Business news has been rife of late with coverage of U.S.-based corporations (e.g., Medtronic, Walgreen, AbbVie, Pfizer, Aon, Eaton, Omnicon) either attempting or completing an effort to re-flag the business as a non-U.S. entity. By and large, companies are using such “inversion” strategies in an effort to reduce corporate income taxes (e.g., Ireland’s headline rate is only 12.5%) and giving them tax-favorable access to the gobs of cash they have stashed offshore.
As an American businessman, it pisses me off (sorry, Mom) that some (repeat, some) American corporations are willing to partake in, but not pay for the fruits of the freest, fairest and safest nation on earth, AND that the U.S. Congress seems more interested in mindless political dithering than providing common sense solutions. Here are some thoughts for those on both sides of this matter:
While the top U.S. headline corporate tax rate (including the average state rate) is about 40%, normal business deductions coupled with offsets (e.g., accelerated depreciation) reduce the effective rate for many large American businesses to zero (or less). You read that right.
Hence, I’m not sure that a cut in rates per se is all that significant or justified. What does make sense though is to provide a tax holiday that would give corporations the opportunity to repatriate offshore cash on a tax-free or reduced tax basis. Coupled with a requirement that a substantial portion of those funds be deployed over, say a five year period, in R&D, cap X, or new hiring, it would seem a win-win proposition. Private industry could certainly deploy that cash more productively for both selfish and beneficial interests than the government ever could.
Further, as espoused recently on CNBC by Mark Cuban, a reduction in the amount of government-induced bureaucratic hassle would be far better for business (and the American economy) than putting a couple dents in the headline corporate tax rate.
Finally, for businesses that are really interested in maximizing outcomes, tapping into the discretionary effort of their workforce via a more focused, fired up, capably led (read engaged) team presents serious opportunity for competitive advantage. Respected published studies on the bottom line benefits of an engaged workforce, including our own 2012 book on the subject suggest three things:
1. There is a lot of low hanging fruit. The economic loss due to having an American workforce that is about 70% DISengaged amounts to about $500 billion annually, or roughly 3% of the U.S. GDP. Capturing only a third of that discretionary effort that currently goes home each day unspent could mean the difference between an economy that is growing at 3% rather than 2%, which is a big deal.
2. Companies that distinguish themselves as employers of choice consistently outgrow and outearn their competitors by a factor of up to 10x. No tax cut is going to yield that kind of benefit.
3. Perhaps the greatest factor is that, unlike tax incentives which apply to businesses across the board, capturing the discretionary energy that is resident within your workforce creates a true competitive differential, one that your competitors don’t get unless they do the work.
Here are three things you might consider doing:
1. Tell your elected representatives that you expect them to take the necessary action to allow U.S. businesses to repatriate some of their offshore cash, but also to thwart efforts to game the system by reflagging. Further, encourage them to identify (and act on) ways that government can reduce the bureaucracy that stifles innovation and growth. Sooner is better.
2. Take a cue from Mark Cuban, and avoid investing in or doing business with companies whose American pride is overcome by greed. Moreover, tell them you’re doing it.
3. Take an honest look at your own workforce. Is it firing on all cylinders? Is it getting harder to recruit? What things are keeping your people from doing their very best work every day, and what are you doing about it? Are your people sufficiently focused, challenged, and appreciated? Find out, and then take action. It’s well worth doing, and you don’t need an act of congress.