Corporate Inversions Are the Symptoms; Poor Tax Policies Are the Disease
In response to several high profile corporate restructurings known as corporate inversions, politicians have been looking for ways to punish any company considering such a restructuring. Hillary Clinton’s ill-conceived exit tax exemplifies the types of harmful policies that are being proposed.
A corporate inversion is a type of acquisition where a U.S. company purchases a foreign owned company and registers the new entity outside of the U.S. It is important to note that while the uncompetitive U.S. tax code is an important incentive driving corporate inversions, typically the tax benefits alone are insufficient to justify the transaction. Instead, corporate inversions typically require other justifications (such as improved operational efficiencies) in order for the restructuring to make sense.
Attempts to punish companies that are pursuing corporate inversions misdiagnose the problem and, in so doing, make a bad situation worse. The uncompetitive U.S. corporate income tax code is the root cause of the problem. The U.S. corporate income tax code imposes large economic costs on U.S. companies and disincents economic growth. Economic efficiency is best promoted when business decisions are based on economic fundamentals, not tax considerations. Unfortunately, the uncompetitive U.S. corporate income tax code ensures that this cannot be the case.
Within all of the current sub-optimal choices available to a company, corporate inversions are an improvement over the status quo. Following the restructurings, the incentives and ability for the new company to invest in the U.S. economy has improved, leading to greater income and job growth in the U.S. economy. Therefore, punishing companies that are restructuring via a corporate inversion creates additional barriers to economic growth.