Barely a day seems to pass without a corporation announcing that it plans to leave the U.S. to save taxes but wants to continue having its business, its employees, its directors, and especially its top executives benefit from our rule of law, democratic system, and the other great things that make America America. It just doesn’t want to pay its fair share for those things. This makes me angry. Judging from the reaction I’ve gotten from readers, it makes a lot of other people angry too.
What to do? In an ideal world I would slap serious penalties on inverters that do business with the federal government, and require them to underbid genuinely U.S. competitors in order to get federal business. Medtronic and Walgreen, that means you.
But we have to deal with what we have, not with what I would like to have. So what should we do? For starters, we shouldn’t make this political, because this is an American problem, not a Democratic or Republican problem.
Unfortunately, instead of using its influence quietly behind the scenes, the Obama administration has publicly entered the fray, via a July 15 letter from Treasury Secretary Jack Lew that invoked “economic patriotism” and urged Congress to do something about inversions. Pardon my skepticism, but the letter felt as if it was designed more to give President Obama populist talking points than to influence Congress to fix the problem.
CORPORATE INVERSIONS HEAT UP U.S. companies are heading offshore to save taxes. This year, which is barely half over, is likely to set a record for inversions.Graphic Sources: Congressional Research Service; Bloomberg. *2014 proposed or actual
Is there a solution? Glad you asked. The conventional wisdom is that we can’t solve the inversion problem without reforming the corporate income tax, which is a mess on multiple levels: a high rate, a million loopholes, mind-boggling complexity.
But I think the conventional wisdom is wrong. We have an emergency, folks, with inversions begetting inversions. As I was writing this column, another one hit: Drugmaker AbbVie announced it would buy Britain’s Shire for $54 billion. There’s a critical mass of hedge funds, corporate raiders, consultants, investment bankers, and others who benefit from inversions, and you can bet they’re all trying to make sure that nothing changes.
So I think we need to deal with the symptom—inversions—immediately. And with the cause—the tax system—later. The quick fix is legislation sponsored by Sen. Carl Levin (D-Mich.) and his brother, Rep. Sandy Levin (D-Mich.), that would stop inversions dead, at least for now. It would require companies that invert after May 8 of this year to do deals in which the foreign firm’s shareholders own at least 50% of the combined company (current threshold: 20%). In addition, managers of the inverting firm would have to step down. Opponents say that this is futile: Despite two previous fixes, we’re still awash in inversions, and stopping inversions will reduce any pressure to fix the tax system. There’s something to those arguments—but I still think we need to stop inversions cold right now to keep our tax base from eroding beyond repair.
We need more than just lower rates to solve our problem. There will always be some place—Ireland, a Swiss canton like Zug, some other revenue-hungry country—that will undercut the U.S. rate, even if we slice it to 20% or 25% from the current 35%. So we have to be clever. Many of the proposals made by the unfortunately dead-on-arrival Tax Reform Act of 2014, pushed by Ways and Means Committee chair Rep. Dave Camp (R-Mich.), would have tightened loopholes, reduced rates, and made staying in the U.S. more attractive and deserting less so.
Let’s not demonize each other, and let’s not quibble about whether we need temporary or permanent fixes. We need both. First, Levin, with a two-year limit to keep the pressure on. Second, we need some modified Camp. Thanks to our toxic political environment, it won’t be easy. But it can be done. With luck, in a few years I’ll be writing a new essay: “Positively American.”
This story is from the August 11, 2014 issue of Fortune.