Conservatives correctly point out that proposals to stop inversions from the Obama administration and Democrats in the House and Senate are only stopgap measures—a mere Band-Aid. If Congress were to tighten the anti-inversion rules first enacted in 2004 and further increase the foreign ownership requirements for mergers that move American businesses’ corporate legal residence outside of the United States, it would stop the type of deals that are now getting all the attention. But we still will not have solved the fundamental problem of tax motivated foreign ownership of U.S. businesses.
Right now the U.S. tax system favors foreign owned corporations over U.S. owned corporations. Although you often hear about the U.S. having a higher corporate tax rate than other major economies, this really has little to do with the disparity between U.S. and foreign ownership. The two big factors that make foreign ownership attractive for tax purposes are 1) that foreign owned firms can pay a lot less tax on their non-U.S. activities (because as non-U.S. firms they are under territorial regimes) and 2) that they can pay a lot less on their U.S. activities (because U.S. rules make it much easier for foreign owned firms to strip earnings out of the United States). Read more