Causes Of Corporate Inversions

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There has been recent media coverage of corporate “inversions”. In other words, corporations originally founded or thought of as “American” transplanting themselves in Canada or the United Kingdom. These inversions draw significant media and public attention and are a hot topic for politicians. Understanding the motivations and root causes of corporate tax behavior is integral to reforming tax code. In general, taxes generate income that funds local, state, and federal government activity. Furthermore, taxes can be used to control negative externalities that businesses would otherwise be incentivized to produce (think emission taxes).

Under the CBS news headline “Expert debunks claim U.S. corporate taxes are too high” a California law professor
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As time has progressed, the Rational Actor Model has become the standard of analysis among academia. The RAM model is used to explain economic and political decisions. Because of the dual use of RAM in politics and economics, this model will be particularly effective in analyzing corporate inversions. To put the RAM model in simple terms one needs to think of an agent as a rational man who makes decisions according to his final goals (Allison, 1).

To parse out the decisions made by a rational actor, researchers attempt to identify all potential outcomes of a decision, as well as all factors that affect said outcomes. The RAM model in politics puts particular emphasis on relationships and reactions, while the economic model tends to focus on economic gain and loss.

The subject of corporate inversions is somewhat new to academia, however analysis of the tax-code is not. A multitude of studies have attempted to parse out the effect of the United States corporate tax on the decisions made by a corporation. The general consensus among corporate tax scholars is that there are a few essential problems with the current corporate tax code of the United
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This theory revolves around the impact that expatriations (inversions) have on consumer demand. When consumers determine which product to buy, they take into account their own wants, needs, cravings, and perceptions of a product (Clemons, 13). The visibility of corporate inversions combined the public perception that corporations that invert are ‘traitors’ puts a powerful constraint on corporations considering inversion (Gose, 4).

The next major constraint is outlined by what I call the Political Impact Theory (Mankiw, 1035-1056). Expatriations generate lots of media attention. In the past few years, several high-profile U.S. based multinational corporations have changed their tax residence, resulting in a reactionary response by the U.S. government (Kirsch, 475). The political impact theory analyzes both tax, and non-tax legislation the specifically targets corporations that expatriate.

On top of the previously mentioned constraints, there is a risk of regulation enforcement through the use of audits increasing when a corporation expatriates (Inclan and Quinn). Due to the negative reaction of the government to expatriations, corporations that invert must account for a potential increase in the regulation and enforcement of existing laws

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