President Obama offered a misleading criticism of corporate inversions and missed an opportunity to call for structural reform of corporate income taxation

Missing the point on inversions

 and corporate taxes

Alan Viard 

In his CNBC interview yesterday, President Obama offered a misleading criticism of corporate inversions and missed an opportunity to call for structural reform of corporate income taxation.

President Obama began by condemning inversion transactions, in which corporations effectively swap their US charters for foreign charters. Inversions offer tax savings because foreign-chartered corporations pay US tax only on their domestic profits while US-chartered corporations also pay US tax on their repatriated overseas profits (with credit for any taxes paid abroad). The president complained that it was unfair for corporations to “move their technical address simply to avoid paying taxes” while still benefiting from “the best university system in the world, the best infrastructure [and] a whole range of benefits that have helped to build companies.” But, those services primarily aid domestic production, on which inverted corporations, like other foreign-chartered corporations, remain subject to US tax. The president did not explain why corporations that previously had US charters and inverted to obtain foreign charters should pay US tax on their overseas profits while corporations that have always had foreign charters face no such obligation.

Rather than condemning corporations that change their “technical address” to lower their taxes, we should be asking why we base tax liability on that technicality in the first place. If we tell a corporation that it must pay millions of extra dollars in tax because it has a piece of paper that was issued in the United States rather than abroad, should we really be surprised when it tries to get a new piece of paper issued abroad? The tax incentive for inversions would vanish if all corporations, regardless of their charters, were treated uniformly, paying tax solely on their domestic profits.

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Read more: www.aei-ideas.org


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