Tax Chauvinism: Who Cares Where a Firm is Incorporated?

Following the recent offer by U.S drugmaker Pfizer to acquire British pharmaceutical firm AstraZeneca, congressional Democrats are proposing new limits on the ability of U.S.-based firms to establish foreign residence and thus cut their U.S. corporate tax bill. Even before this latest flap, the Obama Administration proposed curbs on this practice, known as an inversion.

But why does it matter where a multinational corporation is headquartered? Certainly, it would affect U.S. tax receipts. By some estimates, Pfizer alone would pay $1.4 billion less in annual taxes by moving its corporate residence to London—though its offer has so far been spurned.

But beyond the revenue question, should we really care? After all, changing the corporate address of a firm has no real economic impact. There is no reason to believe the company would move production offshore if it shifts the address of its headquarters. After all, firms will produce goods and services wherever it is most cost-effective, after figuring regulatory, labor, and transportation costs.

Even the top executives and their staffs don’t need to go anywhere after an inversion since the U.S., unlike other countries, bases residence on where a firm is incorporated, not where its senior management or R&D is located. So the effect on labor markets is likely to be small or none at all.

Shifting legal residence isn’t likely to have any impact on a firm’s intellectual property either. U.S. based scientists or engineers will create cutting-edge software or a new drug irrespective of their firm’s mailing address. Many multinationals have long-since moved their patents and copyrights to low-tax jurisdictions—something they can easily do without relocating their legal address. Besides, does it matter to the U.S. economy if Apple’s patents are owned by an Irish subsidiary? Would it matter if it moved its corporate residence to Dublin?

The location of a firm’s legal headquarters has no economic effect on consumers either. Prices don’t vary based on where a firm is incorporated. Firms doing business in the U.S. are subject to U.S. regulation and pay the same corporate tax on U.S. source income, no matter where they are from. When Japanese-headquartered Toyota ran into high-profile problems with its brakes a few years ago, it was subject to the same laws as its Detroit competitors.

Is there evidence that firms are more likely to support U.S. foreign policy just because they are incorporated in, say, Delaware instead of Donegal? On the margins, perhaps. But who expects Exxon to withdraw its extensive energy operations from Russia in response to Moscow’s actions in Ukraine, just because the firm is incorporated in the U.S.?

So we are left with a sort of financial chauvinism. It is important to some politicians to be able to say that a company is a red-blooded American company. But when it comes to multinational firms in a global economy, why does that matter?

And what does it even mean? Is it an American firm if most of its shareholders are American? As my former Tax Policy Center colleague Chris Sanchirico pointed out recently, we don’t know the home countries of investors.

Is a firm somehow more American if its top management is American? Well, where does that leave Chrysler? Its recent turn-around was managed by now-CEO Sergio Marchionne, who is from Italy. The head of the firm’s truck division is a Canadian, and the head of its parts division is Italian. Does this make Chrysler less American?

All that said, the tax consequences of this sort of artificial corporate mobility are important, and yet more evidence that the U.S. tax system is out of synch with the rest of the world and needs fixing.

But beyond the tax issue, lawmakers may have better things to do than worrying about what makes a company American and what does not.