What do corporate tax inversions, $2.1 trillion dollars in overseas banks, and 9,000 companies or projects diverted from California have in common? They are all things companies are doing to avoid paying ridiculous or unnecessary taxes.
You may have read about Inversions in the news lately, or heard politicians talking about them. Investopedia defines a corporate inversion as “re-incorporating a company overseas in order to reduce the tax burden on income earned abroad.” This is typically done when a company has significant profit that is made overseas. Under the current US tax code, that profit will be taxed in the country in which it is made, and then taxed again when it is brought back to the US. And not just taxed, but taxed at a federal rate of 35%, and when the average state tax rate is added to that is becomes 39.1%. This is one of the highest corporate tax rates in the world. For example, Ireland’s corporate tax rate is 12.5%. That means for every dollar you profit in Ireland as a US corporation, you lose 12.5 cents to Ireland, then another 34.21 cents to the US Government, leaving you with just 53.29 cents.
Both Democrats and Republicans agree that corporate inversions are bad for America. However, they disagree greatly about what should be done to curb them. For example, Donald Trump thinks that we should overhaul the US Tax Code, something that we at Van Wie Financial have been saying for years. This would include eliminating the tax on profits earned overseas, and lowering the corporate tax rate to 15%. Other Republicans, like Ted Cruz, have proposed eliminating the corporate tax altogether. This is a great idea that I will go into in another blog. Hillary Clinton, on the other hand, blames the corporations, and accuses them of exploiting the “loopholes” in the US Tax Code. This is a really ironic perspective, as she is part of the government that is responsible for setting up the current tax code, and the “loophole” that she is referring to is simply part of that tax code. They are not taking advantage of anything, but rather complying with it.
So why is this related to the $2.1 trillion dollars currently held overseas by US corporations? Another part of the US Tax Code says that profits made overseas are not taxable by the US government until they are brought back here. If the money is made in Ireland, taxed by Ireland, and then stays in Ireland, it is not yet taxable by the US Government. So what incentive do these companies have to bring profits back to the US?
As you can probably imagine, $2.1 trillion is a number that makes many politicians ears perk up. Under the current tax code, that is $821 billion dollars in tax revenue that the US Government would be paid if these companies brought that money back to the US.
This type of anti-business tax code is the same reason that 9,000 companies or projects have ditched the state of California and moved to more business friendly environments, with Texas being one of the states that have benefited the most. Florida has also benefited, but to a lesser degree. People love California for its natural beauty, weather, beaches, Hollywood, and a host of other great reasons to live there. However, their state income tax with a highest marginal rate of 13.3%, sales tax of 7.5%, property tax of 1% or more on sky-high real estate values, and corporate tax rate of 8.84% make it almost impossible to do business in the state. Is it any wonder that companies and individuals with large incomes are moving to places that allow them to keep more of the money that they earn? Would you start a business in California? I know I wouldn’t.