Tax Inversion: What's the Real Story?

Ken Berry
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Tax inversion is turning the country inside out. Although the rhetoric flying back and forth is complex, the basic premise is actually quite simple: Multi-national corporations that are reaping profits after taking advantage of favorable U.S. laws are relocating to headquarters in foreign countries and taking their assets with him. The Holy Grail for these mega-corporations is to avoid higher U.S. tax rates on corporate earnings and to pay lower rates in well-known tax havens. As you might imagine, the practice of tax inversion, and how to best resolve it, has stirred heated debate from both sides of the aisle.

Media sources have been chiming in on the problem. Just last week, both the liberal-leaning New York Times and Washington Post and the conservative-oriented Wall Street Journal ran pieces attacking the strategy and urging Congress to plug special interest loopholes in the tax code. On July 30, speaking at the Los Angeles Trade-Technical College, President Obama entered the fray in full force, calling on Congress to provide a healthy dose of preventive medicine.

"My attitude is I don't care if it's legal, it's wrong", Obama said, according to a Wall Street Journal report. He is appealing to the public's patriotism by questioning the loyalty of firms that take advantage of our infrastructure and services and then abscond elsewhere with their profits. Obama also accused Republicans of "directly blocking policies that would help millions of Americans", including his personal preferences for overhauling the tax code, and instead focusing on preserving tax breaks for wealthy individuals and big business.

In a conference call with reporters, the article continues, White House officials reiterated that the president supports a comprehensive rewrite of the tax code so the U.S. will become a more attractive place to locate for business, jobs, and investments. But they noted that it's important for Congress to move quickly to keep the corporate tax base from eroding. In particular, administration officials are concerned about a "bandwagon effect", in which one firm in a particular sector inverts, increasing the likelihood that other corporations in the same sector will hop on next.

How much is at stake? It's difficult to say exactly, but one recent estimate by a nonpartisan congressional research panel, as reported by the Wall Street Journal, places the figure at close to $20 billion. That will make virtually anyone sit up and take notice.

So there you have it. Both Democrats and Republicans agree that this is a problem that isn't going anyway anytime soon and is only getting worse. They agree that it's costing the U.S. billions in tax revenue and that the tide must be turned. They agree that it's unpatriotic for "born in the USA" firms to take this approach. Yet there's no agreement, at least not yet, on how to fix the problem and fix it expeditiously. Based on the recent history of a sharply-divided Congress, the prospects appear dim, especially before the results of the mind-term elections are in.

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Bramwell's Lunch Beat: Obama on Inversions: 'I Don't Care If It's Legal, It's Wrong'


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