Corporate inversions are the logistical outcome

  • Article by: EDITORIAL , Bloomberg View
  • Updated: July 18, 2014 - 5:57 PM

If politicians really are offended by them, they need to change the conditions that produce them.

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Treasury Secretary Jack Lew.

Photo: Jacquelyn Martin • Associated Press,

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Another day, another turncoat corporation. U.S. companies seem frantic to renounce their U.S. citizenship and lower their tax bills by acquiring overseas rivals and adopting their domiciles. A dozen companies are exploring such a move; nearly 50 have completed the switch since 2005.

Treasury Secretary Jack Lew calls the dodge, known in the trade as a tax inversion, unpatriotic. He wants lawmakers to crack down. Democrats are advancing legislation to make inversions harder.

Lawmakers may be incensed, yet the fault is theirs. Companies that reincorporate in low-tax countries are rational actors, not traitors. For years, Congress has debated a more business-friendly tax code — one that lowers the 35 percent top rate (the highest in the industrialized world), closes loopholes and taxes only U.S. profits. For years, unfortunately, debating the issue is all it’s done.

Temporary patches aren’t the answer. Frustrated executives are merely running their businesses in a tax-efficient way — as they’re paid to. They also want to put foreign earnings, estimated at $2 trillion, to better use instead of letting them sit overseas. The United States, in its wisdom, encourages companies to let profits pile up abroad, because they’re taxed only if they are repatriated.

Granted, most inversions are fakes. The revenue loss, however, is real. The U.S. corporate-tax system manages the double blunder of taxing at a high rate while collecting relatively little revenue. And note that inversions aren’t the main cause. The 35 percent top rate encourages companies to hire lobbyists to make campaign contributions, curry favor and win loopholes. In short, it fosters corruption.

Republicans claim to want to end corporate welfare. Democrats say they want to close special-interest loopholes. That’s great. The way to do both is through comprehensive tax reform.

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