University of Southern California

Corporate Inversions: A Symptom of a Larger Problem, the Corporate Income Tax

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Note by James Mann
From Volume 78, Number 2 (January, 2005)

A corporate inversion is a paper transaction in which an American corporation reincorporates in a foreign nation without moving any of its operations to that country. The principle reason that a corporation will invert is to save money on taxes, in some cases as much as $60 million annually. Politicians, believing these companies are reincorporating in a foreign country to evade taxes, have introduced numerous bills to try to stop these companies from moving overseas. Senator John Kerry, the 2004 Democratic presidential nominee, stated that he plans to stop inversions within 500 days of his election to office. These corporations, however, have demonstrated that they will not give up these tax savings without a fight. Leucadia National Corp., a company that underwent an inversion in 2002, has hired a high-priced lobbying firm to block congressional efforts to stop inversions.

Members of Congress, believing that inverted corporations should be punished for renouncing their citizenship and their executives should be taxed for making this unpatriotic decision, have proposed complex legislation designed to close this tax loophole. Unfortunately, these solutions will not work. In reality, inversions are only a symptom of a much larger problem: American corporations are uncompetitive in foreign nations because of the corporate income tax. Today, the United States taxes corporate earnings at a rate of approximately 35%. Of sixty-nine countries surveyed as of January 2004, only Japan had higher corporate tax rates. These higher tax rates have yielded an inefficient result: some companies have committed transactions with the sole purpose of reducing their tax liabilities.

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