Corporate inversions help management and punish long-term investors

Boring but important: “The Cost of Keeping Companies in the United States” (nytimes)

Some excerpts:

… in our zeal to keep companies in the United States, we have created policies where inversions benefit some shareholders at the expense of others. Perversely, the inversion rules are more likely to punish American investors and long-term investors to the benefit of senior executives, recent investors and tax-exempt investors, including those overseas.

Fifteen percent to 20 percent of shareholders in the deals we studied were made worse off from inversion. The anti-inversions tax rules are especially bad for long-term investors who have higher capital gains because they have seen their shares appreciate significantly over the years.

In effect, one group of shareholders writes a large check to the government for all shareholders to reap the benefits of lower corporate income taxes in the future.

Foreign shareholders also benefit, as the I.R.S.’s special tax rules don’t apply in other countries.

There’s a third group that benefits: corporate executives. We found that the chief executive’s wealth increases 3 percent to 4 percent, despite the personal tax consequences of inversion. This is in part because stock options, unlike shares, are not subject to capital gains tax at inversion. In 2004 the government added a tax on pay for executives of inverting companies but the companies began reimbursing their executives for this expense, passing the cost along to shareholders.

My personal take: It seems that whenever the government creates anything complex it opens up a new way for one group of Americans to steal quietly from another. Maybe this is why the Europeans lean so hard on the value-added tax.

Related:

• “Economy Recovery Plan” (my November 2008 piece where I proposed some measures to keep executives from stealing from public company shareholders)
• Principal-agent problem