THE BLOG
08/22/2014 01:24 pm ET Updated Oct 22, 2014

Inversion Thinking

This morning I read a headline saying "Treasury Gathers Anti-Inversion Plans" which gave me the impression that something seriously weighty was on their agenda. Perhaps something that would change the course of a country whose #1 issue according to many politicians is income inequality. Further reading revealed that it had to do with Treasury Department officials putting together a list of administrative options to prevent U.S. companies from reorganizing overseas to diminish or avoid their federal tax load. Hmm. That may not be on most people's list of problems that we face as a country.

The world I operate in is that of small to medium sized business enterprises and they aren't thought of in relationship to big international businesses and their issues. However this story has caught my attention for a couple of reasons. One is that many medium sized businesses here in the Southwest are likely examining opportunities in Latin America and Asian markets. Another is that many business regulations trickle down and are eventually applied to businesses of nearly all sizes. The third is that we've all seen businesses grow from very small to rather large in less than two decades. Just check out the beginnings of Facebook for example.

Ford Motor, Apple and the Walt Disney Company all began as small businesses. About 20 years ago we featured a story of the Act-1 Group on the Making It! TV show. The company began as a Los Angeles employment agency founded by Janice Bryant Howroyd, and has grown from one office to an international operation with over a thousand employees and with gross revenues of over a billion dollars per year! The garden for the growth of business in America is one filled with small plants! So all businesses may eventually meet up with the treasury department.

What really astounds me about this story is that from Congress to the White House there seems to be a lack of awareness and will regarding supporting all business communities. This inversion conflict is largely about the federal corporate tax rate in various countries. Among the industrialized nations, the United States has one of the highest corporate income tax rates. We, along with Japan and Germany have corporate income tax rates upwards of 35 to 38 percent depending on the type and amount of corporate income and any allowable credits or deductions.

Other countries that significantly tax corporate income and profits are the United Kingdom, Spain, France and Belgium - all of these Countries typically charge corporations and income tax rate of between 30 and 35 percent. On the other hand, countries like Ireland, Iceland, Hungary and Poland offer some of the lowest corporate income tax rates in the world. In fact, Ireland typically only charges corporations an income tax rate of about 12 to 15 percent. Obviously those countries are hungry to attract investments and job creating businesses from all over the world.

The true "Duh" moment while reading about the Commerce Department efforts came when I noted that they are only discussing and attempting to treat the symptoms of the taxes illness, not the cause. Main Street, Wall Street and even Pennsylvania Avenue all know that our tax code is so convoluted that we collectively spend hundreds of millions of dollars each year in efforts to correctly interpret it! As any doctor would tell us, treating only the symptom and ignoring the cause of an illness is not the best or sustainable practice. America loves competitive sports! In the worldwide competition for hosting thriving business enterprises it would be rather silly for us to admit competitive failure on corporate tax rates but ask for the game rules to be changed just for our convenience!

Those folks on Capitol Hill also divert their gaze from the truth about how money behaves in the modern world. It shares characteristics with water and wind because it also moves across countries and borders freely despite efforts to track and control those movements. Like water, liquid resources run in streams and rivers seeking to gather in ponds, lakes and even oceans of money. It has no nationality, race or gender.

Job creating businesses and entrepreneurial ventures need these pools of money to survive and thrive and it needs them to grow. The people who control these resources have no inclination to leave them dormant, or have them victimized by high tax rates. In the time it has taken you to read this far, I expect that hundreds of millions of dollars have been moved across borders with keystrokes and clicks on computers! Money is never really lost, it simply moves to other hands and pockets.

Whatever happens around Capitol Hill regarding the inversion phenomenon there are thousands of tax lawyers and accountants preparing to defend the freedom of money to move and businesses to form wherever they feel most comfortable in doing what they were formed to do. That is to supply goods and services, innovate and hire people who want the jobs to do those things. The ultimate "inversion" thinking is to believe that the world of commerce operates in any other way.