Call it yet another unintended consequence of pervasive government intervention.
On one hand, the US has the highest corporate tax rate in the world:
On the other, the US tax code is such that it not only allows but encourages firms, who have sufficient resources, to find global loopholes such as the "Double Irish With A Dutch Sandwich [5]."
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On the third hand, as a result of QE and ZIRP, stock prices have never been higher, which means it has never been a more opportune time for companies to use their record high stock price to acquire targets, which coupled with record cheap debt has led to an M&A bubble unlike any seen previously, with total M&A pace in 2014 set to surpass previous records and with deal consideration paid in stock, at 23%, the highest in, well, ever.
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With all these permissive conditions for US corporations to take advantage of the raging M&A bubble, is there any surprise that not a day passes without some US company announcing a "tax-inversion" deal meant to bypass US taxes entirely? Apparently, if you are the government, there is a lot of surprise.
So much so in fact that as WSJ reported last night [9], the Obama administration itself joined the growing cries over U.S. companies reincorporating overseas for tax purposes, urging lawmakers to pass legislation to limit the moves.
In a letter to leaders of the congressional tax-writing committees, Treasury Secretary Jacob Lew said lawmakers "should enact legislation immediately…to shut down this abuse of our tax system." The letter was reviewed by The Wall Street Journal on Tuesday night.
Just this week, two U.S.-based drug firms— AbbVie Inc. ABBV +0.11% and Mylan Inc. MYL +1.81% —moved ahead with plans for foreign mergers that would allow them to move overseas and reduce their tax rates. They would join a growing list of about 50 U.S. firms that have reincorporated overseas through inversion in the last 10 years, most of them since 2008.
The trend appears to have accelerated in recent months, as Congress has come up short in an effort to pass a comprehensive tax-code rewrite that would address corporate concerns and make the U.S. system more business-friendly.
In the meantime, while Congressmen have been calling for a halt to the kind of activity that corporations clearly believe is in their best interest, not all are convinced that the government should meddle yet again in what would clearly be yet another forced capital misallocation:
As more firms are moving to reincorporate in countries with tax advantages, lawmakers remain divided over Washington's response. So far, Republicans as well as some influential Democrats in Congress have favored limiting inversions through a comprehensive overhaul. Some of those lawmakers believe a quick fix could worsen U.S. companies' position.
"I don't want to be part of legislation that ramps up the competitive disadvantage of being a U.S.-based company or makes U.S.-based companies more attractive targets for foreign takeovers," Sen. Orrin Hatch of Utah, the top Republican on the Senate Finance Committee, said in a recent statement.
Finance Committee Chairman Ron Wyden (D., Ore.) also hasn't pushed for a quick fix. In a Wall Street Journal op-ed in May, he said that "this loophole must be plugged." But he indicated that he is still hopeful for a comprehensive tax rewrite that would limit inversions on a retroactive basis.
Which brings us to today's topic: this is how the US Treasury Secretary has decided to approach the issue: with a heartfelt appeal to US coroprations to do not what is right for their shareholders but to be, drumroll, be "economically patriotic."
In the Treasury letter, Mr. Lew criticized corporations that move overseas to avoid the relatively high U.S. corporate tax rate, while continuing to operate from U.S. soil and benefiting from U.S. legal protections, infrastructure and basic research.
"What we need as a nation is a new sense of economic patriotism, where we all rise or fall together," Mr. Lew wrote. "We should not be providing support for corporations that seek to shift their profits overseas to avoid paying their fair share of taxes."
To summarize: the US government first allows corporations (or "people" per SCOTUS) to not only inflate their stock to record highs (via a debt funded, stock buyback scramble facilitated by the Fed's ZIRP bubble), the same companies then engage in the only logical activity that makes sense for the bottom line, one which leaves no tax payments for the US whatsoever, and then the US hopes corporations will show some "economic patriotism." In other words, shame them into adding even more capital misallocation on top what is already the worst case of central-planning since the fall of the USSR. Add this to the "less cynicism, more hope" recent appeal by Obama, and at this rate US GDP will explode courtesy of soaring healthcare fees as everyone ends up in psychotherapy from the resulting cognitive bias of doing the one thing the US government allows, permits and encourages, the very same thing that the same government subsequently shames everyone into having done in the first place!
