“Goodbye Mr. Jones”: The End of the Dow as an American Index

Is the concept of national corporations and financial indices outdated? Perhaps! Charles Hensley's perspective about tax inversion challenges us to think about 'national' status, incentives, and the constraints of 20th C thinking. This is taken from The Intercollegiate Finance Journal (IFJ) is an undergraduate student-run journal about how current finance, economics, business and technology issues affect students' lives.  Please consider supporting the IFJ to ensure that our youth's voices are heard and heeded. 
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Pfizer, America’s largest pharmaceutical company and a member of the Dow Jones Index, made a bid to acquire its British competitor AstraZeneca this past May. The acquisition would have allowed Pfizer to perform a tax inversion by moving its headquarters from the United States, which has the highest corporate tax rate of any rich nation, to Great Britain, which has one of the lowest.

American and British lawmakers alike were up in arms over the deal, which AstraZeneca eventually rejected. American lawmakers denounced the potential loss of corporate tax revenue and of Pfizer as an American company – even though none of its assets held in America would invert. It would simply have been unpatriotic. The Dow has long been considered the showcase of American corporate power and the loss of one of its 30 members to the British would have been a huge blow to America’s corporate hegemony. The British similarly decried the potential loss of one of their most prestigious corporations to foreigners.

The corporations themselves do not take patriotic pride into consideration, however, and see tax inversion simply as a sound business plan.
Corporate Mythology

Decrying tax inversion as unpatriotic misses the point. The idea of an “American” corporation is increasingly becoming a myth.

Pfizer’s CEO, for example, is British. According to The Economist, Pfizer’s domestic density index, which measures a company’s domestic business compared to its international side, is 49 percent. AstraZeneca’s CEO is French and it has a domestic density rating of only 12 percent. Even Coca-Cola has less than half of its sales and staff in the United States, though, like Pfizer, a majority of its shareholders are American. America’s corporations are not really as “American” as we might like to think.

This is the case for much of the Dow and corporate America in general. Medtronic, one of the world’s largest medical device makers, is currently in the process of inverting from Minnesota to Ireland; Burger King plans to send the King himself to Canada; and Chiquita – the only Banana company anyone has heard of – is moving to Ireland. This is all bad news for American corporate tax lawyers because, with their official headquarters overseas, companies will no longer be subject to American’s convoluted corporate tax code.

Officially, the US corporate tax rate is 35 percent, but it is so fraught with loopholes and tax breaks that companies rarely foot the whole bill. Moreover, corporations headquartered in the United States are supposed to pay taxes on revenue generated all over the world but are only required to pay taxes on the money that they actually bring home. Consequently, companies have stopped bringing foreign revenue home: U.S. corporations have around $2 trillion on foreign balance sheets.
 

The Trials of Tax Reform

Tax inversion is not unpatriotic, but it is nonetheless a problem. The United States loses more than half of total corporate tax income to loopholes. Inversions will only compound this problem and siphon off more tax income. Congress is moving to change the laws governing inversion, which currently allows inversions as long as stockholders who were not holders of the U.S. company hold at least 20 percent of the merged company. The Stop Corporate Inversions Act of 2014 introduced by Senator Carl Levin (D-MI) aims to raise the level of ownership to 50 percent among other stipulations. Congressional Democrats claim that their legislation will keep $19.5 billion per year in the United States.

The Treasury Department has also stepped up regulation in the face of the spate of recent inversions. New regulations proposed by Treasury Secretary Jack Lew would cut down on “spinversions,” which are a form of inversion where a company splits off one of its parts and turns it into a separate corporate entity backed by the original company and governed by the original company’s shareholders. Secretary Lew also aims to regulate “hopscotch,” which allows companies to access their foreign cash reserves without paying taxes. However, new regulations will not affect the Burger King deal or many others in their final stages of inversion.

Tax inversions are a symptom of a larger problem: America’s bloated corporate tax code. Substantive tax reform is one of the most politically poisonous issues to grapple with in Washington D.C. and corporate tax debates arouse great rancor from politicians and interest groups. In light of these hurdles, these new measures are stopgap at best. Tax inversions themselves do not need to be legislated away, if that is even possible in the face of an army of corporate tax lawyers. Instead, the corporate tax code needs to be streamlined and the tax rate lowered to be on par with that of other developed nations.

Economics is the study of incentives, so a good economist knows that to change the corporate system, you have to change corporate incentives.

Incremental regulation has failed in the past and will continue to fail as long as other nations have comparatively advantageous tax codes in the eyes of corporations. The idea of corporate patriotism is not enough to keep corporations in the United States. Politicians and regulators must accept this fact and work to alter the incentives so that corporate taxes for work done in the United States go to the United States.

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Charles Hensley is a junior at Brown University concentrating in Philosophy and Economics.  IFJ is a rapidly expanding student-run publication that seeks to educate the undergraduate community about topics in finance, economics, business and technology. The IFJ blends sophistication and accessibility to provide relevant, informative and entertaining financial content. We pride ourselves on having “an article for everyone”. Comprised of students from Brown, University of Chicago, Columbia, NYU and MIT and is expanding to other schools. Please support this organization to let our youth's voices be heard!  The IFJ can be found on LinkedIn, Facebook, and Twitter.

15 Hours: A Common Sense Action Blueprint for Congress

What if our youth started to take government back? Well, it's happening. SamGilman and Andrew Kaplan, college juniors started Common Sense Action in 2012 with one chapter.  Now they have over 20 chapters in 15 states with AGE, The Agenda for Generational Equity to get their voice impacting policy.  Read on, be proud of our next generation and get on board! See why I love learning from these guys? 
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15 Hours: A Common Sense Action Blueprint for Congress

Don’t you wish that we sometimes forced Republicans and Democrats in Congress to sit in a room until they agreed on how to move the country forward? Unless you’re one of the 9% of people who view Congress favorably, you probably do. 

A generation ago, politicians saw eye to eye – literally.  Our Democratic and Republican members of Congress lived side-by-side in the nation’s capital, linking their professional lives with their personal ones.  They ate and drank together; their families were friendly; they stood on the sidelines of their children’s baseball games together.  So when it came time to negotiate and make a deal, they trusted each other, knowing they would have to see each other the next day. Today, most members live in their home states and travel to Washington for three days for a whirlwind of legislating, interest-group meetings, and fundraisers – quickly returning to their home states on Thursdays whether business is finished or not.

At one event last summer, we spent half-an-hour listening to a Representative professing to make an enormous effort to get to know members of the opposite party. Seconds after the Representative finished talking, the former chair of the member’s committee walked in.  This former chair was from the opposite party.  They introduced themselves to each other for the first time. They had never met.  This kind of disconnect is unacceptable, especially when the political gridlock we face can only be broken by the power of relationships. Without time to get to know each other, how can we expect the Senator from Michigan to trust her counterpart from Georgia?

But what if Congress followed the old model today?  What if Congress used a Common Sense Action blueprint?

On Sunday, January 6, delegates from Common Sense Action (@CSAction) chapters across the nation gathered at the Bipartisan Policy Center in Washington to finalize the Agenda for Generational Equity, CSA’s foundational policy agenda.  The setting?  A single conference room.  The goal? Don’t leave until it’s finished.

At 9:00am, we came to that table, all 40 of us, strong in our own beliefs and ready to fight for them – principled partisans in short.  Before beginning debate, we set community norms that allowed us to create a safe space. In particular, our discussion was guided by three principles:

• “Trust intent, name impact.”
• “Safe space, honest space.”
• “Make space take space.”

In other words, we trusted that people have good intentions, but were not afraid to call out hurtful or wrong speech; we created an honest space; and we established a structure for everyone to participate in discussion.  How else could leaders from rural Mississippi, inner-city Baltimore, and suburban Iowa all feel comfortable sharing their experiences?

At first, our debates were cautious.  We did not know each other very well and we were not familiar with each other’s policy beliefs and political ideologies.  It took awhile to get comfortable. We spent two hours discussing the first of 12 potential policy areas – Social Security reform proposals. After finally settling on a policy position for Social Security, we were exhausted.  The discourse, which had started cautious, had turned contentious. Having accomplished little by 11:00am, it was time for a short break.

When we returned to the table, the mood shifted.  During the break, we had hung out with each other, got coffee, and ate breakfast together, sharing a little bit of ourselves with our neighbors.  As the day went on, the conversation grew more and more productive.  At times, we disagreed passionately on ideological grounds. And we honor that disagreement as a necessary part of a responsibly partisan process. However, we were able to build trust through discussion. We tried to live the example that we wished Congress followed: we had made a commitment to ourselves, to each other, and to our chapters to craft an agenda by working together across difference. Of course, the norms helped, as our chapter leaders would consistently bring the group back to the norms before making a critical point or if debate began to get disrespectful.

Ultimately what emerged from this process was an Agenda for Generational Equity that plays between the 40 yard-lines. No Democrats or Republicans got everything they wanted in the Agenda, but everyone proudly endorsed the Agenda as a whole.

15 hours, 3 meals, 3 pillars, and 53 policies later, we had finished.  We finalized the Agenda for Generational Equity as the midnight bell tolled and Monday arrived.

The Agenda for Generational Equity will only have as much life as Common Sense Action members breathe into it.  CSA is building a movement across the country to organize around it. We invite you to endorse AGE to begin building political pressure on Congress to solve our nation’s problems.

Hey Congress – take a page out of Common Sense Action’s book. We have the humility to know when we are not the policy experts, to know that negotiating policy on a federal level requires time, patience, and courage.  But spend some time together.  Get to know each other.  Maybe stay in a room for 15 hours.  It isn’t too much to ask.  By starting with the basics, Congress can get back to good governance, do away with the political football, and start solving the nation’s problems.

Sam Gilman - Co-Founder and Chief Executive Officer (CEO) Sam is a junior at Brown University, pursuing a Bachelors degree in public policy. He is a C.V. Starr Social Innovation Fellow for his work on Common Sense Action. Sam is currently student body Vice President at Brown and previously served as Treasurer and Communications Director. In the summer of 2012, he interned at the Bipartisan Policy Center where he did research for a book on the causes and implications of gridlock in American politics. When he's not working at CSA, Sam is an avid runner, New York Yankees fan, and Civil War buff.  Sam can be reached at Sam@commonsenseaction.org.  

Andrew Kaplan - Co-Founder and Chief Action Officer (CAO) Andrew is a junior at Brown University where he is pursuing a Bachelors Degree in Political Science and Literary Arts. He was selected as a 2013 C.V. Starr Social Innovation Fellow for Common Sense Action. In the past, Andrew worked at the Port Authority of NY/NJ and the Queens Long Island Medical Group. When he isn't working on CSA, Andrew likes to read historical fiction, play baseball and soccer, and occasionally strum the guitar. He is a proud member of the Brown Taekwondo club, the two-time defending national collegiate champions, and he also welcomes anyone to challenge him in Lord of the Rings trivia and/or a cook-off.