Ever since the beginning of kingdoms and empires, taxes have been a controversial subject. Today they continue to be a divisive one, especially in the debate concerning income tax vs. wealth tax.
Recently the subject of corporate tax has come to the fore. Should this tax rate continue to be 35 percent? And what about tax inversion? This last question takes us directly into the heart of our economic system and our broken corporate tax code.
Inversion is basically a tax-dodging scheme. An American corporation buys a subsidiary overseas and then reincorporates in that country (with a lower tax rate). Although it may still do most of its business in the U.S., it gets to pay the lower overseas tax rate. In 2004 Congress encouraged this inversion process by decreeing that American companies could relocate overseas if foreign shareholders owned 20 percent of their stock. Caribbean countries such as Bermuda and the Cayman Islands became popular spots for reincorporation.
This practice, however, has robbed the U.S. of billions of dollars in tax revenue that was greatly needed for education, health care, infrastructure repair, and other important uses in the U.S. Today the federal government gets only a tenth of its revenue from corporate profits taxation. (In the early 1950s it was a third, and in the 1960s, a quarter of this revenue.)
Caterpillar, for instance, saved $2.4 billion between 2000 and 2012 by operating its global parts business through a Swiss subsidiary. It is estimated that American corporations, freed from their traditional U.S. tax system, have been able to accrue some $1.6 trillion in profits that can be used for increasing their CEO salaries and shareholder benefits. A recent analysis by Citizens for Tax Justice and the Center for Responsible Politics lists 25 Fortune 500 companies that spent more on lobbying than on federal taxes between 2008 and 2012.
A remarkable development has just occurred in this area of corporate taxation. Walgreens, our nation's largest pharmacy retailer with 8,200 stores and locations in all 50 states (including one in Crossville) has been considering whether to renounce its U.S. corporate status and claim (on paper) to be a Swiss company. One outcome would be that Walgreens would avoid paying $4 billion in U.S. taxes in the next five years.
On August 6, however, Walgreens announced that it had decided not to go through with its acquisition of Switzerland-based Alliance Boots that would have shifted the company headquarters overseas to avoid paying U.S. taxes. It will still go through with buying all of Alliance Boots' shares, but will still be based in the Chicago area.
Journalist Bryce Covert gave the following reasons for this unexpected change in plans: "The company said that it was 'mindful of the ongoing public reaction to a potential inversion and Walgreens unique role as an iconic American consumer retail company with a major portion of its revenues derived from government-funded reimbursement programs.' CEO Greg Wasson also said that after an 'extensive and rigorous analysis,' the company 'could not arrive at a structure that provided the company and our board with the requisite level of confidence that a transaction of this significance would need to withstand extensive IRS review and scrutiny,' saying that 'it was not in the best long-term interest of our shareholders.'"
A recent poll by Americans for Tax Fairness and Citizens for Tax Justice indicates that a majority of Americans across both parties disapprove of the practice of corporations using inversion to dodge taxes. Perhaps changes will continue coming deep in the heart of taxes.
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