On the Money

Greener pastures, lower taxes: How to solve the inversion controversy

Taking a Trip, Permanently

This week, Wisconsin-based Johnson Controls and Tyco International—based in Ireland—announced a plan to merge, with the new company to be headquartered on the Emerald Isle.

It's the latest attempt at a corporate inversion, a controversial move that prompts a U.S. company to merge with an international brand, and set up shop in that entity's home country to save money on taxes. Nearly 50 U.S. companies have used inversions to reincorporate overseas during the past ten years, more in the previous two decades combined. However, is it good business or greed?

After years of furious argument and political wrangling, the jury is still out. In an interview with CNBC's "On The Money," Aspen Institute President and CEO Walter Isaacson said, "We've always had that debate, and it's got to be a balance."

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Walter Isaacson
Adam Jeffery | CNBC

The U.S. corporate tax rate is among the world's highest, at 39 percent. In a bid to lower their tax bills, more U.S. firms are making merger deals with foreign companies. In principle, moving their legal corporate headquarters out of the U.S. to a country cuts their tax bill.

In the case of Johnson Controls, the new company will operate under Ireland's 12.5 percent tax rate. The companies say the deal is not only for tax reasons: The move is expected to save $150 million dollars every year in other savings. Regardless, some observers say there are more than taxes to consider.

"We always have to balance the question of whether a corporation is supposed to be focused only on the short term return to the shareholder, or whether the corporation has other stakeholders," Isaacson told CNBC.

"The problem is with a 39 percent (U.S.) corporate tax rate and $150 million to be made each year, if you do an inversion, the balance tips and people move jobs overseas", Isaacson added.

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To be fair, with deductions and loopholes, few companies actually pay the full 39 percent tax rate. That said, the list of companies fleeing, or looking to leave, is growing.

In 2014, U.S. medical device manufacturer Medtronic bought Covidien and moved to Ireland. That same year, Miami-based fast food giant Burger King merged with Canada's Tim Hortons and moved the company north of the border.

Meanwhile, a potentially larger deal is still pending. U.S. pharmaceutical giant Pfizer is planning a move to Ireland if its more than $150 billion dollar merger with Allergan clears regulatory muster.

Last Fall, the Treasury Department announced new rules to cut down on inversions, but so far the mergers continue.

Taking away 'perverse incentives'

Inversion proponents argue that the solution appears simple: Rather than penalizing companies, the U.S. should make its tax code more competitive. Isaacson broadly agreed.

"We have to take away the perverse incentives, especially in the tax code, that allow these things to happen," Issacson said to CNBC.

"We have a very, very complicated tax code with all sorts of loopholes and deductions and I think across the board you have support for simplifying the tax code to about 25 percent, which I think would solve a lot of these problems," he added.

Isaacson cites a problem in making progress in Washington on tax reform: The demonization of corporations on both sides of the political aisle. "Whether its Donald Trump….or Bernie Sanders…they're fighting against corporations saying: 'they're messing you up and moving jobs overseas.'"

With corporate America held in such disrepute, "There's a sense the game is rigged in favor of big corporations with lobbyists," Isaacson said. " So not only do you get a bad economic system with this complex (tax) code , you kind of pervert the whole political process, and you have people on both extremes of the political spectrum attacking corporations.

As evidence of how polarizing tax reform can be, the last major undertaking to overhaul the code took place three decades ago.

"We have a political process that just doesn't work well these days, Isaacson said. "So I would hope that the next big push would be a great bipartisan, non-partisan (effort) to simplify the corporate tax code, bring the rates down somewhat."

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