Why We Are Still Asking The Wrong Questions About Inversions

In the summer of 2014, I wrote that Washington was asking the wrong questions about tax inversions. The conversation was focused on stopping these deals, rather than making any attempt to understand the regulatory factors that were leading so many U.S. companies to move their tax domiciles elsewhere. Nearly two years later, following another round of regulations from the Department of the Treasury aimed at cracking down on so-called “corporate deserters,” it’s tempting to ask:

“What’s changed?”

The answer – which won’t surprise Washington observers – is depressingly little.

It is easy to understand why many want to respond to inversions or accounting strategies that companies are employing to lower their tax bill. And it is easy to understand why many feel the solution is as simple as asking corporations to pay more. But like it or not, we live in a globalized world, and despite what some would have you believe, there are no simple solutions to complex questions of cross-border tax and trade.

If recent history is any indication, these rules may not put a halt to tax inversions (the last two rounds of regulations certainly haven’t). The leadership that multinational corporations employ are too smart to not pursue every competitive advantage in today’s ferociously competitive market. Our tax code is a Byzantine relic of a bygone era. And even if the Treasury does slow the exodus of U.S. corporations to other jurisdictions, that won’t do anything to address the real issue here: namely, we are saddling American workers, investors and management with a corporate tax code that discourages investment and encourages companies to park their earnings overseas. Put differently, inversions are a symptom; our tax code is the disease. Treasury has announced that it is putting another Band-Aid on a bullet hole.

Consider this: according to a Credit Suisse report published in March 2016, S&P 500 companies have a staggering $750 billion in cash (and nearly $3 trillion in total earnings) stored overseas. And in truth, that number isn’t even close to the real figure, as only 219 members of the S&P 500 provide that level of disclosure (which isn’t required by law). But even taken at face value, that’s $750 billion dollars of corporate profits that’s not building new facilities, not being used to hire new employees, and not being invested in R&D to develop new and innovative products and create high paying jobs for American workers.

Given the tremendous pressure on companies to grow their businesses and return value to shareholders, you might wonder why these companies aren’t at least doing something with all that cash. The answer can be found in our corporate tax code, an antiquated and needlessly complex set of regulations that ranks among the least competitive in the world. In addition to the highest corporate tax rate in the Organization for Economic Cooperation and Development, we are also one of the last (and certainly the largest) countries to maintain a worldwide tax system – meaning that revenues are subject to the U.S. corporate tax rate as soon as they come into our country, regardless of where they are earned. So if we go back to that $750 billion in cash, repatriate every penny today, and subject it to the top marginal corporate income tax rate of 39.1%, those 219 companies are looking at a tax bill of $293.25 billion. If it sounds unreasonable to ask American companies and their shareholders to sign off on $300 billion in taxes on revenue that has already been taxed in the country where it was earned, well, it should. That $750 billion is just being underutilized, rather than injected into our economy and creating growth.

Again, I’m not placing the blame for this situation solely at the feet of Executive Branch or on Congress. Everyone recognizes that we desperately need comprehensive tax reform to restore America’s status as a nation that welcomes investment and drives innovation. But the political will simply isn’t there, and no one is taking responsibility for building a consensus on this crucial issue. Until both parties have the courage to work together and figure out how to bring our country in line with the rest of the industrialized world, we’re going to be left with more Band-Aids on bullet holes.

Wake up, Washington. The real tax is that of political gridlock and it is chocking the growth that all Americans deserve.