Maya MacGuineas: The Long-Term Answer to Inversions? Tax Reform.

Maya MacGuineas, President of the Committee for a Responsible Federal Budget, wrote a commentary that appeared in the Wall Street Journal Washington Wire two weeks ago. It is reposted here.

So far this year 14 companies have announced plans to merge with foreign companies or relocate overseas to lower their tax bills and increase their ability to compete internationally. Calls for economic patriotism are not going to stop these “inversions.” The U.S. has the developed world’s highest corporate tax rate, and it taxes operations overseas differently than our competitors do; that’s what is driving our companies away.

Legislative efforts to raise the standards companies must meet to invert, or reduce their tax benefits if they do, would not address the fundamental problems in the tax code that are driving money overseas.

Instead of punishing companies for moving abroad, we should be creating an environment in which they can succeed.

The best way to stop inversions is to enact comprehensive tax reform. Specifically, we should broaden the tax base, lower rates, tax foreign operations more like other countries do, and create a stable, competitive international tax system.

It is no coincidence that moves toward inversions picked up after it became clear that tax reform would not happen this year. The message is that Washington, rather than solving problems, accepts lurching from crisis to crisis.

What’s needed is a strategic pause: Corporate America and lawmakers could agree to a nine-month hiatus. Companies would pledge not to move forward on plans to invert, and lawmakers could use a fast-track process to substantively reform the tax code. Companies would have little to lose, as they would still be able to change their legal structure after the pause, and a deadline could help move tax reform along.

While tax reform is hard–pitting companies, industries and interests against each other–there has already been a great deal of progress.

President Barack Obama, former senator Max Baucus, House Ways and Means Committee Chairman Dave Camp and Senate Finance Committee Chairman Ron Wyden all have put forth proposals that would cut tax preferences and lower the corporate rate. They would reevaluate our tax code’s treatment of overseas earnings. And all would attempt to make the tax code simpler and more economically competitive.

Operating in the global marketplace, the U.S. has to think more deeply about how and what it taxes. While many complain that ”corporations don’t pay their fair share,” the reality is that corporate taxes are passed on to customers, employees and shareholders. And as borders become more porous and corporate structures and capital become more mobile, corporate taxes increasingly encourage inefficient and costly behavior.

A smarter approach—one that will take time—would be to shift more of the corporate tax onto wealthy individuals and those who earn much of their income from gains in the corporate sector. The first step would be to eliminate tax breaks for the well-off and equalize the treatment of wages and capital, which would be preferable to further raising marginal rates. Over the long term, this kind of shift would merit a more radical rethinking of the way the individual and corporate income taxes interact. Any tax changes should capture at least as much revenue as is raised now—and hopefully more, as part of a broader deal to fix the budget—and in a way that is at least as progressive as the current code.

"My Views" are works published by members of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the committee.