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© 2016 by Steven Mintz and  Do Good PR Group

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Is Donald Trump Right About Corporate Inversions?

March 22, 2016

 
Is Tax Avoidance an Ethical Issue?
 

Last week Donald Trump used his primary night victory speech to name just a few companies that he has big plans for once he’s in the Oval Office. A few of them were familiar targets for the Republican front runner — Apple, Carrier Air Conditioning, Eaton, Ford, Nabisco, and Pfizer. He has railed many times about how he will force these companies to move their manufacturing operations back into the United States where American workers will be employed. But are these companies doing anything wrong by merging with smaller foreign companies, moving their headquarters overseas, and avoiding U.S. corporate income taxes?

 

All these companies are doing is taking advantage of U.S. tax law. There is a difference between tax avoidance (legal), as these companies are doing, and tax evasion (illegal), which means to knowingly lie or cheat on taxes to gain an advantage through fraudulent actions. No one is accusing the companies of such egregious behavior.

 

As I have blogged about many times, there is a difference between following the law and being an ethical person – or company in this case. The notion of ‘ethical legalism’ equates ethical behavior with being law-abiding. Most ethicists dismiss such a notion. After all, it would have been legal to tell the Nazi’s where Ann Frank was hiding when they came knocking on the door, but not very ethical to do so. This is because we value the rights of human beings above all else.

Back to the issue at hand. As I have explained before, in an inversion, a large U.S. firm acquires a much smaller target company domiciled in a tax-friendly jurisdiction such as Ireland, Switzerland or the U.K., but the deal is structured so that the foreign minnow swallows the domestic whale. U.S. shareholders of the U.S. firm must pay immediate capital gains tax for the privilege of inversion, and the U.S. Company ends up as the nominal subsidiary of a publicly held foreign corporation.

 

The deals are driven by a desire to avoid paying U.S. corporate income taxes that are the highest in the world (35%) by relocating to a tax-friendly country. The UK tax rate is 21%, Switzerland is 18% and Ireland, with the lowest corporate income rate, at 12.5%. U.S. companies avoid paying any corporate income taxes by shifting profits overseas so that taxes are avoided until and unless those profits are repatriated from their low-taxed foreign earnings to the U.S. By simply keeping the profits overseas a U.S. company avoids paying U.S. corporate income taxes.

 

Trump has also called for a reversal of corporate policy that encourages U.S. companies to move production facilities overseas, to say China, Mexico, or Vietnam, to drastically reduce their labor costs and enhance profits. Just imagine if a U.S. company could pay $1 or $2 dollars to factory workers rather than $10 or more. Now think about the savings in not paying retirement or health benefits to foreign workers. Is there any wonder U.S. companies routinely move production facilities offshore? But, it is not illegal to do so.

 

The problem is the U.S. is still acting like it’s the 1960s, 1970s, 1980s, and 1990s rather than the 21st century where economic factors surrounding global competition and national tax and export policies of foreign countries put them at a competitive advantage compared to the U.S. We no longer can act like these countries need our help to move toward a capitalistic society and our economic and tax policies are used to push them along this road. We need to realize the country is divided in part because about 10 million manufacturing jobs have been lost thereby ‘hollowing out’ the U.S. manufacturing segment. Add to this the fact that many American companies use H-1B visas to bring in small numbers of foreigners for openings demanding specialized skills. But for years, most top recipients of the visas have been outsourcing or consulting firms based in India, or their American subsidiaries, which import workers for large contracts to take over entire in-house technology units — and to cut costs. The immigrants are employees of the outsourcing companies.

 

The U.S. needs to craft a long-term economic policy to bring jobs home and encourage U.S. corporations to stay in the country and pay their ‘fair share’ of taxes. If we don’t do this and soon, the economic divide in the country will continue to grow. The gap between the top 10% on the wealth scale and the middle class is over 1,000%; that increases another 1000% for the top 1%.

 

So, yes, Trump is mostly correct about corporate inversions. However, the irony is not lost on me that he rails against U.S. companies taking advantage of tax laws while doing the same with his bankrupt companies. He has no problem taking advantage of eminent domain as well. To say he is hypocritical is an understatement.

 

The problem is ethics has taken a back seat in our country to self-interested behavior and corporate greed. It’s been happening for years so it won’t turnaround anytime soon. However, we need to start moving in the right direction or risk falling behind China as the largest global economy. We need to start being insular and look out for our own workers, not encourage companies to shift wealth to foreigners. If not now, when?

 

Blog posted by Dr. Steven Mintz, aka Ethics Sage, on March 22, 2016. Professor Mintz is on the faculty of the Orfalea College of Business at Cal Poly San Luis Obispo. He also blogs at: www.workplaceethicsadvice.com.

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