Tax-avoiding CEOs manage to avoid tax-avoidance tax

This Bloomberg News article about companies reincorporating abroad to avoid taxes provides some good perspective on Jamie Dimon's pay. The short story is that U.S. companies can, with a certain amount of effort, move their legal address to Ireland or wherever and more or less avoid paying any taxes. This is called an "inversion," and the math is pretty straightforward: Take money from the U.S. government. Give it to shareholders.

So if you can do it you ... do it? I guess? I mean, not everyone does it, and there are public relations and so forth reasons not to,1 but roughly speaking if you are a corporate director you value a dollar in the hands of your shareholders significantly higher than you value a dollar in the hands of the government. This is pretty basic stuff.

Similarly straightforwardly, the U.S. government values a dollar in its own hands more than a dollar in the hands of shareholders of foreign-incorporate companies, though this is perhaps a more complex calculation. So in 2004 Congress passed a law to express its displeasure.

The law imposes a special tax of 15% on restricted stock and options held by the most senior executives when a company reincorporates outside the U.S.

Can you guess what happened? Oh sure you can, you are smart, and it is easy:

Since the measure took effect, at least seven large companies have disclosed in securities filings that they risked triggering the tax. All took steps to shield their executives from having to pay.

Three of the companies’ boards simply picked up the tax bill for their executives, maintaining that the managers shouldn’t suffer for a decision that benefits shareholders.

At three other companies, including Actavis, the boards went a step further, helping them avoid the tax altogether by allowing restricted stock to vest early and for options to be exercised. Awarding the equity early raises the risk that the executives might quit or sell their shares, or get paid for meeting goals they never attain.

So fine, this joins the long list of stories of "law intended to reduce executive compensation does opposite."2

But that theory is interesting: "the managers shouldn't suffer for a decision that benefits shareholders."3 Congress literally decided that the managers should suffer for a decision that benefits shareholders. Like, they passed a law that said, "here is how we will cause suffering to the managers who make that decision to benefit their shareholders." The suffering was, of course, in the form of taking away money, both because that is how the tax law imposes suffering, and because that is how corporate managers experience suffering.

And the managers -- oh, their boards, whatever -- were like, hahahahaha nope. The transaction is now: Company takes $100 from the U.S. government. Government takes $10 from executives. Company gives $10 to executives, $90 to shareholders.

Or whatever, the numbers aren't important.4 What's important is that they are just numbers. An alternative way of thinking would be: Government says "we do not want you to do this thing even if it's good for shareholders." Government, being government, expresses this disapproval through a tax law. (Though also through words: “These expatriations aren’t illegal. But they’re sure immoral,” Charles Grassley said about one of them.) Company says, "hmm, okay, sorry shareholders, but we are doing our patriotic duty and abiding by the will of Congress." Executives keep their money, government keeps its money, and shareholders miss out on some extra money, but feel a warm sense of patriotic pride, if they're American, which some of them are.

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