'Corporate Inversion' Is Tax-Speak For U.S. Companies Turning Their Backs On Us

If the only things certain are death and taxes, pretty soon these companies will start cheating death.

Rajiv Narayan Curator: .
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Trace Dominguez: The main goal of the vast majority of corporations is to increase profits year over year. It's a large part of how their value is determined on Wall Street, and it's pretty much the whole kit and caboodle for why corporations do everything they do. One great way to increase profits is to sell more goods. Another great way is to cut down on costs, which could mean letting people go, or buying cheaper materials, or paying less in taxes.

Corporations love paying less in taxes. One way to do that is by switching their corporate domicile to a country with a lower tax rate. It's called corporate inversion, and it's easy to do. They just merge with a tiny company overseas, and let's say, Ireland, and they become an Irish company instead of an American one, and it makes sense. The U.S. has a corporate tax rate of 35%, whereas Ireland's rate is 12.5%. The company increases profits without having to lay anybody off, or sacrifice the quality of their products, or change pretty much anything else about their business.

Tyco International and Sara Lee have already done this. It's a win-win for everybody, except the American public. They lose the tax revenue. This has a lot of people up in arms and justifiably so. There are Congressmen calling corporate inversions unpatriotic. There are other people urging the U.S. to lower their tax rate to encourage companies to stay. Others want foreign nations to step up and block the mergers. There is even a bill in the House of Representatives designed to regulate when companies can and cannot change their corporate domicile.

Unfortunately, there is no silver bullet solution here, but there is one thing that you should keep in mind when thinking about the issue of corporate taxation. America is an enormous market with unbelievable buying power. If a company wants to maintain profits, they have to deal with us. They can't find this buying power elsewhere, and they can't afford to lose the U.S. market. The government doesn't have to lower tax rates or compromise our laws to make them stay. They just have to set up clear, consistent laws that benefit the citizenship, even if that means making corporations pay more. The struggle is setting up laws that work, which isn't easy in our current political climate, which is full of partisanship, lobbying, and commentators overreacting on both sides.

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There may be small errors in this transcript.

Video from Trace Dominguez and the good folks at TestTube.

Aug 28, 2014

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