Thursday, August 14, 2014

Tax Inversion: “Fiduciary Duty to Shareholders” vs. “Duty to Society”

Herb Brennan had a good letter published in the 8/11/14 New Jersey Star-Ledger rebutting Steven Pressman’s op-ed "We must invert tax inversion" (covered in my last two blog posts). In his letter, Inversion not a crime, I was particularly impressed with this statement:

Any corporation’s board of directors has a fiduciary duty to shareholders to use all legal means, including inversion, to increase after-tax profits.

While there is no such duty to society, most well-managed companies make substantial contributions to the community.

I not sure if Brennan understands the full implications of his statement, so I left these supporting comments:

I agree with Herb Brennan, especially his observation that “there is no such duty to society.”

“Society” is not an entity apart from the individual human beings that comprise it. When someone suggests that “society” takes precedence over private individual interests such as corporations minimizing taxes, they are saying that some individuals’ interests should be sacrificed for the benefit of other individuals who have an automatic moral entitlement to the lives and wealth of others. There are no such entitlements or duties.

Those who propose criminalizing tax inversion always justify their argument on some collectivist rationalization like “duty to society” or the “nation”, and then smear tax inverting companies as “unpatriotic” or “deserters.” But, collectivism is the hallmark of tribal slave systems like communism and fascism, where the group rather than the individual is the focus of moral concern. America is the opposite: It is the land of the free—free, sovereign individuals pursuing their own interests (their happiness) by their own efforts. Tax inversion is not just economically sensible, but moral and patriotic as well. While we should never condone tax evasion, I say shame on our unpatriotic politicians for the confiscatory, discriminatory tax policies that are chasing American businesses abroad. These politicians and their supporters are deserting American principles by demanding that these companies sacrifice their own interests as a duty to society.

Keep in mind what the whole issue concerns; profits earned outside of the U.S. The federal government taxes all of a U.S.-based multinational company’s income, wherever it is earned. For example, if a company pays a 20% tax to a foreign government on sales in that country, it still must pay an additional 15% to the American government because the U.S. tax rate is 35%, the highest in the world—plus additional state corporate income taxes where applicable, such as NJ’s 9% rate—if and when the foreign earnings are “repatriated” (reinvested) in the U.S. The earnings shielded from U.S. taxes when a company does a tax inversion is not money earned inside the U.S., which is fully taxable at the draconian U.S. rates regardless of the company’s official residency. It is only U.S. taxes on money earned outside the U.S. that companies escape when “inverting.”

Is it any wonder that many U.S.-based companies often re-establish residency abroad? Is it any wonder why statists must resort to collectivist arguments to justify their attack on tax-inverting companies?

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