A corporate inversion is a paper transaction in which an American corporation reincorporates in a foreign nation without moving any of its operations to that country. The principle reason that a corporation will invert is to save money on taxes, in some cases as much as $60 million annually. Politicians, believing these companies are reincorporating in a foreign country to evade taxes, have introduced numerous bills to try to stop these companies from moving overseas. Senator John Kerry, the 2004 Democratic presidential nominee, stated that he plans to stop inversions within 500 days of his election to office. These corporations, however, have demonstrated that they will not give up these tax savings without a fight. Leucadia National Corp., a company that underwent an inversion in 2002, has hired a high-priced lobbying firm to block congressional efforts to stop inversions.
The design of the tax system and substance of tax laws have an effect on nearly every economic decision made by individuals. Whether to invest or consume, buy or sell, and what forms of consumption or savings in which to engage are all issues that are influenced by the design of the tax system and the substance of tax laws. The tax treatment of debt in the U.S. hybrid-based income tax system generates inequities and inefficiencies that result from both an inconsistent base and failures in timing. Americans with high net wealth and sophisticated tax advisors can strategically use the inconsistent base and timing problems associated with debt to avoid, delay, or shift tax burdens. Unfortunately, for lower- and middle-class Americans without the benefit of tax advisors, the inconsistent base and timing problems associated with debt in our tax system can be economically detrimental.
The United States raises revenue through a variety of taxes that are fragmented or “disaggregated” into multiple components. Although most Americans think of taxes primarily in terms of the income tax, its lesser known cousin, the payroll tax, produces nearly identical revenues while falling disproportionately on the poor and middle-class. Disaggregating the tax system into several component taxes thus conceals the true aggregate tax burden on taxpayers. This misleading effect is exaggerated because the media and politicians focus on the income tax while ignoring the equally significant payroll tax.
The use of abusive tax shelters by major corporations has been called “‘the most serious compliance issue threatening the American tax system . . . .’” Losses to the Department of the Treasury (“Treasury”) are estimated to range anywhere from $7 billion to $30 billion per year. Meanwhile, corporate profits have risen 23.5% while their corresponding tax obligations rose by only 7.7%. Personal income taxes, on the other hand, are up 44%, which represents 79% of the total federal income tax and is estimated to increase to 85% by the year 2004. Also astounding is that the corporate tax-to-profit ratio has dropped between 1.5% and 2.9%, roughly translating into a decrease in corporate income tax receipts between $13 and $24 billion. Although the decrease in corporate tax receipts is unlikely to be attributed to a single cause, many commentators point to the growing acceptance of abusive tax shelters by large corporations as a major contributor.