Policy Points: How Tax Inversions Hurt Smaller Businesses

By Zach Bernstein

Everyone’s “favorite” day of the year is less than 24 hours away – Tax Day. And the big question is: Have you filed your return yet? (If you haven’t, stop reading this and go take care of that. This will still be here when you’re done.)

By now, most people have (hopefully, anyway) sent in their returns. Some have probably gotten a pretty decent refund; others might be a little disappointed at their bill.

One thing you can always count on come April 15 is some griping about how much Americans pay in taxes. Nobody likes paying them, after all. But as Oliver Wendell Holmes once wrote, “Taxes are the price we pay for a civilized society.” Everything people rely on the government for, from public safety to infrastructure, health care and education, is paid for with your tax dollars.

It’s easy for this to get lost in the mix – especially when you find out you owe more than you thought you would – but paying taxes is one of the most important things Americans do for their country. Name a program that matters to you, and your tax dollars -- and those paid by businesses -- help make it possible. What makes it work is that everyone recognizes the burden is not only on them: Everyone has taxes to pay, and everyone has to chip in for the services we all rely on.

Unfortunately, this Tax Day, some companies will shoulder a smaller tax burden than others -- a few will have none at all. It makes absolutely zero sense. And it’s all legal.

Turning the system on its head

One way companies can get their bill down to zero is through the process of a tax inversion. Here, a U.S. company buys a foreign competitor, then reincorporates the new company in the foreign country, where tax burdens are lower. This sleight of hand can have very real consequences for businesses.

This is exactly what people realized last year, when Burger King purchased Canadian company Tim Horton’s and announced it would place the new company’s headquarters in Canada – a move that could reduce its tax burden in the U.S. by hundreds of millions of dollars, according to a report from Americans for Tax Fairness. (Some other major companies, like AbbVie and Walgreens, backed down from their own attempts under massive public pressure.)

While this is completely legal, it’s also not something everyone can take advantage of. (How likely is it that your neighborhood coffee shop will reincorporate in Luxembourg?) Ultimately, this loophole allows larger corporations to cut their tax burden, leaving smaller businesses and consumers to pick up the slack. At the same time, those companies still get to take advantage of American infrastructure, first responders and courts – they just don’t pay their fair share.

The Obama administration has taken some steps to stem the tide of inversions, but eliminating the practice altogether would require an act of Congress, likely as part of broader tax reform.

Taxes for thee, not for me

Everyone agrees the tax code is in need of reform – it’s far too complicated, with too many tiny provisions that advantage certain groups over others, and too many loopholes that allow companies to make themselves a foreign company on paper, but not in practice. The only question is: What kind of reform efforts can pass? And inversions are a perfect place to start.

Not only are voters strongly opposed to the practice of inversions, small businesses don’t think it’s fair for some companies to have access to tax loopholes like this.

Past polling puts small business owners on the same side as most Americans. For one thing, 85 percent oppose a territorial tax system, which would exempt overseas profits from being subject to U.S. taxes. Another 64 percent, including at least 62 percent of Democrats, Republicans and Independents, support ending the practice of deferral, where profits can be shifted overseas without paying taxes.

Proud to be an American Company, a joint campaign between the American Sustainable Business Council (ASBC) and Main Street Alliance, is an opportunity for American businesses to protest inversions by pledging to keep their operations headquartered in the U.S. Any interested business owner can sign to show that they value the services our tax dollars pay for, and that having some companies get out of that burden just moves it onto everyone else – or risks cutting funding for the investments we need to grow.

After all, any business owner worth their salt can tell you that you have to spend money to make money – investing in new equipment, locations, or people. For all the talk about how the government should be run like a business, people tend to forget that businesses invest to thrive, and that means spending money in the expectation it will pay off in the long run. Government can, and should, do the same, but that means people – and businesses – have to pay for it. And our tax system shouldn’t allow some to take unfair advantage at the expense of others.

Tax Day may be a day everyone dreads, but it’s not fair that some larger companies should get to enjoy a much lower burden than others. That’s not the way to make sure America continues to grow. That’s why inversions need to end, now.

Image credit: Flickr/MoneyBlogNewz

Zach Bernstein is Research Manager for the American Sustainable Business Council.

Policy Points is produced by the American Sustainable Business Council. The editor is Richard Eidlin, Vice President – Public Policy and Business Engagement.