Why We Ask: Our mission and operations are funded 100% by conservatives like you. Please help us continue to extend Liberty to the next generation and support the 2021 Year-End Campaign today.

Maarten van Swaay / September 10, 2014

Misleading Moans – and Propaganda – About ‘Inversion’

About inversion, in connection with Mr. Will’s column of 17-aug-14:

Mr. Will makes some astute observations about the asymmetry between praise for U.S. operations of foreign companies such as Toyota and BMW, and obloquy for U.S. companies that choose to establish domicile outside the U.S. Mr. Will is right: such bigotry is a hallmark for the current Administration and Senate.

It may be useful to review just what ‘inversion’ is:

Under current U.S. law, when foreign companies invest foreign profits in the U.S., that investment is not taxed by the U.S. When a U.S. company earns profits outside the U.S., those profits are taxed by the country where they are generated. But when a U.S. company ‘repatriates’ foreign profits to the U.S., that capital is additionally taxed at a rate that is the difference between the tax that was already paid abroad under the rate prevailing where it was earned, and the U.S. rate – the highest in the world.

To the best of my knowledge, the U.S. is the only major nation that taxes corporate profit without regard for where it is earned. Other nations impose a ‘territorial tax’ that is levied only on profit earned within the country.

The U.S. taxes foreign profit only when it is ‘repatriated’ to the U.S., and then allows a credit for taxes already paid outside the U.S. In effect, the U.S. imposes taxes at the U.S. corporate rate, but allows for deferral of differential tax until foreign profit is brought into the U.S. Profit from U.S. operations is taxed in the U.S. without deferral, and without regard for domicile, for both U.S. and foreign companies.

Inversion, i.e., acquisition of a U.S. company by a foreign company, such that its fiscal location will then move outside the U.S., reduces the tax on future repatriated foreign profit by making it subject only to the lower tax in its new location, rather than to the (highest in the world) U.S. corporate tax. Inversion does not affect either U.S. or foreign tax on the profit from U.S. operations. Nor does inversion shelter earned but not yet repatriated foreign profit from the (differential) U.S. corporate tax. Significantly, inversion is unlikely to reduce U.S. tax revenue: U.S. companies already can choose to leave foreign earnings outside the U.S.

The net result: as long as a U.S. company does not return foreign earnings to the U.S., inversion has no effect on U.S. tax revenue. But when a U.S. company returns foreign profit to the U.S., that returned profit is incrementally taxed in the U.S. Foreign companies are not subject to that incremental tax; they are free to invest their foreign profit here.

Consequences: Inversion makes it possible to invest (future) foreign profit in the U.S. without subjecting it to additional tax. That is likely to increase investment in the U.S., with the associated creation of U.S. jobs and associated tax revenue. The corporate interest in inversions indicates that industry is optimistic about the opportunities of future investment in the U.S.

Conclusion: the story that inversions amount to ‘unpatriotic’ tax avoidance, let alone evasion, is thick and smelly snake oil. The same legal tax avoidance is already available and widely used in the form of leaving foreign profit outside the U.S., i.e., ‘exporting jobs’. But reinvestment of that profit in the U.S. is severely hampered by current U.S. corporate tax law.

Professor Maarten van Swaay retired from Kansas State University in 1995. He can be reached at [email protected]

Start a conversation using these share links:

Who We Are

The Patriot Post is a highly acclaimed weekday digest of news analysis, policy and opinion written from the heartland — as opposed to the MSM’s ubiquitous Beltway echo chambers — for grassroots leaders nationwide. More

What We Offer

On the Web

We provide solid conservative perspective on the most important issues, including analysis, opinion columns, headline summaries, memes, cartoons and much more.

Via Email

Choose our full-length Digest or our quick-reading Snapshot for a summary of important news. We also offer Cartoons & Memes on Monday and Alexander’s column on Wednesday.

Our Mission

The Patriot Post is steadfast in our mission to extend the endowment of Liberty to the next generation by advocating for individual rights and responsibilities, supporting the restoration of constitutional limits on government and the judiciary, and promoting free enterprise, national defense and traditional American values. We are a rock-solid conservative touchstone for the expanding ranks of grassroots Americans Patriots from all walks of life. Our mission and operation budgets are not financed by any political or special interest groups, and to protect our editorial integrity, we accept no advertising. We are sustained solely by you. Please support The Patriot Fund today!

★ PUBLIUS ★

“Our cause is noble; it is the cause of mankind!” —George Washington

The Patriot Post is protected speech, as enumerated in the First Amendment and enforced by the Second Amendment of the Constitution of the United States of America, in accordance with the endowed and unalienable Rights of All Mankind.

Copyright © 2021 The Patriot Post. All Rights Reserved.

The Patriot Post does not support Internet Explorer. We recommend installing the latest version of Microsoft Edge, Mozilla Firefox, or Google Chrome.