How to stop the inversion perversion

Restricting companies from moving abroad is no substitute for corporate-tax reform

ECONOMIC refugees have traditionally lined up to get into America. Lately, they have been lining up to leave. In the past few months, half a dozen biggish companies have announced plans to merge with foreign partners and in the process move their corporate homes abroad. The motive is simple: corporate taxes are lower in Ireland, Britain and, for that matter, almost everywhere else than they are in America.

In Washington, DC, policymakers have reacted with indignation. Jack Lew, the treasury secretary, has questioned the companies'patriotism and called on Congress to outlaw such transactions. His fellow Democrats are eager to oblige, and some Republicans are willing to listen.

The proposals are misguided. Tightening the rules on corporate “inversions”, as these moves are called, does nothing to deal with the reason why so many firms want to leave: America has the rich world's most dysfunctional corporate-tax system. It needs fundamental reform, not new complications.

America's corporate tax has two horrible flaws. The first is the tax rate, which at 35% is the highest among the 34 mostly rich-country members of the OECD. Yet it raises less revenue than the OECD average thanks to myriad loopholes and tax breaks aimed at everything from machinery investment to NASCAR race tracks. Last year these breaks cost $150 billion in forgone revenue, more than half of what America collected in total corporate taxes.

All this imposes big costs on the economy. The high rate discourages investment and loopholes distort it, because decisions are driven by tax considerations rather than a project's economic merits. The tax rate companies actually pay varies wildly, depending on their type of business and the creativity of their lawyers: some pay close to zero, others the full 35%.

Twenty years ago inversions were rare. But as other countries chopped their rates and America's stayed the same, the incentive to flee grew. Until a decade ago Bermuda and other tax havens were the destination of choice, until Congress banned inversions where less than 20% of the company changed hands. Democrats have proposed expanding that prohibition to any transaction where less than 50% of the company changes hands—so an American company that bought a smaller foreign firm could not reincorporate abroad if its original shareholders remained in charge. Such a ban would be at best a temporary palliative. An American company paying higher taxes than its foreign competitors has a powerful incentive to find a way around the rules. Consultants are already coming up with dodges in case this proposal becomes law.

Home, sweeter home

The real solution is to lower the corporate rate, eliminate tax breaks and move America from a worldwide system to a territorial one. Barack Obama has proposed a reform that cuts the rate to 28% but keeps the worldwide reach. Dave Camp, a Republican congressman, has plumped for 25%, the OECD average, and a shift to a territorial system, instead.

It should be possible to bridge the differences. But both sides have tied the subject to other issues. Mr Obama insists that corporate-tax reform must also raise more money to spend on things like public infrastructure, which the Republicans oppose; they, in turn, want to package it with cuts in personal tax rates, which Mr Obama is loth to accept. Thus, nothing happens.

The two sides should drop their conditions and hammer out a stand-alone corporate-tax reform that reduces the rate and broadens the base. Until then, expect the line-up of corporate migrants to grow.