Fall of inversions

The need for tax reform is made clear by plans to stop the trend of corporations switching their tax status.
Last summer, more American companies like Mylan and Walgreen said they wanted to move their headquarters overseas to avoid paying U.S. taxes. They usually did this by combining under a new foreign holding company, which made the media pay more attention to the issue of “tax inversions.” The Congressional Research Service says that 75 companies have changed their names in the last 20 years, and most of them have done so in the last seven. The Joint Committee on Taxation says that over the past 10 years, this has cost the U.S. as much as $20 billion in tax revenue.
As the issue of inversions got more attention, it quickly split into two camps. President Barack Obama ’91 criticised these companies for their lack of “economic patriotism” and said in July, “I don’t care if it’s legal—wrong.” it’s Lawyers for corporations and others didn’t agree with this description. Michael Mollerus ’88, a partner at Davis Polk & Wardwell and an expert on inversions, says, “What our clients do is perfectly legal under the law as it stands, and we help them do it the right way.”

Business people think that the problem is that the U.S. tax rate is too high. Mollerus says that the system is broken and doesn’t help U.S. companies or the U.S. economy as a whole. “What you’re seeing with inversions is the result of a system that isn’t working well and no one doing much to fix it.”

When state and federal taxes are added up, the U.S. has the highest corporate tax rate in the world, at about 39%. Other countries in the Organization for Economic Co-operation and Development have a rate of about 29%. Some people say this number is misleading: A report by the Congressional Research Service says that the effective tax rate for corporations is 27.1 percent, which is lower than the average effective tax rate of 27.7 percent in other OECD countries. This is because corporations use credits and deductions, which are also called “loopholes.” A report from the Government Accountability Office said that in 2010, profitable U.S. companies with at least $10 million in sales paid an average effective federal tax rate of just 13% on their worldwide income for financial accounting purposes. This was according to The Wall Street Journal, which cited the report.

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