“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Is the concept of national corporations and financial indices outdated?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.

Happiness or Value?

21^st century capitalism is shifting focus from making money to making meaning (ends vs. means, trailing indicators v leading indicators). This is good and necessary.  However, ‘happiness' is starting to dominate discussions about 21^st C capitalism, even in governments' measures of economic growth.  While it is important to find happiness in life, make no mistake, even in the 21^st C, business is all about value, not emotion.  To keep creating jobs, paying taxes for schools, donating to the arts, growing communities, etc., business must first and foremost create and deliver real value to customers (and then to other stakeholders, like shareholders).  Happiness ≠ Value!

This is not to say that happiness isn't important.  It is.  It makes total business sense to try to create an environment in which employees can be happy.  The way Tony Hsieh has run Zappos is a great example of a ‘happy' culture...which delivers significant value.  But a company, a person, an experience is not responsible for another's happiness.

Happiness is taking on a tone of a right, of entitlement.  We must not go from "it's all about mywealth/stuff" to "it's all about my happiness" with "MY" remaining front and center.  Usually, happiness focuses on ‘me' - extrinsic, external things making me happy - my friends, my family, my job, my stuff, my stature, etc.  If happiness is the goal, it's a fool's errand - the desire/need to constantly feed it is insatiable.  The incredibly prescient Declaration of Independence states, "We hold these truths to be self-evident...endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness..." As Saul Kaplan, a sage and friend, asked, what if the Founding Fathers had replaced ‘happiness' with ‘goodness'?

John Stuart Mill, a stalwart believer in free-markets and liberty, said, "Those only are happy who have their mind fixed on some object other than their own happiness...not as a means, but as itself an ideal end. Aiming thus at something else they find happiness by the way."

What if that meant creating something truly good, truly valuable, consistently, for someone else?  Isn't that what companies should be doing? If they don't, we won't need to worry about happy employees and customers. So, in this 21^st century, let's focus our energies, time, and resources on providing real and significant value.

Yes, Compare Apples & Oranges!!!

One of my favorite authors is the Albanian,  Ismail Kadare, and there's been a lot of discussion of the Mideast in my home. Trust me, these are related.

The media keeps comparing Egypt, Libya, Yemen and Tunisia’s futures to either Iran or what? Pakistan? Indonesia? Turkey? Always to other Mid-East, Asia, or Asia Minor countries (yes, Turkey straddles both continents, in so many ways).

No one compared these countries futures to any European country. I kept thinking about Albania. Now see the link?

Having read Kadare’s books and learning a bit of Albanian history and ‘freedom’ post-1989, it seemed Albania could be just as likely a model for Egypt as any of the others. Kind of wondered if I wasn’t a bit nuts with this analogy until Monday 2/14’s WSJ article by Matthew Kaminski.

So what in the world does this have to do with strategy and innovation? Everything! When we start creating our organization’s strategic direction (which should be a living, ongoing, adapting process) and look at how and where we can innovate, we tend to look at others ‘like us’.

This is natural, but not helpful.  Blockbuster did this, was offered the opportunity to buy another ‘near’ it, but not ‘like it’ and got Netflixed*.  What if Blockbuster had looked at those not “like us” or even combined what it did with what others did…the power of “AND”?  Apple and Best Buy have built success on not looking at those ‘like us’ AND combining what’s out there (e.g., iTunes, iPod). Who else can you think of?

So, try these two things to grow your business:

1. Stop looking at those ‘like us’… look at those very “not like us”;
2. Start combining…instead of asking do you want this or that, put them together!

Sometimes it’s worth comparing apples and oranges! As Capt. Renault said in Casablanca, [don’t] “Round up the usual suspects.” Go look for unusual suspects.  My friend, Saul Kaplan, puts it so eloquently: innovation is found in “random collisions of unusual suspects” – in RCUS (ruckus!) – go make a RCUS! You’ll be amazed at what you discover and learn to grow your business, your people and yourself.