Locking Out Prosperity: The Treasury Department’s Misguided Regulation to Address the Symptoms of Corporate Inversions While Ignoring the Cause
Over $2 trillion of US corporate profits have been systematically locked out of the US economy by an outdated tax system. The United States has the highest corporate tax rate in the developed world and is one of just a few countries that taxes the worldwide income of domestic businesses.
One major symptom of the poorly designed worldwide corporate tax rules in the US is the rise of corporate inversions, where a domestic firm merges with a foreign firm and moves the new corporation’s headquarters abroad. High numbers of inversions from 2012 through 2015 show that the tax savings that come from moving corporate headquarters abroad are financially worthwhile for specially situated firms meeting the Treasury’s ownership requirements.
In response to some highly publicized corporate inversions, the Treasury Department has issued regulations that raise the cost of inverting by increasing the complexity of international corporate merger rules. Treasury’s regulatory response addresses the symptoms, but it fails to address the cause of corporate inversions. Instead of trying to address the symptoms of corporate inversions by issuing more complex regulations, the US should address the cause of inversions by moving toward a territorial tax system and a significantly lower corporate tax rate.