Companies are “inverting” to avoid taxes. That is, domestic U.S. companies are buying foreign competitors and becoming foreign themselves to avoid paying corporate taxes, which are among the highest in the world at 36%. This process is called inversion and it solves the problem, if that’s the right word, of big cash balances stuck in foreign banks that are taxed at 36% if brought home. Thus, Medtronic (MDT), which is one of our companies, this weekend announced an inversion by buying Covidien for $45 billion. Now when it brings international profits home, home will be in Ireland with a lower corporate tax rate than in the U.S.
People behave this way. Should corporations? One can expect the government to eventually close the loophole. In the meantime, expect a rush of Medtronic-like inversions. That will weaken U.S. hegemony as the best place to do business. The inversions will generate fees for investment banks and op-ed jeremiads against corporate greed but not, we expect, higher stock prices.