Mergers Designed to Avoid U.S. Taxes: Is This Ethical?

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?

How to Profit From Corporate Mergers

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.

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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.

Knight came to Kiplinger in 1983, after 13 years in daily newspaper journalism, the last six as Washington bureau chief of the Ottaway Newspapers division of Dow Jones. A frequent speaker before business audiences, he has appeared on NPR, CNN, Fox and CNBC, among other networks. Knight contributes to the weekly Kiplinger Letter.