More Perspective on Inversions: Not a Threat to the Tax Base but the Face of U.S. Uncompetitiveness

August 05, 2014

In recent weeks there has been an excessive amount of hand-wringing and gnashing of teeth about corporate inversions. The comments range from the White House calling these companies unpatriotic to reporters claiming that inversions are eroding the corporate tax base.

It is time for a little perspective.

First, while the number of companies moving their headquarters abroad has increased in recent years, the numbers are very small compared to the 1.6 million corporations in the U.S.—of which roughly 5,000 are publicly traded. According to the Congressional Research Service, just five companies moved their headquarters abroad in 2013, down from nine in 2012. This year, seven companies have taken steps to merge with a foreign-based company and move their headquarters abroad.

So all this hysteria is over the fact that 0.1 percent of all publicly traded U.S. firms moved their headquarters to another country. The nearby chart shows the number of inversions annually since 1983. As Congressman Sander Levin (D-MI) illustrates on his website, there have been 47 corporate inversions over the past decade. Even so, this ten year figure represents less than 1 percent of all publicly traded companies and 0.003 percent of all U.S. corporations. Hardly a tidal wave of expatriations.

Now, what about the tax base? In a recent Washington Post article, BusinessWeek’s Allan Sloan says that “All of this threatens to undermine our tax base, with projected losses in the billions.” Sloan endorses legislation written by Sander Levin and his brother Michigan Senator Carl Levin, the “Stop Corporate Inversions Act of 2014” (H.R. 4679). The bill would supposedly save the Treasury $19 billion over ten years by limiting inversions to deals where the U.S. purchaser of a foreign entity must be 50 percent of the new company, unlike today where the U.S. firm can be 80 percent of the new company.

If this legislation is meant to protect the U.S. corporate tax base, then the erosion threat can’t be that bad. The Congressional Budget Office currently projects corporate tax revenues will total $4.8 trillion over the next ten years. Thus, $19 billion represents a savings of 0.4 percent of those projected corporate tax revenues over a decade. In Washington, that is a rounding error.

The reason inversions are getting so much attention today, even though they are few in number and not a threat to the tax base, is that they put a face on what has until now been an abstraction in the political debate—the fact that the U.S. has the least competitive corporate tax rate and international tax regime in the industrialized world. People tend not to take storm warnings seriously until the first tree blows down.

And the reason for the over-the-top reactions from the White House, and lawmakers like the Levin brothers, is that inversions are an embarrassing reminder that their world view—which says that taxes don’t matter—is fundamentally wrong. Reality is a hard pill to swallow.

 

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