Skip to content

“Inversion” Lies And Truth

The lies:

“I think most people would say: If you’re doing business here, if you’re basically still an American country, but you’re simply changing your mailing address to avoid paying taxes, then you’re really not doing right by the country and by the American people,”

Barack Obama.

“Burger King’s decision to abandon the United States means consumers should turn to Wendy’s Old Fashioned Hamburgers or White Castle sliders. Burger King has always said ‘Have it Your Way’; well my way is to support two Ohio companies that haven’t abandoned their country or customers  To help business grow in America, taxpayers have funded public infrastructure, workforce training, and incentives to encourage R&D and capital investment. Runaway corporations benefited from those policies but want U.S. companies to pay their share of the tab.”

“We need an immediate fix to forestall a flood of these dangerous inversions and a long term solution that lowers corporate tax rates while instituting a country-by-country global minimum tax,”

Senator Sherrod Brown

The truth (from Forbes Magazine’s Yevgeniy Feyman):

But why is inversion even necessary? This has to do with two elements of the American tax system.

For one, the U.S. has the highest statutory corporate tax rate in the OECD, a combined rate of about 39 percent when taking into account federal and state taxes. Effective tax rates are harder to come by, but a report from the Tax Foundation found that the U.S. had the highest marginal effective corporate tax rate among developed country groups. It can be profitable then for U.S. firms to move offshore to reduce tax liabilities.

But there is another factor at play here as well. Most developed economies use what’s known as a “territorial” tax system. Under such an approach, income is only taxed when it’s earned domestically. So a U.K.-headquartered company will only pay U.K. taxes on its British income. The United States, however, employs a hybrid between a territorial and worldwide system. U.S. citizens and corporations are required to pay U.S. taxes on all income – even if that income is earned outside of the country. (The tax system provides credits for foreign taxes paid, which reduce or eliminate double taxation of income.) But foreign income is only taxed upon repatriation – when it is brought back to American shores. At this point the incentives should be fairly clear – companies have every reason to avoid bringing their earnings back to the U.S. if they were earned in a lower corporate tax rate country. So it’s not hard to see why firms hold somewhere around $2 trillion abroad in unremitted earnings, according to the Center for Budget and Policy Priorities.

Simply put, a worldwide tax system puts American firms at a significant competitive disadvantage. In a paper I co-authored with my Manhattan Institute colleague, Diana Furchtgott-Roth, we explained how this plays out:

“If an American company operates in the United States and Switzerland, its domestic affiliate pays U.S. taxes at 35 percent. But its foreign affiliate pays U.S. taxes at 35 percent and Swiss taxes at 8.5 percent, putting it at a disadvantage vis-à-vis its foreign competitors. America allows companies to deduct the taxes paid to foreign governments from U.S. taxes owed to the Internal Revenue Service, but corporations always pay the full U.S. rate and are unable to take advantage of low-tax jurisdictions.”

To be fair, there is one other country in the world that taxes the foreign earnings of its citizens and corporations: Eritrea


  1. MATH WOMAN wrote:

    Lower the tax percent……………Seems simple enough to me.

    Tuesday, August 26, 2014 at 8:48 am | Permalink
  2. Anonymous wrote:

    Would rectal impaling be a bit too harsh a penalty for these tax cheats?

    Tuesday, August 26, 2014 at 9:11 am | Permalink
  3. admin wrote:

    When you say “tax cheats” I assume you are referring to the federal gov’t and not it’s victims.

    Tuesday, August 26, 2014 at 9:18 am | Permalink
  4. admin wrote:

    BTW, the Burger King inversion is being orchestrated by the supposedly tax-loving Warren Buffet, darling of the left.

    Tuesday, August 26, 2014 at 9:44 am | Permalink
  5. MATH WOMAN wrote:

    ANONYMOUS–They are not TAX CHEATS..They are saving $$ by following USA tax laws.

    Tuesday, August 26, 2014 at 10:25 am | Permalink
  6. Shrugged wrote:

    The corporation exists to make a profit for its stock holders. That is why they invested in it, aka purchased the stock. They are doing right by trying to increase net worth by paying less in taxes. More profit for its stock holders, actually means a healthier economy,and higher standard of living for all. They can now lower the price of their product, allowing more customers to afford them, selling more, growing the company, making the stock worth more. Smart move…..unless you believe the government does more good for you then corporations. I never bought a burger from the IRS.

    Tuesday, August 26, 2014 at 11:01 am | Permalink
  7. admin wrote:

    And they are still going to be paying 39% tax on every dollar earned in the United States

    Tuesday, August 26, 2014 at 11:13 am | Permalink
  8. Anonymous wrote:

    “They can now lower the price of their product”

    That’ll happen at the same time that donkeys fly.

    Tuesday, August 26, 2014 at 2:20 pm | Permalink
  9. admin wrote:

    Well, at least they can lower the prices in markets where they aren’t paying 39% extortion to the gov’t.

    Tuesday, August 26, 2014 at 2:57 pm | Permalink
  10. Shrugged wrote:

    Because of the federal reserve, inflation is going to get worse. If BK doesn’t raise their prices and inflation goes up, this is the same as lowering prices. Maybe they offer larger meals, or more items for your money or maybe they offer a wider $1 menu. Either way competition is forcing their prices down. Paying less in taxes gives them more options to compete with. I know this burns liberals ears, but in a free market the consumers always win. They get to pick and choose who gets their money, and the business with the best product/service always makes the profit. BK now has more options to provide better value and better value = higher profits. win win all around.

    Tuesday, August 26, 2014 at 4:44 pm | Permalink
  11. MATH WOMAN wrote:

    ANONYMOUS Wake up..It is a free country.If they want to lower or raise prices it is their decision. Sad state of affairs when people/ companies have to make decision because of tax laws. Flat tax best. Means no more blotted IRS. Fair treatment for all

    Tuesday, August 26, 2014 at 5:15 pm | Permalink

Post a Comment

Your email is never published nor shared.