The purpose of this disclosure is to explain how we make money without charging you for our content.
Our mission is to help people at any stage of life make smart financial decisions through research, reporting, reviews, recommendations, and tools.
Earning your trust is essential to our success, and we believe transparency is critical to creating that trust. To that end, you should know that many or all of the companies featured here are partners who advertise with us.
Our content is free because our partners pay us a referral fee if you click on links or call any of the phone numbers on our site. If you choose to interact with the content on our site, we will likely receive compensation. If you don't, we will not be compensated. Ultimately the choice is yours.
Opinions are our own and our editors and staff writers are instructed to maintain editorial integrity, but compensation along with in-depth research will determine where, how, and in what order they appear on the page.
To find out more about our editorial process and how we make money, click here.
This morning AbbVie, a big pharmaceutical company based near Chicago, announced it agreed to acquire Shire, another drug maker that is often described as being based in Ireland. It’s actually incorporated on the small island of Jersey, a British Crown dependency. As part of the deal, AbbVie will incorporate in Jersey too, and as a result get what looks to be a pretty sweet tax break. The company’s “effective” tax rate, reports USA Today citing regulatory filings, would fall to 13% in 2016, compared to 22% last year.
And the great part is, the people who run the new company will get to stay in Chicago. Jersey’s nice, but with a population of about 90,000, and the English Channel on all sides, it’s a little inconvenient. For everything besides taxes, that is.
Allan Sloan just wrote an epic cover story for Fortune (which like Money.com is owned by Time Inc.) about the growing trend of companies switching their on-paper country of residence to avoid paying U.S. corporate taxes. Recently, the Obama administration has called on Congress to find a way to crack down on the practice, known as “inversion.”
So here’s a question: How is it that corporations can so easily change their legal address to get a tax break, but the rest of us can’t? (Not that we want to. We’re patriotic, fair-share-paying Americans… but still.)
The simple answer is that corporations are legalistic fictions. You could theoretically move and switch passports, but you’d miss your family and your favorite baseball team, and your employer might wonder why you’re not at your desk. Besides, explains Eric Toder of the Tax Policy Center in Washington, D.C., to do a inversion you need to find an overseas company to merge with, such that 20% of the new combined entity is held abroad. Sort of hard to slice-and-dice yourself that way. A company can go “live” in Jersey and still visit its U.S. customers every day, still employ people here, and still let the CEO keep his season tickets to the opera in New York or Chicago or Boston.
Corporations may be people these days, as the Supreme Court would have it, but they are magically incorporeal ones.
Behind the ghost-like corporate entity that lives abroad, of course, there are lots of actual flesh-and-blood people who live right here in the U.S. of A. So one answer to the question “Why can’t I get this tax break?” is that you can: Just own shares of a company like AbbVie that’s a good candidate for inversion. When corporations pay lower taxes, most of the value of that accrues to the shareholders, says Toder. So if you own some stocks, you get a piece of the action when corporations invert. But it’s probably a very small piece because you have to own a lot of stock to be paying much in the way of corporate taxes.
In other words, inversion isn’t a tax break for “corporations.” It’s a tax break largely enjoyed by wealthy households. Here is how much the Tax Policy Center estimates people pay in corporate taxes, based on income.
You need to get to people earning over $100,000 per year before corporate taxes start taking more than a 1% bite, and the really noticeable burden of the corporate tax falls on people above the $500,000 level. They pay more because they’re the ones who own shares. (How do people earning less that $10,000 end up with some corporate tax? TPC attributes some of the cost of corporate taxes to workers getting lower pay than they would otherwise.)
When companies find tax loopholes, it effectively lowers tax revenues from higher earners, and means the government has to find other ways to raise money instead.
One way to stop companies from “inverting” is to lower U.S. corporate rates, which are high compared to the rest of the world, perhaps paying for it by closing tax preferences enjoyed by some but not all companies. (Many companies are good enough at working the tax code that the “effective” taxes that are actually paid by U.S. firms is more in line with international averages.) And that’s part of the long-term solution even the White House says it wants.
But Congress moves slowly, while corporations are light on their disembodied feet. Too bad the rest of us can’t move that fast.