Q. I’m appalled that many U.S. companies are moving their official headquarters to countries with lower corporate tax rates than ours. What do you think about this?
A. This trend of reincorporation overseas (through merger with a foreign firm, a strategy called inversion) is perfectly legal under current tax law. The U.S. company benefits because it reduces its total global income taxes, enabling it to compete better with multinationals based in countries with much lower taxes. The top corporate tax rate on a U.S. company’s earnings anywhere in the world—not just in this country—is 35%, the world’s highest.
Some economists say that inversion could actually benefit the U.S. economy in the near term by enabling formerly American firms to send more of their overseas earnings back to the U.S. via tax-advantaged loans from foreign parents to U.S. subsidiaries. The big losers are the U.S. Treasury and state treasuries, which collect less in corporate tax revenues.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
But a strategy can be legal and rational without being ethical. Yes, as the great Judge Learned Hand wrote, no one has a moral or patriotic obligation to pay any more tax than the law requires. But Hand wasn’t talking about a person or company giving up U.S. citizenship and moving abroad to take advantage of lower taxes.
The ethical stance for a U.S. company would be to stay and fight: Continue the battle for comprehensive tax simplification that would lower the top C-corp rate from 35% to 15% or 20% and be applied only to domestic earnings. In exchange, large U.S. firms should be willing to give up all of their industry-specific tax breaks, which enable many of them to pay little or nothing in U.S. corporate taxes.
In the coming months, there will be a lot of talk about ways to slow corporate flight abroad by toughening the rules on foreign mergers or giving U.S. businesses a lower tax rate (say, 10% or 12%) on their overseas earnings (permanently or by way of a one-time tax holiday). But nothing is likely to be done until after the next presidential election.
Have a money-and-ethics question you’d like answered in this column? Write to editor in chief Knight Kiplinger at ethics@kiplinger.com.
-
IRS Gives Truckers a Tax Break in Response to the Colonial Pipeline ShutdownTax Breaks The tax penalty for using dyed diesel fuel for highway use is temporarily suspended.
-
How the GOP Tax Bill May Affect BusinessesBusiness Costs & Regulation Corporations would enjoy a lower flat tax rate while individual owners of pass-throughs would also see a lower rate, but with more complex terms.
-
How a Border Tax Would Affect You
Business Costs & Regulation A plan to limit imports could raise prices but also create more jobs.
-
How Should I Handle a Tax Windfall That I Don't Want?taxes If getting a huge windfall from impending tax cuts has you feeling guilty, here are some options.
-
Splitting Time Between States to Pay Less Tax
taxes If you try to play it both ways, expect your old state to try to keep taxing you.
-
Government Reparations for Oppressive ActsBusiness Costs & Regulation It is ethically dubious for descendants of oppressed peoples to seek reparations for wrongs done to their forebears, to be paid by contemporaries not responsible for long-ago sins.
-
Should Nonprofits Pay Property Taxes?
Tax Breaks Because most basic services provided by cities are funded by real estate taxes, it's reasonable that every property owner should pay something.
-
Obama vs. Romney on Taxes
Business Costs & Regulation Both candidates for the White House are spewing a lot of rhetoric on taxes. But what exactly do the buzzwords mean and how would their proposals affect you?
