Are U.S. corporate tax inversions a necessary crisis?

One of the best cries of outrage appeared in Allan Sloan’s piece in Fortune earlier this month. The patriotism angle I get, but then again, why blame corporate chiefs for taking advantage of tax games that are perfectly legal, especially in a rapidly globalizing economy?

The big mystery is why it took some companies so long to do this, and why many others have held back, at least so far?

My personal best guess is that until recently, many corporate leaders had some faith that this would be the year of major corporate tax overhaul. That faith eroded with the retirements of two tax committee chairs (Former Sen. Max Baucus, who went to China as U.S. Ambassador, and U.S. Republican Congressman Dave Camp of Michigan, who is leaving at the end of this year). In addition, companies doing or contemplating inversions want to get them done before they are handcuffed by Congress (or so they may think).

The amounts at stake are still small by government standards (though not by corporate standards). The Joint Tax Committee has estimated that legislation aimed at stopping inversions would prevent the U.S. Treasury from losing roughly $2 billion a year, a drop in the bucket compared to federal corporate tax revenues of $333 billion in fiscal 2014 (and an even smaller share of total federal tax receipts of $3 trillion in that year).

The problem is if Congress does nothing to bring down corporate tax rates, in return for narrowing or eliminating deductions and credits, inversions will continue, eventually eroding conceivably up to half the revenue from the corporate tax (that’s the latest share of all corporate tax revenue derived from multinational companies).

Obviously alarmed at this possible end game, Treasury Secretary Jack Lew asked Congress in a letter this week to take immediate action to prevent inversions, if necessary then retroactively to May (hold that latter thought until the end of this essay).

There is much sympathy in both political parties for clamping down on inversions. The best known proposal to do this has been drafted by the “Levin brothers” (Sen. Carl Levin and Rep. Sander Levin) and would allow inversions only if the shareholders of the acquiring foreign firm hold a higher share, at least 50%, of the U.S. company after the transaction (the current threshold is just 20%). In addition, the proposal would require management to change, a feature that would probably do most to stop inversions in their tracks.

But even sympathetic Congressional members will consider anything like the Levins’ proposal only as part of comprehensive corporate tax overhaul, which is all but dead now, especially heading into the mid-term elections.

As they say, when one gets lemons and doesn’t want them, turn them into lemonade. Think of inversions as the big lemon that just landed in Washington, and lemonade being real comprehensive corporate tax reform.

This is because Washington has gotten into the unfortunate habit of legislating only in response to a crisis. Up to now, the best argument for corporate tax reform is that it would boost growth over the long-run – a conclusion widely shared across the political aisle, but one that has no immediacy to it. Inversions are a game changer and may be just the sort of crisis that next year could really put corporate tax reform high on the political agenda, regardless of the outcome of the November elections.

If this is true, then it will sure help the effort if the Administration walks the talk and really backs Congressional efforts to do this. A tax reform package that really lowers “corporate tax expenditures” in return for a markedly lower statutory rate (25 percent may be too ambitious, 28 percent may be more realistic) would be the one bipartisan legislative accomplishment that the President could tout as he leaves office in 2016.

While we’re discussing crisis-driven legislation, I can’t resist noting that in an ideal world, the current child immigration crisis would be the spark for Congress to enact comprehensive immigration reform. Likewise, there would be a crisis – short of another recession – that would spur Congress and a President (if not this one, then next one) to enact a compromise package that would put our nation’s long-term finances on a sustainable path.

But this is surely dreaming too much. Let’s start with true corporate tax reform. And companies should now be on notice that any inversions they may enter from now on could very well be retroactively undone by tax legislation enacted sometime in the next two and a half years.

Robert Litan is a non-resident senior fellow at the Brookings Institution and author of The Trillion Dollar Economists. Follow him @BobLitan