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Whatever Happened to Corporate Inversions?

Remember Corporate Inversions?

Corporate inversions—when a U.S. company merges with a foreign domiciled company in order to gain the benefits of the lower-tax country—were a major tax policy controversy over the last couple of decades. The first high-profile corporate inversion was the 1998 Chrysler/Daimler merger, where the newly merged company chose to base itself in Germany because of lower taxes. But the peak of the corporate-inversion furor was during the Obama years, because the U.S. had maintained its high corporate tax rates even as other developed economies lowered theirs.

The result was that U.S. companies faced significantly higher tax burdens than their competitors simply by virtue of being based in the U.S. And, during the Obama years, Democrats were angling to raise corporate taxes even more. This tax inequity stranded trillions of dollars of U.S. company profits in overseas subsidiaries and pushed companies into inversions in order to be more tax competitive.

President Obama’s proposed solution to corporate inversions was to clamp down and make it more difficult for companies to invert, and Democrats in Congress also proposed authoritarian regulations designed to hold U.S. companies hostage to high corporate taxes.

So why don’t we hear anything about corporate inversions anymore? Because President Trump and the Republican Congress solved the problem.

The Tax Cuts and Jobs Act (TCJA) of 2017 slashed the U.S. corporate tax rate from 35 percent to 21 percent, which in one fell swoop moved U.S. corporate rates from one of the highest among O.E.C.D. countries to below the average O.E.C.D corporate tax rate. Immediately, the United States became one of the most favorable countries on earth for corporations, instead of one of the worst.

Further, the TCJA moved the U.S. from a global corporate tax system, where foreign income was taxed at U.S. rates, to a mostly territorial tax system, where only domestic income is taxed, which again made the U.S. more competitive and encouraged the repatriation of billions of dollars in stranded corporate profits.

And that’s why you don’t hear about corporate inversions anymore. Because President Trump and the Republican Congress fixed the problem for good.

Or maybe not. Both Joe Biden and Kamala Harris promised to raise corporate taxes during the Democratic primaries. A Biden/Harris administration would be a two-headed, tax-hiking dragon should they win the November election.

Businesses are fleeing Democrat-run cities because high taxes make it difficult to succeed. Capital moves from where it is punished to where it is favored.

And if the Biden/Harris team wins the election and keeps its promises to raise corporate taxes, U.S. corporations could find themselves right back in the same old tax mess, and looking once again to escape.