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New Report on Corporate Tax Inversions Lacks Important Context

2 min readBy: Kyle Pomerleau

This week, Bloomberg Businessweek reported that corporate taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. inversions will cost the U.S. Treasury $2.2 billion in corporate tax revenue in 2015. According to the report, this is double what they cost the Treasury this year, and inversions will continue to cost $2 billion a year into the future. While $2.2 billion is nothing to scoff at, the report gives no context to this number. This makes inversions seem like a much larger problem for the corporate tax revenue than it really is.

A corporate inversion is when a U.S. company is purchased by a foreign company. This allows a U.S. firm to reincorporate in a foreign country. The tax benefit is that the former U.S. corporation no longer needs to pay the U.S. corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. on its foreign profits (it still must pay tax on every penny it earns in the United States).

At first glance, Bloomberg’s estimated $2.2 billion cost of inversions may seem large. Anyone with $2.2 billion in the bank would be a rich man. However, in the context of the U.S. economy ($16 trillion GDP) and the U.S. federal budget (nearly $4 trillion), $2.2 billion doesn’t seem like all that much anymore.

Even compared to how much the federal government is projected to raise in corporate tax revenue in fiscal year 2015, the cost of corporate tax inversions is small. According to the Office of Management and Budget (OMB), the federal government will raise $449 billion in corporate tax revenue in FY 2015, 200 times the amount the report says we will lose to inversions.

Going forward, the cost is similarly small. According to the JCT, the total cost of corporate tax inversions will be $19.5 over the next ten years. This is 0.4 percent of $4.5 trillion the corporate income tax will raise over the same period.

Just because corporate tax inversions are not a threat to the corporate tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. does not mean that they do not matter, though. Rather, corporate tax inversions are a sign that it is expensive for a multinational corporation to be based in the United States. Our worldwide corporate tax system makes the costly decision of reincorporating overseas more attractive than continuing to deal with the U.S.’s arcane international corporate tax rules.

This is a big problem for competitiveness given that corporations in most other nations throughout the world do not have to deal with worldwide taxation. Most countries today have territorial tax systemA territorial tax system for corporations, as opposed to a worldwide tax system, excludes profits multinational companies earn in foreign countries from their domestic tax base. As part of the 2017 Tax Cuts and Jobs Act (TCJA), the United States shifted from worldwide taxation towards territorial taxation. s that completely exempt most of their corporation’s foreign income from domestic taxation.

More time should be spent discussing the underlying cause of inversions: The U.S.’s worldwide tax systemA worldwide tax system for corporations, as opposed to a territorial tax system, includes foreign-earned income in the domestic tax base. As part of the 2017 Tax Cuts and Jobs Act (TCJA), the United States shifted from worldwide taxation towards territorial taxation. is uncompetitive and the solution is moving towards a territorial tax system. Less time should be spent wringing our hands over their miniscule cost to the Treasury.

For more on the cost of corporate tax inversions, click here