07/28/2014 09:07 am ET Updated Sep 27, 2014

Inversions Should Pave the Way to Reform


The late Senator Russell Long of Louisiana, who served many years as chairman of the Senate Finance Committee, gave a classic rationale for tax policy: "Don't tax you, don't tax me, tax that fellow behind the tree."

The Obama administration is making a mighty fuss about the perceived evils of tax inversions -- the process by which U.S. corporations relocate to tax-friendlier places, such as the United Kingdom or Ireland, by merging with a foreign company. The U.S. corporations thus become British or Irish for tax purposes.

This is a serious issue but Obama's call for "economic patriotism" along with the absence of anything resembling a coherent reform plan makes it clear that politics -- not economics -- is the real issue on the table. Berating big business has always been a staple of Democratic politics. The White House is playing music for its most loyal constituents.

In fact, tax inversions do seem to be increasingly popular with business. There have been 47 such deals in the last decade, 14 in the last year. A typical example is the pharmaceutical firm AbbVie which announced on July 18 its plan to buy the British drug firm Shire for $54 billion. Walgreens is pursuing a deal with a Swiss firm. More are on the way.

There is serious money at stake in inversions and it all is based on tax policy. The top corporate tax rate of 35 percent in this country is the highest in the world and when you add in state and local taxes it is closer to 40 percent. That is double the average in European nations and more than three times the 12.5 percent rate in Ireland. Predictably, a growing number of U.S. corporations are moving offshore or are at least thinking about it.

This is an old song. From time to time over the years, Congress has enacted legislation ostensibly to make it more difficult for U.S. firms to relocate overseas, but it never seems to have much effect. Our tax laws are incredibly complex, filled with loopholes and special provisions that sharp-eyed tax attorneys use to their advantage. Amending the tax code is an insider racket that enables legislators to generate more campaign contributions from business, and every new amendment just creates more loopholes for opportunistic tax lawyers to take advantage of.

There are various bills in Congress to deal with tax inversions, but the main thrust is to require that any company with more than half of its business in the U.S. maintain its headquarters -- and tax liability -- on these shores. Obama and the Democrats are pushing for quick action on a measure to address tax inversions specifically. The Republicans are holding back arguing it should be part of an overall tax reform measure.

I believe the Democrats are right that we should curtail tax inversions and the Republicans are right that it should be part of an overall tax reform package. I understand the reluctance of the Dems to pursue this, but our tax system is a mess of special interest provisions that needs to be cleaned up. Comprehensive reform will be a major challenge, but the tax inversion issue provides an incentive to take it on that should not be missed.


Jerry Jasinowski, an economist and author, served as President of the National Association of Manufacturers for 14 years and later The Manufacturing Institute. Jerry is available for speaking engagements. July 2014