Do Corporate Inversions Really Cost Much Tax Revenue?

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Peter Fricke Contributor
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President Obama and congressional Democrats consistently deride companies moving headquarters overseas as “unpatriotic.” They say corporate inversions must be banned to prevent further loss of tax revenue.

But are the stakes truly high enough to justify such a significant restriction of business activity?

Corporate inversions occur when U.S. firms merge with foreign companies in order to relocate to lower-tax countries. A number of high-profile inversion negotiations have been reported in recent months, including the potential moves of pharmaceutical company AbbVie to Ireland and of Burger King to Canada.

In addition to launching rhetorical attacks against inverters, Democrats have responded to the news with a flurry of legislative and regulatory proposals to discourage the practice.

Michigan Democratic Sen. Carl Levin has been among the strongest opposition voices in Congress, though neither of his two anti-inversion bills has been passed.

One of those bills is the Stop Corporate Inversions Act of 2014, which would treat corporations as domestic for tax purposes if at least 50 percent of stockholders are American, or if at least 25 percent of the company’s sales, employees, or assets are located in the U.S.

The other is the No Federal Contracts for Corporate Deserters Act, which would deny federal contracts to any company that relocates overseas if more than 50 percent of its shareholders are in the U.S. and it has no “substantial business opportunities” in the country to which it relocates. (RELATED: Democrats Would Deny Federal Contracts to Corporations That Relocate Overseas)

On Monday, the Treasury Department announced the issuance of new tax rules designed to make inversions less profitable, because according to Secretary Jacob Lew, “it is clear that Congress won’t act before the lame duck session.”

The new rules are necessary, Lew said, because “inversion transactions erode our corporate tax base, unfairly placing a larger burden on all other taxpayers, including small businesses and hardworking Americans.” (RELATED: Treasury Department Seeks to Discourage Corporate Inversions with New Regulations)

Prior to those rule changes, however, “the Joint Committee on Taxation estimated that U.S. corporate inversions could cost $20 billion in missed tax revenue over the next decade,” according to the International Business Times. The same figure was also cited in a post on the White House Blog.

Though hardly an insignificant figure, it represents “a mere 0.5 percent of overall corporate tax revenue,” which is expected to total about $4.5 trillion during the same period. In contrast, the ten-year cost of extending existing corporate tax loopholes would be about $400 billion. (RELATED: US Tax Code Causes Companies to Flee Overseas)

Moreover, the new rules issued by the Treasury are likely to fall well short of that high-end estimate, according to The Wall Street Journal.

Tax policy experts told the WSJ that, “any chilling effect on inversions might not last long,” because “companies could find ways to do the deals despite the new rules.” Some even predicted that while the new rules might cause companies to put inversion deals on hold while they investigate the implications, those negotiations would resume within a few weeks.

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