Do tax inversions hurt America’s bottom line?

Some US companies are buying foreign firms to move their headquarters overseas for lower tax rates

August 12, 2014 11:00AM ET

by Inside Story Team @AJInsideStoryAM

In a recent video address, President Barack Obama criticized corporate tax inversions, in which a company buys a business in a country with a lower tax rate, then claims that country as its primary home — something Obama called a “renunciation of citizenship.”

“Rather than double down on the top-down economics that let a fortunate few play by their own rules, let’s embrace an economic patriotism that says we rise or fall together, as one nation and as one people,” he said.

With an inversion, domestic earnings — profits made in the United States — are still subject to U.S. tax rates. However, after an inversion, a company no longer has to pay the almost 40 percent U.S. corporate tax rate for revenue earned in foreign markets.

While many inversions result from traditional business mergers, policymakers are attempting to halt a recent rise in the practice. For example, there has been a 207 percent spike in health care industry inversions in the last year.

There has been plenty of public pushback. Responding to online petitions, Walgreens decided last week that it would not seek an inversion as part of its purchase of the Swiss-based company Alliance Boots.

Senate Finance Committee Chairman Ron Wyden called the increase in inversions a symptom of a broken tax system.

‘The U.S. tax code is infected with the chronic diseases of loopholes and inefficiency. These infections are hobbling America’s drive to create more good-wage, red-white-and-blue jobs here at home. They are a significant drag on our economy and are harming U.S. competitiveness.’

Ron Wyden

chairman, Senate Finance Committee

Republicans like Sen. Orrin Hatch of Utah say that they’re frustrated but that the issue needs to be dealt with as a matter of U.S. competitiveness.

“I am greatly concerned about these corporate inversions,” said Hatch. “I believe the best way to solve this problem is to reform our corporate and national tax law in a manner that will make our multinationals competitive against their foreign counterparts.”

“That would mean, among other things, a significant reduction in the corporate tax rate and major changes to make our tax system more competitive.”

But with little hope of congressional action, the Treasury Department says it is looking into how to slow inversions on its own.

It’s hard to know just how much a rule change could affect the government’s bottom line, but one estimate by a nonpartisan congressional research team said that over the course of a decade, the U.S. stands to gain $20 billion in revenue if most new inversions are prevented.

What exactly is tax inversion?

What are the politics behind potential corporate tax reform?

Are tax inversions bad for the national economy as a whole?

We consulted a panel of experts for the Inside Story.