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Tax Inversion and Tax Complexity

This year has seemed to be the year of tax inversions, where United States based companies purchase foreign companies and change their primary place of business to a foreign country. A major factor influencing the acquisitions is the perceived income tax reduction available to foreign based companies due to the wide disparity in tax rates and rules among countries.

The response to these business decisions has ranged from share price increases and investor interest to outrage at the potential loss of tax dollars to the United States.  These responses are not surprising but as is the usual case, they fail to address the real issue and that is the overwhelming complexity of the tax code and a pervasive inability of government to deal with it. One would expect taxpayers to sift through the code to find the combinations and provisions that allow them to pay the least amount of tax. It is legal to do so. There are always some taxpayers who will not bother to expend this effort and others who will leave no stone unturned to obtain a reduction. The fact that a firm finds a way to reduce its tax burden within the strictures of the tax code is not, in itself a problem. Again, the problem lies in the tax code itself.

A comprehensive review and restructuring of our tax code, with the goal of simplifying the code while maintaining a level of progressiveness and achieving taxpayer compliance is long overdue. One of the primary reasons for the lack of change is the vast numbers of firms and people who have a financial interest in keeping the current version going. The loopholes, the tax breaks, the favoritism, the government choosing winners and losers, these all have their advocates who place their financial self-interest above the interests of the country as a whole. That’s human nature and it will take one enormous effort to clean up even a part of this mess. 

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