Let’s start with my favorite quote from a NY Times article:
“For some companies considering deals, today’s actions will mean that inversions no longer make economic sense,” Mr. Lew said. “These transactions may be legal, but they’re wrong.”
– U.S. Acts to Curb Firms’ Moves Overseas to Avoid Taxes, NY Times Online
Mr. Lew and others seem to want to skirt the law because, according to them, they know best. It is legal and they are attempting to make it illegal. But what about addressing the reason it is being done. Foreign tax rates are lower than U.S. tax rates. This puts U.S. companies at a disadvantage.
Foreign Companies have an Advantage
Foreign companies can have the same gross sales as U.S. companies yet pay less in taxes and therefore have more money left over to invest and grow. They, foreign companies, also have more money to acquire additional companies. It is not uncommon for a U.S. company to be up for sale and a foreign company purchases it because they have more capital. Why do they have more capital if their gross sales are the same as a U.S. company? Because they pay less in corporate taxes.
Law Dictates Behavior
Let us not forget that law dictates behavior. We know for a fact that those states with pro-corporate laws, more litigated laws, better tax rates, and corporate friendly states have more corporate filings. Delaware is a case in point. So is it going to be a surprise that less and less companies in the future will be started in the U.S. and more and more companies will be started overseas?
Entrepreneurs Need to Look at Countries, Not Just States
Now the issue will not be which state to incorporate but which country. Here is a chart from the TaxFoundation.org showing the corporate tax rates by country.
Based on this chart, where should a new company incorporate. Every country as a lower corporate income tax rate than the U.S.