The Truth About Corporate Inversions

The U.S. Treasury Department on Tuesday introduced new regulations designed to clamp down on corporate inversions, which occur when a company changes its legal place residence to a foreign nation, usually with lower taxes, but keeps its operations in its original home country.

Corporate inversions are “one of the most insidious tax loopholes out there,” Obama said in a press conference held after the Treasury Department’s announcement. Of course, he also admitted in the very same conference that such inversions “are legal” and that companies that take advantage of them aren’t breaking any laws — yet.

“Corporate inversions are an insult to hard-working Americans” said Nancy Pelosi in response to the new regulations. “Instead of stacking the deck for the special interests, Republicans should join Democrats to discourage inversions by closing loopholes that encourage American corporations to restructure under foreign ownership,” she continued.

It’s easy to think of corporate inversions in such a way, and companies that engage in them are frequently criticized as being un- or anti-American. Indeed, Donald Trump, Hillary Clinton, and Bernie Sanders have all introduced solutions to this “problem” on their campaign platforms.

Sanders’ solution is the Stop Corporate Inversions Act of 2015 he co-sponsored. Clinton’s plan is a ridiculous combination of an arbitrary rule stating that at least 51 percent of a company’s shares must be owned by foreigners before that company can relocate, in addition to an “exit tax.” Only Trump’s plan actually addresses the root cause of corporate inversion, and it’s not greed or anti-Americanism.

[lz_table title=”Effective Corporate Tax Rates Compared” source=”KPMG”]
USA,40%
Mexico,30%
Canada,26.5%
China,25%
UK,20%
Switzerland,17%
Ireland,12.5%
[/lz_table]

Corporate inversions are a direct result of bad regulation, specifically the draconian U.S. corporate income tax code. “Companies leaving is not the disease, it is the symptom,” his website reads. “Politicians in Washington have let America fall from the best corporate tax rate in the industrialized world in the 1980s … to the worst rate in the industrialized world.”

The U.S. corporate income tax code imposes the highest tax rate among industrialized countries. Successful U.S. companies can expect to hand over 39.1 percent of their earnings to Uncle Sam in the form of income tax (35 percent federal rate plus a combined state rate).

On top of that, the country’s corporate tax code requires American companies to pay taxes on global income as well as on the same revenue more than once. By law, U.S. companies must not only to pay taxes on income earned in the U.S., but they must also pay the difference between the extremely high U.S. corporate income tax rate and local income tax rates on income earned overseas.

Most other industrialized countries, however, require only that companies pay income tax on revenue earned at home. This puts U.S. companies at an extraordinary competitive disadvantage, ensuring that U.S. companies will earn lower profits after tax than foreign competitors. Who can blame them for looking to greener, foreign pastures?

This is the precise issue corporate inversions address. Indeed, if a company pursues an inversion, it will still pay the same amount of income taxes on income earned in the U.S. The only difference is that after said inversion is complete, that company will no longer have to pay tax to the U.S. government on foreign profits.

[lz_table title=”Regional Corporate Tax Rate Averages Compared” source=”KPMG”]
Africa,27.92%
Americas,27.35%
Asia,22.59%
Europe,20.12%
Oceania,27%
Latin America,26.85%
European Union,22.25%
Global,23.87%
North America,33.25%
[/lz_table]

And what of the negative effects felt at home when a company seeks a corporate inversion? They might not be so negative after all. Contrary to Democratic propaganda, evidence “suggests that inversions do not lead to job losses, reduced investment, and weaker companies but more likely the opposite,” according to a 2016 analysis of effects of corporate inversions by economic consulting firm Bates White.

Those who criticize corporate inversions as acts of greed seem to mistake companies for charities. “Business decisions should be driven by genuine business strategies and economic efficiencies, not accounting gimmicks that game our broken tax system,” said White House Press Secretary Josh Earnest.

But trying to stay profitable in the face of a hostile tax system is not an accounting gimmick. If a company can’t provide its shareholders with returns, there is no company. Democrats can wax hysterically about greed as much as they would like, but if average working Americans were subjected to a system in which four out of every ten dollars they earned were taken by the government, there would be riots on the street.

Indeed, the only truly insidious thing about corporate inversions is the way Democrats talk about them. Americans “expect big corporations to be governed by the same set of rules,” said Pelosi, but the reason they’re fleeing the country is precisely because they aren’t governed by the same set of rules as everybody else.

Trump is right in asserting corporate inversions are a symptom, and punishing companies for seeking them leaves the disease untreated. Unless the U.S. corporate income tax code is simplified and made competitive with the rest of the world, American companies will continue to be unable to compete with foreign entities and seek ways to protect their revenue.