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Lessons In Stopping Tax Inversion and Free-Riding Corporations

Lessons In Stopping Tax Inversion and Free-Riding Corporations
Wed, 7/30/2014 - by David Cay Johnston
This article originally appeared on Al Jazeera America

Walgreens, Pfizer, Medtronic and some other big American companies are working on a tax trick known as inversion. By acquiring or merging with a foreign company — the inversion — big companies can reduce or eliminate federal and state taxes on profits in the U.S.

The latest inversions have drawn a lot of criticism, even from sources usually considered cheerleaders for big business. “Positively Un-American,” declared Fortune magazine’s latest cover, while its story inside expressed revulsion at these moves.

Inversions, if not stopped, will spread. When Congress last enacted laws to thwart these moves in 2002, in part because of my reporting on an earlier round of inversions, I warned that the new laws included loopholes. As predicted, the inversion problem is back and could cause serious damage to both our economy and the rule of law.

Free-rider Problem

Inversions are just part of a larger problem — one of the most important issues in economics and public policy, in fact. It’s the very same problem addressed by the Affordable Care Act, mandatory auto insurance requirements and motorcycle helmet laws.

It's known as the free-rider problem. A free rider is someone who gets benefits that others pay for.

Health and auto insurance makes sure those responsible pay for their health care or damage to others in automobile accidents. Likewise, helmet laws reduce the exposure of taxpayers to pick up the costs from motorcycle crashes, including not just brain surgery and chronic care but financial support for widows and orphans.

From another perspective, many people who oppose food stamps, Medicaid and other government assistance argue that the recipients are seeking a free ride and should get a job.

The free-rider problem also affects unions, when those workers who do not pay dues to cover the costs of contract negotiation and enforcement benefit from union contracts.

Companies that invert get all the benefits of operating in the United States, including purchases financed by taxpayers, while not equally shouldering the burden of supporting the government whose services, legal system and educated workforce enable their profits.

Doing nothing to stop free-riding inversions means Congress will ultimately help those companies that abandon America for tax purposes at the expense of American companies that pay their taxes.

Walgreens took in $72 billion last year, a good portion of it filling prescriptions for people on Medicare, Medicaid and health insurance programs for government workers. The company wants to keep collecting that revenue from taxpayers, but it does not want to share the burden of supporting the state and federal governments that generate much of its business and profits.

What Walgreens’ directors and executives want is a subtle form of corporate welfare. They want to keep filling prescriptions paid for by government without supporting that government. If Walgreens and its ilk succeed with their tax trick, they will shift part of the burden of government off the company and its investors and onto not only its competitors but you, too.

How many days, hours or even minutes are you willing to work to provide Walgreens with this welfare? Why should you shoulder a burden that Walgreens, and the other companies working on these tax dodges, seek to escape? Why should you pay for their free ride?

Congressional Inaction

One sign of how distant official Washington has become from the rest of America is the lack of congressional debate about how tax tricks such as inversions tilt the commercial playing field in favor of the least ethical, least principled, least patriotic companies.

Corporations can make these moves because Congress and the White House under Presidents Barack Obama, George W. Bush and Bill Clinton have actually encouraged such shenanigans. In addition, tax lawyers figured out how to triangulate laws intended to block inversions into a pathway to low- or no-tax profits.

At its core, the free-rider problem is about shirking responsibility. But to some people shirkers are heroes. Nevada rancher Cliven Bundy offers a classic example.

Bundy refuses to pay grazing fees for cattle he runs on publicly owned lands. He also complains that his taxes pay for benefits going to people who do not share his white skin color.

When the federal Bureau of Land Management sought to enforce the law that requires payment for use of public lands, armed men and women showed up to defend Bundy. Any doubt about the potential for violence evaporated on June 8 when two of them murdered a pair of Las Vegas police officers in a failed attempt to ignite a revolution.

Bundy’s free riding not only cost you as a taxpayer, but it also put honest ranchers who paid their fees at a disadvantage. In the same way, Walgreens seeks to put other drugstore chains at a disadvantage if it inverts and cuts its corporate income taxes.

This is not an argument for, or against, the corporate income tax. I have long called for Congress to order an intense study of what it would take to eliminate the corporate income tax.

Rather, my argument is that Congress should impose rules that level the playing field.

Corporate Welfare

Companies have no right to welfare. Indeed, they do not even have an independent right to exist. Corporations and other artificial persons, collectively known in tax argot as “entities,” are creatures authorized by government. Government sets the terms of their existence.

The founders of this country were deeply suspicious of corporations. In the early days of our country there were few corporations; they were limited to a single purpose and typically allowed for only 20 years. It wasn’t until the early 19th century that government eased controls on creating corporations.

The states authorize corporations, and Congress has the power both to regulate commerce and to tax. It can stop these inversions in a variety of ways, but its efforts so far have been half-hearted and loophole-ridden.

By failing to stop the free-riding efforts of Walgreens, Pfizer and others, Congress is acting less in accord with the principles of the framers and more like the fans of free-riding Cliven Bundy. There is a word for this inaction, too: despicable.

David Cay Johnston is a Pulitzer Prize-winning investigative reporter, author of “Perfectly Legal,” “Free Lunch” and “The Fine Print,” and editor of the new anthology “Divided: The Perils of Our Growing Inequality.”

Originally published by Al Jazeera America

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