Political campaigns are not generally known as ideal laboratories for devising sensible, innovative policies. Yet Hillary Clinton’s proposals to combat corporate inversions – in which U.S. companies move their tax homes abroad – are just that. They would largely eliminate the tax incentives to invert.
A U.S. company currently has many such incentives. It can lower its taxes by creating a home base in a low-tax country, even if it leaves its headquarters and other operations in the U.S., and even if the U.S. operations represent as much as 79.9 percent of the new combined company.
In the past two years, the Treasury Department has imposed tighter restrictions on inversions when the U.S. company represents 60 percent to 80 percent of the combined entity. It’s clear that more has to be done, and while further administrative action is possible, the most substantial changes will require legislation.
The one strategy for comprehensive corporate tax reform that would minimize the incentives for game-playing is something called formulary apportionment, in which X percent of a company’s global profits are taxed in the U.S. if X percent of the company’s sales or employment are here, regardless of where the firm is domiciled for tax purposes.
Clinton would do three things. She would drop the 80 percent threshold to 50 percent. That means that U.S. companies wanting to invert would have to find a foreign partner that’s at least as large as the U.S. company. She would also impose an “exit tax” on profits that the U.S. company had accumulated tax-free abroad – so that it would be taxed just as money that accumulates tax-free within retirement-savings accounts is taxed upon withdrawal. And she would make it harder to strip earnings, even if that means acting without Congress via executive authority.
Those three targeted steps would effectively eliminate the tax incentives for inverting. And they could be done without major legislation. Indeed, they would combat inversions more effectively than many if not most comprehensive reforms would. So we have a choice: We could spend the next several years debating big reforms while inversions continue – or we could adopt Clinton’s proposals now. •
Peter,
Another easy solution would be to lower corporate taxes in the US to make them more competitive with the rest of the world. Then companies wouldn’t be looking for inversion possibilities.