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Inversions: Fix the Problem, Don’t Make it Worse

July 21, 2014

Washington has been trying to stop inversions for three decades, but it never addresses the real problem – that having the highest corporate tax rate in the industrialized world is why we keep seeing companies move overseas.  We need to fix a broken tax code that makes American workers and businesses uncompetitive.  Even the Administration admits this is the right answer.

  • Obama Plan Doesn’t Solve the Problem:  Anti-inversion rules have been around and repeatedly changed over the last three decades.  What hasn’t changed over those decades is America’s corporate tax rate.  As long as America continues to have the highest corporate tax rate in the industrialized world, companies will find a way to invert and take advantage of lower tax rates in foreign countries.
  • Obama Plan Actually Makes the Problem Worse:  In a typical inversion, an American company becomes a foreign company only on paper to pay lower taxes, but the headquarters and employees remain in the United States.  The President’s plan creates a perverse incentive to not just move on paper, but to actually move the headquarters and jobs overseas.  That’s because the legislation does not allow the company to get the tax benefit if it is managed and controlled in the US. That’s a lose-lose proposition for American workers.
  • The Real Solution:  Even the Obama Administration admits that the best solution is tax reform that lowers our tax rates.  The House has a draft plan to lower our tax rates and modernize our tax code.  It is time for the Administration to finally do more than just talk about tax reform; it is time to put forward a real plan.  Tax reform will not only protect our jobs, but it will strengthen our economy so new jobs are created.

Typical Inversion

Obama’s Lose-Lose Inversion Policy

Step 1: Company USA merges with a foreign Company.

Step 1: Company USA merges with a foreign Company.

Step 2: Company USA keeps operating in the US – keeping its HQ and jobs in the US – but gets the benefits of a being a “foreign” company for tax purposes.

Step 2: Company USA cannot “manage and control” its operation from the US if it wants to file taxes as a foreign entity. Company USA moves overseas, taking its HQ and jobs with it.

Step 3: Company USA files taxes as a foreign company, thus avoiding the high US tax rate on its foreign income.

Step 3: Former Company USA files taxes as a foreign company, thus avoiding the high US tax rate on its foreign income.

Bad for taxpayers.


Bad for taxpayers.
Bad for American workers.


What They Are Saying About Obama’s Inversion Policy

Make no mistake: Such proposals would do nothing to make the U.S. a more favorable place to locate multinational headquarters or investments. If they succeed—which is unlikely, given the creativity of tax planners and the potential large tax savings at stake—the most likely outcome will be more foreign takeovers of U.S. companies. No anti-inversion legislation will block this route for garnering the large tax savings that U.S. companies are now seeking.

Michael Graetz, tax expert and professor at Columbia Law School

Treasury Secretary Jack Lew waded into the “policy” discussion on inversions with a letter to Ways and Means Chairman Dave Camp (and other tax-writing leadership on the Hill). I found it to be full of misleading statements and mistakes…

-Doug Holtz Eakin, President of American Action Forum and former Director of the Congressional Budget Office (CBO)

We have been playing this whack-a-mole game for 30 years, and by now its contours are undeniable to all but the most willfully blind. Yet, we keep playing the same tired game instead of fixing the fundamental tax disparity that fuels its continuation…The United States cannot have a tax system that treats similarly situated competitors in the U.S. marketplace differently and not expect the disfavored competitor, the U.S.-owned MNE, to try to transform itself into the more favorable foreign-owned MNE.

Bret Wells, tax expert and professor at University of Houston Law Center

So the same Administration that refuses to work seriously on tax reform has decided that its top economic priority is providing even more incentives to drive American companies overseas. And then accusing anyone who disagrees of having a lack of “economic patriotism.” … As for “economic patriotism,” Mr. Lew also doesn’t understand that foreclosing inversions would only make U.S. firms more vulnerable to foreign takeovers. If executives can’t reduce their tax disadvantage by moving abroad, more of them will choose to serve shareholders by offering to be purchased by foreign firms that have a lower world-wide tax rate.

-The Wall Street Journal Editorial Board

Legislation to block inversion is not tax reform. It would make the U.S. even less competitive globally. It would not stimulate economic recovery. It’s an attempt to trap U.S. companies in an outdated and globally uncompetitive tax code that would benefit from fact-based, thoughtful, comprehensive reform.

Miles White, Chairman and Chief Executive Officer of Abbott Laboratories