How Much Revenue The U.S. Is Losing Through Tax Inversions, And How Much Worse It May Get

Yesterday was quite a day for corporate tax geeks. We saw a corporate tax inversion that comes with a long, Baroque history; an estimate by Reed College economist Kim Clausing that inversions and other income-shifting techniques reduced Treasury revenues by as much as $111 billion in 2012; and a new Congressional Budget Office projection that corporate base erosion will continue to cut corporate tax receipts over the next decade.

In case you hadn’t noticed, corporate income-shifting is a real problem. The related real problem is that while Democrats and Republicans agree that something is seriously amiss, they profoundly disagree on what is wrong and what to do about it.

Let’s start with the inversion, which is just one form of tax planning aimed at reducing the U.S. corporate tax base. This one was a $14 billion deal between Ireland-based Tyco International and Wisconsin-based Johnson Controls JCI +0.00%. The firms estimate that by moving the legal headquarters of the combined business to Cork, the new company will save $150 million annually in taxes. They argue that the transaction makes good business sense on its own, but there is little doubt that, whatever its merits, the deal was structured to maximize tax savings.

This would be just another tax-advantaged merger except that one of the partners is Tyco, a firm that is legendary in the peripatetic world of income shifting. Describing Tyco as an Irish firm can only bring a smile to the faces of those who have been watching its tax-driven comings-and-goings for two decades.

Briefly, here’s simple version of the story (summarized from a blog I wrote about back in 2014). There were even more deals involving other spinoffs but you’ll get the drift.

In 1997, Tyco did an early inversion by turning itself into a subsidiary of a small Bermuda-based security firm, ADT ADT -3.57% Limited. ADT took Tyco’s name. Tyco took ADT’s Bermuda address. And the new firm was firmly ensconced in a tax haven.

By 2007, Tyco spun off its health care unit into a new publicly traded firm,Covidien Ltd., also legally headquartered in Bermuda.

In 2009, with Congress pursuing legislation to crack down on tax havens, Covidien moved its headquarters to Ireland, though it operates out of an office park in Mansfield, Massachusetts. The legacy company, Tyco, changed its legal address to Switzerland.