A Tax Reversion Proposal

A Tax Reversion Proposal

to: Sen. Orrin Hatch, Chairman Rep. Kevin Brady, Vice Chairman Joint Committee on Taxation United States Capitol Washington, D.C.


The Joint Committee on Taxation is a bipartisan committee closely involved in every aspect of the tax legislative process. This is an election year, and typically various candidates will run around the country making all kinds of flamboyant promises regarding tax reform; none of them will see the light of legislative passage. But there is one issue that you could address.

During our last Senate election in Minnesota, the topic of companies leaving the country in so-called tax inversions became fodder for campaign TV ads. We were treated to ads featuring leprechauns decamping for Ireland. Medtronic had announced its “inversion” by merging into a smaller company in Ireland, in part to achieve a favorable tax situation. Much Sturm und Drang were generated about this issue, but of course, nothing was done. It is now time to act.

At least 47 major multinational corporations headquartered in the United States have “inverted” in the last 10 years, with more to come. Most recently, last year, a $160 billion inversion between Pfizer and Allergan was announced. Allergan, of course, is based in Ireland. According to Carl Icahn, writing in the New York Times, many chief executives have told him that they plan to follow Pfizer’s lead.

Part of the problem is that the United States is one of the very few countries that employs a global income tax system for corporations—the U.S. tax rate of 36 percent (39 percent with our state tax) is levied against all global income of companies doing business in the United States. Almost all other countries have a territorial system; only income within the taxing jurisdiction is taxed at that jurisdiction’s rate. So what happens is that U.S. corporations pile up huge surpluses outside the U.S., because bringing the money back to this country would require paying almost a 40 percent tax. It is estimated by experts that the amount of money held by U.S. corporations overseas exceeds $2.6 trillion.

The amount of money “trapped” overseas is but a small part of the overall problem. In fact, due in part to tax inversions, a recent Government Accountability Office study found that U.S. corporations pay an average effective tax rate of 12.6 percent. But there is a solution to this mess that you should embrace now, so that it becomes part of our political dialogue during the upcoming elections—an approach that might appeal to all major candidates.

For years, a number of economists, including Dean Baker, co-founder of the Center for Economic and Policy Research (he accurately predicted the year and the quarter when the housing bubble would burst), have turned their attention to reforming corporate structures so that we stop making exiles of our largest companies. That proposal—the one I hope you advance—is that a certain amount of non-voting stock be turned over annually to the government in lieu of taxing corporate profits. The election to switch from taxes to stock could be voluntary with the corporate entity. Congress, after hearings, could set the percentage of non-voting common stock to be transferred, but somewhere in the 10 to 12 percent range would mimic the current effective tax rate already being paid. While the stock would be non-transferrable and non-voting, upon the payment of dividends, buyouts, or mergers, the government shares would be treated exactly like everyone else’s common shares.

Think about this. Without naming presidential candidates, democratic socialists should welcome the opportunity for government to participate in a people’s capitalism. No longer would companies have any incentive to “invert” or escape to low-tax havens in foreign countries, because the effective rate of taxation after the non-voting stock transfer would be zero. Political candidates who worry about jobs being exported would no longer have to worry about companies artificially establishing headquarters and other locations outside the U.S., because there would be no incentive to do so.

Conservative presidential candidates, while bothered by governmental ownership, would nonetheless welcome the result: a corporate income tax rate of zero. You may remember a number of years ago conservative Republicans supported the idea of turning Social Security over to market investments; this proposal is more direct than that. And finally, libertarian-minded political candidates should favor this approach because the corporate entity would have the option to participate or not.

So there you have it—the possibility of bipartisan tax reform that would address a real problem: tax exiles and tax inversion robbing our country of valuable companies and employees. My hope would be that success on this front would open the door to the more difficult issue of systemic tax reform, but that would have to await the elections. You do not have to wait.


Vance K. Opperman
Corporate Tax Reformer


Vance K. Opperman (vopperman@keyinvestment.com) is owner and CEO of MSP Communications, which publishes Twin Cities Business.

Related Stories