lower, and could go lower still in order to lure our companies. Is Corporate America willing to pay any corporate rate above zero? I wonder.

Great: So we're back to playing a how-low-can-you-go game, and to hell with the rest of us. I don't know about you, but I'm stuck here -- and patriotically glad of it -- and paying my taxes. And may I point out that, while the "sticker rate" is 35%, it's not the actual rate that most companies pay (2013 CNN Money piece, here; according to the GAO, the effective tax rate in 2010 was ....12.6%).

As I said, Sociopaths.