Inversions Hurt Individual Investors, Too
Taken from gated post from Vanguard Fund Adviser:
Inversions Hurt Individual Investors, Too
As U.S. corporations move offshore to potentially avoid billions in U.S. taxes, they are sticking their shareholders with an unexpected tax burden over which investors have no control.
The Joint Commission on Taxation, a non-partisan congressional research panel, estimates that the U.S. stands to lose as much as $19.5 billion in tax revenues over the next decade if corporate “inversions” are allowed to continue. Yet, while U.S. corporations will gain—by exploiting a loophole to avoid paying billions in U.S. taxes if their deals are successful—shareholders stuck footing a tax bill on capital gains stand to lose.
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This is complicated stuff, so let’s take a real-world example. Consider the recent $28 billion merger between Dublin’s Activis PLC and U.S.-based Forest Laboratories, which closed on July 1. When Forest reincorporates in Ireland, its shareholders will owe capital gains on their Forest shares.
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(For example) Vanguard’s massive 500 Index Fund owned, collectively, 2,468,154 shares of Forest Labs at the end of June, the day before the transaction closed. The gain in Vanguard’s position based on Forest’s average price could be $146.7 million dollars, though it could be even higher or lower thanks to the invisibility factor. On that $146.7 million gain, shareholders in the fund could collectively owe as much as $29.3 million in taxes. And that’s just one fund. To be clear, investors in IRAs and other tax-exempt accounts aren’t liable for the tax hit.
Is that $23.9 owed in taxes over and above what would be owed on dividends collected?
This amuses me hugely for it’s a point I’ve made elsewhere. For the conclusion here is that we can’t actually state that a tax inversion is going to lead to a loss of tax revenue, can we?
It can most certainly lead to a loss of corporate income tax revenue. But as is being pointed out, some part of that is being capitalised into current share prices and also, the inversion itself is a taxable event. So, More tax will be collected on the capital gains, less on the corporate income tax.
And what will the net balance be? I have no idea and I’m not going to try to work it out. But it’s at least possible that in the short term the net effect will be *higher* tax revenue.
Tim:
So bottom line, corps transfer taxes to investors who make up the difference in tax revenue. How does that change corps avoiding corporate income taxes? The key here is “tax revenues” as stated by the JCT and who pays in the end, the investor. Cute . . .
The Joint Commission on Taxation, a non-partisan congressional research panel, estimates that the U.S. stands to lose as much as $19.5 billion in tax revenues over the next decade if corporate “inversions” are allowed to continue. Yet, while U.S. corporations will gain—by exploiting a loophole to avoid paying billions in U.S. taxes if their deals are successful—shareholders stuck footing a tax bill on capital gains stand to lose.
as a follow up to Worstall,
the headline is fairly amusing given the unsaid content of the article. the primary way that individual investors are subject to increased taxes from their holdings, is that their holdings appreciate in value. If I have a cost basis of zero, and my investment goes from $100 (hidden tax liability of $20 on cap gains) to $200, yes my hidden tax liability increases to $40, but my net worth has increased. Hard to see how this “hurts” individual investors.
Well, Jed
If you are paying taxes on imaginary money, I”d say you are being hurt.
But if your “net worth” is what you think you are worth, well god help you.
coberly,
if your stock appreciates because the expected cash flows of the company have increased as a result of a lower expected tax bill, and you realize a capital gain by selling your stock, it’s hard to see how that’s “imaginary money” or how an individual investor owning the shares prior to inversion is getting hurt. I don’t see many people arguing that a salary increase that leads to a higher tax bill as “hurting” the recipient of the raise.
And your snide comment about worth and net worth is all so cute and clever but also a non sequitur as I never mentioned anything but “net worth”