A tax loophole is something that
benefits the other guy. If it benefits you, it's tax reform. ~ Sen. Russell Long
Fiscal shenanigans continue with the latest
proposed "inversion" merger – Burger King and Tim Hortons (a donut
and restaurant chain in Canada). This merger brought out the crowd of nay- and
yea-sayers one more time with feelings, including President Obama. The
President said inversion mergers are an "unpatriotic tax loophole."
Inversion describes a merger between 2
companies – one based in the US the other in a foreign locale that has lower
corporate tax rates – whose objective is to reduce the US firm's corporate
taxes by adopting the foreign location as its headquarters. The US is one of
the few countries that applies a second layer of tax on foreign income for
companies. US companies can avoid this second layer by becoming foreign firms.
If this burger-donut merger happens, the answer for Burger King to
"Where's the beef?" will be British Columbia, the likely headquarters
of the newly-merged firm. British Columbia's top corporate tax rate is 26%. In
the US, the statutory corporate tax rate for corporations is 35%, which large and
not-so-large companies loudly complain is too high. Their complaints are
outright bunk.
Over 40 US multinationals have reincorporated
in foreign countries since 1982. The US Treasury Department may
forego $19.5 billion in tax revenues over the next decade because of such
inversion mergers. Apple made this maneuver famous by "re-locating"
its intellectual property in Ireland, the land of green (that's corporate green
because of its very low corporate tax rate[1]
and its use of territorial taxation.
Based on a detailed study of 288 firms in the Fortune 500 – who
earned more than $2.3 trillion in pretax profits in the US – these large firms'
actual average effective tax rate
from 2008 to 2012 was only 19.4%; a little over half the statutory 35% rate.
For the electric utility companies the rate was 2.8%; for the
industrial machinery sector it was 4.3%; the telecommunications industry it was
9.8%; for the aerospace and military industry, it was 19.7%. Dozens of
corporations including Verizon, Boeing and Corning paid the government absolutely no taxes. Over the 5-year
period the tax subsidy provided by the government to large corporations (to
reduce their taxes) was an astonishing $364 billion, $70B in 2012 alone. All by
itself, Wells Fargo Bank received a tax subsidy of $21.6B over the 5-year
period. Did the Wells Fargo CFO give solid gold medals to his tax CPA's and
advisors, who are Olympians in the corporate tax loophole and subsidy slalom?
Perhaps I should check Wells Fargo's 10-K form.
It thus should be no surprise that as a
percentage of total federal spending, corporations have
contributed less and
less over time as shown in the figure and now it's 7%. Yup, a mere 7%. And
they're complaining? What about those of us who file 1040 forms to calculate
our individual income taxes without the help of Olympic CPAs? Individuals pay
nearly 7 times as high a percentage of federal spending as corporations: 47% of
federal spending now comes from individual income tax receipts. These corporate
wolves are crying Canis lupus.
Not usually mentioned in the media stories
about mergers like Burger King's, but lurking in the background with broad
smiles and fat wallets, are the financiers and mergers and acquisitions
(M&A) specialists who really benefit from these corporate efforts, no
matter what their outcome. It's interesting to note that Burger King has been
bought and sold 7 times in the last 20 years; Tim Hortons twice. The M&A clan
has been busy with burgers, donuts and much more. Global M&A activity has
steadily risen, increasing market concentration and tightening market control
in a multitude of industries. So far in 2014, M&A deal volumes are at a 7 year high.
As usual, the tribe of Midas (both rich corporations
and wealthy individuals) wants it both ways, lower tax rates and preserve every tax loophole and subsidy that shrinks their effective tax
rates far below the published ones. In large part this is why Senator Carl Levin's
dogged but needed efforts to thread the fiscal needle and reform our tax system
(both for personal and corporate income taxes) are going nowhere. Why? Because
"Every loophole has a lover."
If corporations want their federal
income tax rate reduced, we should consider it, but only if we also eliminate Loophole World – all the loopholes and subsidies that produce their low actual,
realized rates.
[1]
According to the Tax Foundation, Ireland has the lowest statutory
corporate tax rate (12.5%) of any industrialized nation, the US has the highest
(35%, which does not include a 4% rate representing the average rate that states levy
on corporate income).
No comments:
Post a Comment