BECAUSE WE PUNISH THEM FOR STAYING HERE: Why U.S. Companies Are Moving Abroad.

Because the American taxman has unusually long arms, companies based in the United States who earn profits abroad can end up with piles of cash “stuck” overseas: earnings that face hefty corporate taxation the instant they are brought to America (for example to pay staff or to invest). . . .

Pulling off a successful inversion requires only a modest sleight of hand. When company A (based in America, say) acquires company B (based in Ireland) the managers of the combined A+B entity get to choose a domicile. If they choose the United States, they are in effect choosing to pay relatively high American corporate rates—up to 39%—on all the overseas profits they repatriate; unusually, the IRS taxes income on a global basis. If they choose Ireland instead, they will have to pay a much lower tax rate (12.5%) on profits generated in Ireland, but the crucial bit is that they will pay only the local rate on whatever profits are generated in foreign subsidiaries—because Ireland, like most other countries, taxes on a strictly territorial basis. That means paying, for example, 39% on profits generated within the United States, 20% in Britain, or 0% in Bermuda. A third option is to choose a neutral country, such as Britain or the Netherlands which, like most of the world, also have lower rates and a territorial system. Few global companies would choose to stay in America given that choice, though plenty remain based there, often for publicity reasons. Walgreen’s bosses abandoned plans to move to Europe last year, but only after calls for a consumer boycott. The IRS managed to tighten some rules in September, which seems to have made it slightly harder for other companies to invert.

But simply making it harder to leave is surely not the answer. It has the effect of increasing the chances of hamstrung American firms being swept up by foreign rivals. This has already happened to American targets valued at $315 billion, all sold to foreigners this year, on the calculations of S&P Capital IQ, a data provider. So long as America’s tax code is out of kilter with the rest of the world, its firms will find reason to sail for fairer shores, whether the IRS likes it or not.

A more rational tax policy, and one more consistent with what the rest of the world does, would put an end to this.