Inversion: What’s all the Hub-Bub About?

In recent weeks, corporations have been sharply criticized for domesticating their home country from the United States to a foreign country with (sometimes much) lower tax rates. Commonly referred to as Inversion, this legal action has the potential to save a company hundreds of millions in taxes over a period of years. Critics complain that companies who make a simple paper transaction to avoid paying taxes are hollowing out the corporate income tax base that the government relies on to fund its’ programs. Inversion is thought to be unpatriotic and unfair to the country as a whole. Critics believe that if a company does 90% of its’ business in the United States, it should pay 90% of its’ income taxes here in the US.

What is Inversion?

Inversion is the process by which a United States-based company buys another company in a foreign country, such as Canada, and then using that acquisition to move its’ overall headquarters to the foreign country. Normally, during most acquisitions, the buying company’s stock loses some value while the acquired company’s stock goes up. But in an inversion, both company’s stocks increase in value since the buying company will experience greater profits as a result of domiciling in a lower tax environment. Companies who have inverted have noted that they wouldn’t do it only for the tax savings – there is always another reason for the acquisition, such as product line expansion, entrance into new markets, overhead cost savings and so forth.

Inversion has a number of benefits:

  • Essentially it is a tax arbitrage trade
  • Lower cost of doing business
  • Increased profits
  • Greater market capitalization
  • Increased ability to invest and grow
  • Creates new jobs and new opportunities

Inversion is also fueled by the natural tendency of acquisition as a growth strategy. And as competitors invert and pair up, there is strong pressure on those who have not inverted to do the same. Inversion becomes a competitive advantage. Given the hub-bub on Capitol Hill and recent remarks by the President, it seems clear to many that if you’re going to invert, now is the time to do so. This illustrates how remarks by a President can fuel and even justify the precise action he is speaking against: the more indications he gives that current tax laws should be changed to remove the benefits of inversion, the more likely it is that companies will invert before the laws are changed.

One Christian’s ViewPoint

Small business owners don’t really have inversion on the top of their agenda these days. Inversion is for the big guys. But if you’re interested, here is one Christian Business Owner’s take on Inversion.

First, referencing the Christian Business Reference Architecture, we recall that one of the purposes of business is to give back to the community in which the business resides. If a company’s profits increase, this gives them greater opportunity to give back to their communities. In this model, the community is not necessarily the legal address of the organization’s headquarters. It really should be thought of as the location(s) where their employees live and work.

Secondly, there is, in our opinion, an inverted relationship between the amount of money spent by government on social programs and safety nets and the average American’s sense of social responsibility to his fellow man. We have no research to back this up, it is just a hunch on our part (though some articles argue in this direction, here and here). When giving back to the community is reframed in terms of taxes paid to a government, then duty to fellow man is replaced with fiscal obligations to pay as little tax as possible. Giving is reduced to a line-item expense. Taxes are not charity and forced charity through the taxation system is not charity at all. We see a need for less government spending on social programs while individuals and companies need to reframe their purpose for existence to include increased giving and philanthropy.

The government has not been bashful about demanding they take on the role of social safety net support and equalizing unfairness in our society. Why then would anyone be surprised that companies have a low sense of supporting their communities through giving? Why would we be surprised that companies support social causes rather than the poor in general? The latter is taken care of by the government through taxes, so companies that do give tend to do so to social causes that often represent political agendas.

Thirdly, many believe that too much profits (however that is defined) is inherently evil and oppressive. We fully disagree. Profits are good. Profits are a social good. Profits are a spiritual good. And profits are what is used to fuel charity and philanthropy. In our opinion, it’s not that profits are too high, it is that giving is too low. But since the government takes care of the poor, profits are spend in other ways – sometimes lavishing oneself or others with extravagance. But from this viewpoint of too-much-profit-is-evil springs the notion that companies have a moral responsibility to pay more taxes to support the poor. But their argument misses a core clash point: why would an organization want to pay taxes in order to support the poor when they can do it directly and much more efficiently?

Government management of social programs is widely known to be highly inefficient. Most programs in the Federal government have overhead costs that approach 50%, meaning that for every dollar in taxes collected for a program, 50 cents or less finds its’ way to the recipients of that program. Private charities are more efficient in administering philanthropy and giving. Taxing corporations to pay for social programs might make good politics in an election year, but it is the most inefficient way to distribute charitable dollars.

In the end, Inversion is the result of an onerous tax system coupled with a government that is too big to succeed. We have lost sight of the notion that God is the answer to our problems and that while government has a good and legitimate role, it too has limits on the good it can perform in society. Individuals and businesses are to be the main source of giving in God’s economy – through the church first and then directly through both formal and informal transactions. The Hebrew’s notion that there should be no poor among you is both noble and achievable, if government assumes its’ proper role and the population views it’s wealth as being owned by God, not by themselves. Inversion is a symptom, not the problem. Let’s focus on transforming the hearts of men so that both government and business understand their proper role in society as they live and walk before God.