America and business: peanut butter and jelly
America has an illustrious, grand entrepreneurial spirit. Many generations of families started from humble beginnings to succeed. The United States was an incubator for business acumen. After the industrial revolution, we became the world leader. Amidst a growing infrastructure, companies and their entrepreneurs found success in the States.
Henry Ford was one of those genius businessman. He was responsible for designing the first moving assembly line, which greatly increased manufacturing and production time. Additionally, Ford instituted a $5-per-day income for his workers. The reasoning: He wanted his employees to be able to purchase the vehicles, decrease employee turnover, and increase the company’s bottom line, in turn.
Everybody won. He sold more cars, his employees saved and purchased more, and there was a pride in creation. This was an American company — fulfilling the American dream.
During World War II, production was reinstituted for a desperate military. An enemy stood to destroy entire races, religions, and peoples. The Allies came together to extinguish this enemy, but the pains were felt at home. Families rationed necessary foods for soldiers. People bought government bonds and women went to work. The U.S. needed its people, and they stepped up to defeat the Axis of evil. We were patriots.
Businesses were essential to a powerful rise in the middle class during the 50s and 60s. Taxation among executives and companies was high. This period is famous for 90 percent marginal tax rates in the highest income brackets. Despite the most social mobility and income equality ever, the system began to crumble.
Special interest groups, political power, and declines in average America
It all starts with special interest groups. Free market principles exalted an invisible hand that led to massive outsourcing. Much of the manufacturing industry disappeared as a consequence. We’ve lost nearly all customer service and basic technological leadership to Asian countries. It’s a rarity to find anything “Made in America.” Instead of stopping and correcting this course, America and its people have held steady — buying, consuming, and destroying as much as they can. Patriotism and pride in country be damned.
These economic principles, which largely took America by storm in the 80s, were lauded by the Reagan administration. Swift cuts to taxes were made for everyone, but they mostly benefited the richest of our population. Almost immediately, an increase in income inequality, social stratification, imprisonment, and use of tax havens increased.
Each time we’ve lost another layer of pride and power in America, corporate executives have argued that they are creating jobs, cutting inefficiencies, and raising shareholder value. We can’t fall for these tired logical fallacies. Jobs have been created elsewhere and people are paid less than ever. Wages are stagnating for most, as executives get rich. We’re stuck in the twilight zone of corporate disrespect, political power, lobbying groups, and massive outsourcing of everything. It’s dystopian in the powerlessness of average people. The last thing to go: corporate headquarters and revenue.
How to avoid taxation and book record profits
In the past, tax havens were simply “offshore,” Caribbean or Mediterranean islands. Rich doctors, businessmen, and criminals used these countries to store untraced funds. The money would be protected from extradition, taxation, and/or criminal prosecution. But as businesses grew with the new, global economy, tax practices changed in step.
Yet again, the start was in the 80s. Apple — yes, the iPhone and iPad maker — pioneered a strategy to avoid federal taxes “legally.” This gets complicated quickly. Essentially, Apple setup subsidiary corporations in other countries and booked intellectual property sales from those international locations. Income then sidestepped the higher-tax policies in America for lower-tax zones. This magical strategy is called, the “double Irish arrangement.”
Named for its home location, Apple set up a location in Ireland, where corporate taxes are 0%. Then, these new funds avoided billions of dollars in taxation and could still be reported as revenue and profit. This opened the floodgates for copycat companies to do the same (e.g., Facebook, General Electric, and Google).
By harnessing the power of this tax-dodging trick, some companies whittled down their tax liability to nothing. We’re talking about multibillion dollar profits — untaxed. More importantly, all of those loopholes lead to severe federal tax revenue shortages, despite record-breaking profits. Our people, infrastructure, and future are in the balance.
The regular American, a patriot
Warren Buffett is famous for saying that if you’re born as an American, you’ve already lucked out. This is still the land of opportunity. And frankly, I couldn’t agree more. The U.S. is still an incredible place. I have a lot of pride and feel humble for my opportunities. I couldn’t have done it without this place.
Over the last couple years, I’ve built a solid side income as a writer and entered a doctoral program. This is the life I want. I’ve carved out my niche. I feel fortunate for the privilege to be given room to explore and succeed. The financial successes also increased my tax burden.
My company, Frugaling, is based in America. I don’t have an LLC or formal corporation, but it’s my business. At the end of every year, I have to account for this revenue through a Schedule C form and self-employment taxes. Last week, I explained that I had begun to prepare for this accounting challenge, as self-employment taxes are about 30% of revenue. This is because medicare, medicaid, and social security aren’t withheld. But I’m happy to contribute and do my part.
I owe it to the place where I found success. I want others to have the opportunity to excel, as well. America is empty without a cyclical, contributing populace. What goes around comes around. I pay my taxes. Why don’t companies?
Warning! We’ve crossed the tipping point
Today, the largest corporation yet, Medtronic, filed to leave America. We’re talking about a pure formality that will make more tax revenue leave America. The medical device manufacturer just purchased another company — Covidien — that is incorporated in Ireland. Medtronic will switch to that legal address. BusinessWeek reported that this is becoming increasingly popular:
Minneapolis-based Medtronic joins some 44 American companies that have reincorporated abroad or struck plans to do so, including 14 in a recent wave of moves that began in 2012. Earlier this year, Pfizer Inc., the largest U.S. drugmaker, briefly proposed taking a U.K. address, a move that might have cut its tax bills by as much as $1 billion a year…Without a change in law, a congressional panel estimated last month, future deals will cost the U.S. $19.5 billion in tax revenue over the next 10 years.
For shareholders, this is wonderful news. Those tax savings can be directed to share buybacks, increased dividends, greater research pipelines, and better compensation for employees. But meanwhile, Americans will suffer. See, we are stakeholders in a way. We have a stake in what a company does or doesn’t do. Now that companies are fleeing the states in search for individual gain, at the cost of the whole, we must realize that the last pillar of corporate responsibility and patriotism is about to fall. As this disintegrates, and taxation revenue crumbles, so will our country.
American companies move business offshore. US citizens keep money offshore. Hold on a minute while I adjust my flag pin – it’s ruining my silk blouse!
Robert Main says
Unfortunately what is happening is, in part, a side effect of the globalization and 2006-2008 financial crisis.
But I firmly believe that US corporates should be socially responsible an, as you said, patriotic. Often we witness CFOs and CEOs finding excuses (i.e. low profit) to justify unethical and unpatriotic behaviors. But doing like that they forget that they are putting them self on the level of some undeveloped country that to catch up with the rest of the world is destroying our planet, attaching our culture and put in jeopardy the future of our children. Is this what we really want for us and the rest of the world?
It certainly is an economic conundrum. Corporations doing the right thing in the short term might negatively impact your long term or vice versa. At the end of the day, these people running these businesses put their sox on the same way as you and I, one foot at a time. They are also similarly self-motivated. Do we really have confidence in the greater good, given this perspective?
Great post, Sam.
To add, what bothers me a little bit is a lot of people are making their fortunes in America and spending those fortunes overseas. I’m referring to people who retire in places such as Thailand or Panama. The US allowed them to earn copious amounts of cash but the US sees little of it enter back into the economy during their golden years.
Jen @Sprout Wealth says
What a great start for a great country! But in the end, what might happen seems dreadful. And for what?
The Wallet Doctor says
This is a complicated issue to be sure. I think the discussion really heads back to human nature. It seems that, for at least some, its rather built in to seek more and better success. This can lead to avoiding things like taxes in the name of profit. While this is unfortunate, its hard to change something that is so basic to at least a large number of people.
Dana Wilson says
What can they really do? Except to save their company. Save thyself before others. What has the world come to?