Why are Tax Inversion” Relocations Accelerating?

Tax inversions — the process of U.S. firms, merging with or buying foreign companies to shift their taxpaying headquarters abroad — have deprived the U.S. Treasury of ever-increasing billions of dollars.

Although President Barack Obama promised to take punitive action against companies deliberately engaging in mergers and/or acquisitions for tax avoidance purposes, only the loophole closing of 80% ownership by American investors was the result of this threat a year ago. But it only tended to speed up deals in negotiation.

Since then, there has been no letup in attempts by prospective multi-nationals to escape the much higher costs of corporate tax liabilities in the U.S. Unfortunately, the substantially easier corporate tax base in such developed nations as Canada, Britain, Germany, and Japan, for instance, act as a substantial magnet for relocation. In addition, since these moves to foreign pastures are spread through a wide range of business sectors, competitors of these involved corporations are increasingly influenced to follow their example. In light of such moves in the past year by Burger King, Coca Cola Enterprises, crane maker Terex, fertilizer manufacturer CF Industries, and lately divisions of Ford and Nabisco, have initiated such “headquarter” relocations.

While such GOP presidential candidates as billionaire business tycoon Donald Trump and former Florida Governor Jeb Bush have recently come forth with major revisionary tax plans, if elected, these are strictly for vote-getting purposes. Retrospectively speaking, no major comprehensive tax proposals have been brought before Congress for debate since the early days of the two-term Clinton presidency.

Both two-term presidents George W. Bush and Barack Obama never made a serious effort to put their prestige and presidential clout on the line for the hard-nosed commitment that such a massive undertaking would have required. This didn’t stop President Ronald Reagan, in close conjunction with House Speaker Democrat “Tip” O’Neill, to put through the last meaningful, and all-encompassing tax structure. This, with subsequent presidential “rule changers,” is still the base for today’s long-awaited overall new tax approach.

Since it will likely require the next President to be supported by a “politically friendly” House and Senate, even that is no guarantee, since President Obama had that advantage for the first two years in office. Also, such an increasingly complex tax obligation on the various sectors comprising the taxpaying public will require a major expenditure of “good will” by the contemporary presidency, and will elicit pockets of hostility by politically powerful lobbies.

Consequently, the odds against this happening, even with a presidential change, are becoming ever greater. It seems that the internal revenue structure implemented by the Reagan/O’Neill alliance 30 years ago, will continue to be more difficult to dislodge.