Are Corporate Inversions the Latest Sign of Failing Tax Policies?

Are Corporate Inversions the Latest Sign of Failing Tax Policies?

U.S. companies are in effect being forced to abandon their American citizenship in an effort to defend their competitiveness in international markets. Corporate inversions are the latest in the continuing struggle for American companies to stay financially viable in the increasingly global economy. While companies have been charged with being unpatriotic for this most recent move, the root of the problem lies within the U.S. tax code itself.

If corporate inversions are a mystery to you, you’re not alone. It can be as confusing as hedge funds to the average person who’s not heard of it. But the concept is simple. Firstly, a U.S. company merges with a foreign company. For instance, Burger King is planning to merge with the Canadian doughnut chain Tim Hortons. Once the merger is completed, the U.S. company declares itself a native company in the foreign nation. This provides them with a tax shelter against paying a good amount of taxes here in the U.S.

Now, you can obviously see why many consider companies doing this to be tantamount to a betrayal of their country. But you have to take into consideration the price of doing business as an American company. According to USA Today, the U.S. has the highest corporate tax rate in the industrialized world at a staggering 35%.

That’s not to say U.S. corporations don’t have a big advantage operating here in America. Corporations get the strength of the American dollar, the stability of our economy, the vast availability of services our infrastructure offers and access to our skilled labor pool. So that’s the argument for why corporate inversion is some kind of evil being perpetrated by corporate America.

But that really isn’t the whole story.

I’m going to ask you to think of a corporation as a person for a moment. Yes, I know that might infuriate some people, but this has nothing to do with political fundraising, it’s only to help illustrate the problem with the U.S. tax rate.

Say you’re an individual that makes lamps. You make about a dollar profit per lamp. After paying 35 cents in taxes (your 35% rate), that 65 cents you take home per lamp is just enough to pay your bills and keep a roof over your head. You’re as competitive as you can be at your current lamp price – if you sell lamps for any less, you’re out of business, bankrupt, game over…

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