Great Graphic: US Corporate Taxes, Inversions And Surplus Savings

Walgreen’s decision to go ahead an buy the 55% of Alliance-Boosts that it does not own, but not move their headquarters may mark the beginning of the end of the so-called inversion boom.  Inversion is simply when a US businesses buys a foreign company in a lower tax country and moves its headquarters there. 

As this Great Graphic, from Goldman Sachs and published on Business Insider by Joe Wesienthal, illustrates there has been an explosion in such deals this year.  The latest legislation was in 2004 that seemed to prevent or deter inter-company inversions, requiring actual transactions to accomplish this.  There is a push for new legislation to close this loophole and there is some idea that the legislation could be retroactive. 

While there is genuine concern, perhaps it is not too cynical to suggest that it also makes good copy for some candidates ahead of the November elections.  The counter argument is two-fold.  First, that addressing the perverse incentive structure should be part of the a larger tax reform effort.  Second, in some quarters the tax avoidance strategy is condoned as part of a criticism of the double taxation on corporate profits. 

One of the big arguments is that the 35% top US federal corporate tax rate is among the highest in the world.  It is little wonder then that corporations seek to minimize their tax burden, with inversions being simply one of the ways.  Yet, we think the debate is all too often based on tax scheduled rates and not actual rates.  What is the average rate that the large US multinational companies, who are doing these inversions to reduce their taxes, actually paying?

Large companies operating in other countries have to file special tax forms (M-3).  According to the Government Accounting Office the effective tax rate that is actually being paid is 22.7% in 2013.    If only profitable companies are included, the effective tax rate is 17%.