July 27

Jacob J.Lew is the U.S. treasury secretary.

Since we last overhauled our federal tax code, in 1986, countries around the world have lowered their tax rates, leaving the United States with the highest corporate tax rate in the developed world. At the same time, the system has become full of inefficiencies and special-interest loopholes. That is why it is so important that we reform our business tax code to make the U.S. economy more competitive and to accelerate economic growth and job creation. Taking this step will make the United States an even more attractive place to do business and ensure that capital and talent are allocated more efficiently in pursuit of high economic returns, rather than low tax bills.

The president put forward a framework for business tax reform more than two years ago and has been pushing Congress to move forward on it. The president’s proposal would lay the foundation for broadly shared long-term growth by lowering corporate tax rates, broadening the tax base, simplifying the system and eliminating wasteful carve-outs and tax expenditures. These reforms would result in savings that could be reinvested in our nation’s aging infrastructure.

But one particular tax loophole has become increasingly urgent to address: the fact that the law rewards U.S. corporations with substantial tax benefits when they buy foreign companies and declare that they are based overseas.

This practice, known as an inversion, has accelerated in recent months, with a significant number of big corporations nearing completion of such deals and reports of many more in the works. To be clear, there is nothing wrong with cross-border merger activity; our economy is stronger for our investment overseas and for foreign investment in the United States. But these activities should be based on economic efficiency, not tax savings. Many of these transactions have been motivated by — and even expressly justified by — the tax savings. In touting these transactions, individual firms have projected saving as much as $1 billion per year. On July 15, I wrote a letter to Congress and called on lawmakers to address this problem as soon as possible.

Many of these companies are for all intents and purposes still based in the United States, and they remain here to take advantage of everything that makes the United States the best place in the world to do business: our rule of law, our universities, our research-and-development capabilities, our innovative culture and our skilled workforce. By moving their tax homes overseas, these companies are making the decision to reduce their taxes, forcing a greater share of the responsibility of maintaining core public functions on small businesses and hardworking Americans. That includes paying for the things all of us, particularly U.S. businesses, depend on: our national defense, education, medical research, courts and vital infrastructure such as roads, bridges and airports. In addition, by allowing these transactions to continue, we run the risk of eroding our corporate tax base and undoing the progress we have made to reduce our budget deficits.

Enacting comprehensive business tax reform is clearly the best way to address the problems in our tax code that trigger inversions, although even if we cut our tax rates and broaden the tax base, we would still need to enact anti-inversion provisions because companies always would find countries with near-zero rates to which they could relocate. Moreover, even the most optimistic know that the administration and Congress need more time to complete bipartisan comprehensive business tax reform. While the business-tax-reform process moves steadily forward, the pace of inversions is increasing at breakneck speed. We must confront this problem now, before our tax base is so eroded as to damage the prospects of comprehensive reform.

The president’s proposal applies a common-sense approach to determine whether a corporation has truly switched its base of operations to another country — a company would not be able to move outside the United States for tax purposes if it is still managed and controlled in the United States, does a significant amount of its business here and does not do a significant amount of its business in the country it claims as its new home.

The president’s plan also would eliminate the incentives a U.S. corporation has to acquire a foreign company and use its foreign address to claim tax status beyond our borders. To make sure the merged company is not merely masquerading as a non-U.S. company, shareholders of the foreign company would have to own at least 50 percent of the newly merged company — the current legal standard requires only 20 percent. This approach is based on a bipartisan law enacted in 2004 and could serve as a basis for a bipartisan solution again. Right now, leaders in Congress have put forward strong legislation that adopts elements of this plan.

For legislation to be effective, it must be retroactive. Current proposals in Congress would apply to any inversion deal after early May of this year. The alternative — legislation taking effect after the president signs it into law — could have the perverse effect of encouraging corporations to act more quickly, negotiate new deals and rush to close those transactions before the bill is enacted. It would be a mistake for Congress to pass anti-inversion legislation that creates a race against the clock and encourages more, not fewer, inversions.

Making legislation effective before the date that a bill is enacted is not a new or novel approach; the Congressional Research Service referred to the practice as “quite common” in a 2012 report. A good example of this is the 2004 anti-inversion legislation. Passed by a Republican-led Congress and signed into law by President George W. Bush in October 2004, it had an effective date of March 2003.

For all these reasons, I call on Congress to close this loophole and pass anti-inversion legislation as soon as possible. Our tax system should not reward U.S. companies for giving up their U.S. citizenship, and unless we tackle this problem, these transactions will continue. Closing the inversion loophole is no substitute for comprehensive business tax reform, but it is a necessary step down the path toward a fair and more efficient tax system, and a step that needs to be in a place for tax reform to work.