Whenever liberals argue that Congress needs to close the corporate tax loophole known as an inversion, conservatives always respond the same way: Reform the tax code. The latest example comes from Charles Krauthammer in the National Review. “Companies are doing what they always do: legally lowering their tax liabilities,” he writes. “What is maddening is that the problem is so easily solved: tax reform that lowers the accursed corporate rate.”
Krauthammer notes that Democrats and Republicans both support lowering the corporate rate of 35 percent. So, corporate tax reform should be easy, right? Wrong. Nothing in Washington these days is easy. Here’s what Krauthammer misses: The impasse between Democrats and Republicans over tax reform is not about the statutory rate. It’s about revenue. Democrats want more of it. Republicans don’t. (I know, shocking positions.)
This is the fatal flaw in every conservative argument against closing the inversion loophole: it assumes corporate tax reform will be deficit-neutral. Just listen to Krauthammer: “A real political leader would abandon this sideshow and actually address corporate tax reform with a serious revenue-neutral proposal to Congress.” See how he slips in that “revenue-neutral” provision as if both sides agree on it? But Obama’s proposal for corporate tax reform (yes, he has one) would raise additional revenue. In other words, Krauthammer’s solution to tax inversions is corporate tax reform—but only his version of it.
The Democratic Party’s desire to raise more revenue is not unreasonable either. There has been a long-term decline in revenue generated from corporate taxes, as you can see from this graph:
And it’s not as if corporations are struggling. Just look at their profits:
In corporate tax reform, Obama wants to raise $150 billion in additional, one-time revenue and use it to invest in American infrastructure. That shouldn’t be controversial, but it’s unacceptable to Republicans. (They dislike other parts of his plan as well.) All of this is to say that corporate tax reform isn’t a solution to inversions, because corporate tax reform isn’t happening anytime soon. It’s just an excuse to continue allowing companies to avoid U.S. taxes.