pennies.jpgBeware the Law of Unintended Consequences. Think twice about what you are truly incentivizing.

Even though we often approach it as a single-move, one- or two-player static situation, life is really a rather complex series of multi-move, multi-player, incredibly dynamic, extremely fluid interactions.

The United States taxes corporations headquartered in the U.S. on ALL their income, worldwide, regardless of where it was earned. If a U.S.-based company made a profit on selling a can of soda in Vietnam, it must pay income taxes on it here. True, any tax that the local government might levy generally can be taken as a credit against U.S. taxes. Nonetheless, international companies tend to chaff at the inability to take advantage of any lower tax rates that might exist overseas where the operations that created the profit exist.

Thus many companies that you might think of as “American,” actually are incorporated overseas: What shareholder would ever vote to incorporate in a country that taxes your worldwide income?

Accenture, the major accounting firm, is currently preparing to move its incorporation to Ireland for tax reasons even though its CEO lives in Boston and its primary operating office is based in Austin, Texas. That might work under current U.S. law but perhaps not in the future: “Sen. Carl Levin of Michigan and Rep. Lloyd Doggett of Texas, both Democrats, submitted bills that both assume that companies controlled and managed in the U.S. — regardless of their place of incorporation — are subject to U.S. corporate-income tax. Pres. Obama was a co-sponsor of a similar bill with Sen. Levin in 2006 and the Obama administration has already endorsed the proposed legislation.” (The Wall Street Journal, May 28, 2009, “Accenture Is Seeking To Change Tax Locales.”)

If you are tempted to applaud, stop and think about the long-term consequences.

I’ve been to Ireland. It’s a nice country and lovely to look at. London, Paris, and Rome are all easy to reach. Today Accenture’s CEO lives in Boston. Today Accenture is controlled and managed in America. Pass a bill that taxes worldwide profits for real, and how long before Accenture and dozens and dozens of other major corporations move not only their legal registration but their physical headquarters as well?

Talk about brain drain! Talk about job loss!

And that is not all. A very real loss of political, economic, and even military power would occur. Many of these corporations produce vital materials and control incredibly valuable intellectual capital and patents. Major multinationals often have the ability to impact global affairs, often in nuanced, but still important ways. When major internationals move not just their legal residency but their actual management and control infrastructure overseas they would quickly “go native.” Before long, much of top management, most of middle management, as well as almost all the entry-level staff will be locals, whether it be Ireland or India or France. These are the people who actually implement corporate policy, thus making policy more than we acknowledge. When push comes to shove, when the then-American president stands on his bully pulpit and asks for support, to whom will their primary loyalty be? To the United States of America? Or their own country?

It won’t happen over night. People do love the U.S. Of A. and like to live here. However, we are talking some major real dollars that can be saved just by finding a CEO willing to live in Ireland. If Sen. Levin’s bill passes, it will happen. And when and if it does, we will have been penny wise and pound foolish.