Sunday, August 17, 2014

Corporate inversions are a good thing

Recently politicians on the left have been up in arms over corporate inversions. A corporate inversion is when a company, for example Walgreens, buys a company located in another country in order to lower their tax burden by reincorporating in that country. Many people view this practice as "unpatriotic" including AFL-CIO president Richard Trumka, Senator Elizabeth Warren, and President Obama among others.

Let me first say that in my opinion there is nothing patriotic about paying taxes. Company executives have a duty to maximize value for their shareholders. A lower tax burden means that companies will have more money to either distribute to shareholders as dividends or to reinvest in the business. This is a good thing, not a bad thing. Almost everyone today owns stock in some large, international companies, either in an account that they actively monitor and trade on or in an investment like a Roth IRA or 401 K.

Despite what politicians on the left say it is not at all clear that sending corporate profits to Washington D.C. via taxes is better than keeping that money in the hands of shareholders or reinvesting in the business. In fact, I find it hard to believe that anyone who monitors D.C. spending habits with an unbiased eye would argue that the government spends money in a value maximizing way. It is important to remember that the primary opportunity cost of tax dollars is the purchase that would have been made had the person taxed been able to spend that money as they desired. Even if one believes that the government spends tax dollars on goods and services that people want, this does not mean that the purchases the government makes maximize the utility of the individuals that the money was taken from. A person may want the government to hire a new IRS call center worker, but they may way want a new car more.

In addition to the commonly made opportunity cost argument, the problem with labeling corporate inversions unpatriotic and trying to stop them is that it stifles cross jurisdiction competition for scarce resources. Why shouldn't Ireland or Estonia be able to compete with the U.S. for scarce tax dollars? If another country offers Walgreens a better overall deal than the U.S. then the U.S. should counter with an even better offer, not use force to eliminate the first offer.

Inter-country tax competition ensures that countries stay vigilant about attracting scarce resources rather than become complacent behind nationalistic walls. Like competition at all levels, tax competition and varying corporate rules and regulations allow policy makers to see what systems work best and maximize real value to shareholders, consumers, and workers. It is just like inter-state and inter-city competition within the U.S. If it is not a good idea to put all states under one corporate tax and regulation umbrella why would it be a good idea to put all countries under one? But in effect that is exactly what stopping corporate inversion would be doing. There would be no incentive for countries to implement the most economically efficient corporate tax structure if company movement was forbidden.

Far too often politicians resort to force to stop something they don't like rather than view it as an opportunity to learn about what people want. Competition sorts out the good ideas from the bad and restricting competition will ensure that bad ideas stay around much longer than necessary.

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