A new government report indicates that the Treasury could lose about 2.5 percent of corporate tax revenue if Congress doesn't act to prevent companies from shifting profits to tax havens and undertaking "inversions."
In a new report Monday, the Congressional Budget Office estimated that inversions and other tax-minimizing strategies would cost the government roughly $12 billion in 2027, about 2.5 percent of all corporate revenue.
An inversion is when a U.S. multinational merges with a company in a low-tax jurisdiction, such as Ireland, and then places the headquarters of the newly formed company in that low-tax country to lower its tax bill.
The new estimates suggest that the problems with the corporate tax system in the U.S. are serious, if not disastrous.
And it shows that the corporate tax base will continue to shrink despite former President Barack Obama's last-minute attempt to stop inversions via administrative action. The Trump administration is reviewing the rules implemented by the Obama Treasury Department.
Companies seek to move their headquarters out of the U.S. because of two unique characteristics of the tax code. One is the corporate tax rate, which at 35 percent is the highest among developed nations. The other is the practice of taxing companies on overseas earnings, also an anomaly. By moving to a country with a low tax rate that doesn't tax overseas earnings, multinationals may be able to save on taxes paid on earnings all over the world.
Addressing that problem is one of the major reasons that Republicans are seeking to pass tax reform this year.
Republicans such as Rep. Kevin Brady, the Texas chairman of the House Ways and Means Committee, have said that they want to eliminate the incentives companies face to move their headquarters out of the country and even encourage them to move their supply chains back.
Democrats, meanwhile, have called for more immediate measures to block inversions and other ways corporations strategize to avoid taxes.