Why Tax Inversion Is Wrong

August 22nd, 2014

This week the Treasury Department began assembling administrative options for deterring or preventing U.S. companies from inverting—or reorganizing overseas to avoid paying federal taxes. This move follows on the heels of a strong statement from President Obama who accused inverting firms of “cherry-picking the rules.” As he put it: “My attitude is I don’t care if it’s legal, it’s wrong.”

Particularly common among pharmaceutical and life-sciences companies, inversions are primarily a means for U.S. companies to avoid corporate taxes. In an inversion, a smaller foreign company “acquires” a large U.S. firm, allowing the domestic firm to reincorporate overseas and pay a lower foreign tax rate. Usually, this process does not change the operational or functional structure or location of the company – it just changes the way that company has to pay taxes.

Historically, these tax inversions haven’t been all that common. In fact, according to the Congressional Research Service, only been about 76 companies have inverted or planned to do so since 1983. The practice has become much more frequent, however, which is why inversion has garnered the spotlight from Treasury. Of the 76 inversions since 1983, 47 occurred in the last decade, and 14 occurred just this year.

Many have argued that, at 35 percent, the corporate tax rate forces U.S. corporations to invert to remain competitive. “You can’t maintain competitiveness by staying at a competitive disadvantage. I mean you just can’t,” says Heather Bresch, the chief executive of Mylan, a generic drug maker that recently incorporated in the Netherlands using tax inversion.

It is true that the United States has a statutory tax rate of 35 percent, which is the second highest among developed nations. However, through loopholes like inversion and many others, corporations in this country pay an effective tax rate of just 12.6 percent.

There is a lot of talk about whether all of this is fair. Organizations like the conservative Tax Foundation echo Bresch’s sentiment that U.S. corporations need to invert to keep up with the rest of the world. Others have argued inversion is the unfortunate, but inevitable byproduct of the Affordable Care Act and U.S. tax policy.

What these statements ignore, however, is all of the benefits and perks that businesses do enjoy by establishing and doing business in the United States. For years or decades, companies employ our skilled workforce educated by our public schools; they use our taxpayer provided roads to deliver their products; and they enjoy the safety and security provided by our publicly-funded policemen and fire fighters. These benefits are not trivial – they are what allow our corporations to become successful and profitable – and our corporations should pay taxes in exchange for these benefits.

I must agree with President Obama, I don’t care if it’s legal. It’s wrong.

As Jack Lew put it: “Many of these companies are for all intents and purposes still based in the United States, and they remain here to take advantage of everything that makes the United States the best place in the world to do business: our rule of law, our universities, our research-and-development capabilities, our innovative culture and our skilled workforce.”

Democrats and Republicans in Congress generally agree that we should deter this practice, although they differ on the proposed policy solutions. I don’t want to get too far into the specifics because the Citizens for Tax Justice has some excellent proposals and you should just read that. Suffice it to say, however, we should seriously consider these solutions that would allow the United States to maintain competitiveness, to keep our tax base, and pave the way for U.S. corporations to continue to pay for all of the benefits they enjoy from establishing a business in this country.

Written by Ann Hollingshead

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