Paul L. Caron

Wednesday, June 19, 2019

How Tax-Motivated Inversions Threaten State Sovereignty

Darren Rosenblum (Pace), The Futility of Walls: How Traveling Corporations Threaten State Sovereignty, 93 Tul. L. Rev. 645 (2019):

Inversions — mergers in which one firm merges with another abroad to avoid taxes in its home country — have spread as globalization has reduced many of the transactional costs associated with relocating. As firms acquire the power to choose the laws that govern them, they challenge the sovereignty of nation-states, who find their ability to tax and regulate firms depleted. States and firms compete in a game of cat and mouse to adapt to this new global reality. The subversion of state power by these firms reveals the futility of walls, both literal and regulatory. This Essay describes the phenomenon of these “traveling corporations” and analyzes several remedies that could limit future mergers. We conclude by arguing that inversions provoke deglobalization and yet may continue to flourish despite it as firms take the lead in dictating global norms.

Conclusion.  Inversions subvert sovereignty and upend the relationship between the public and the private. As recent political events suggest, they may have pushed globalization too far. Few solutions seem promising and neither physical nor regulatory walls succeed at keeping capital, goods, or labor from crossing political borders. Tax incentives may soon decrease the number of inversions because firms may come to more greatly value the pleasures of home, or at least fear the political risk of leaving home. Regardless, legal remedies, as they appear now, seem ill-suited to the task.

tried to find a way to effectively protect the United States’ tax base. While some congressional efforts have proven useful in the short term, inversions continue to be an unremitting problem as firms become increasingly sophisticated. Cross-border mergers involve increasing complexity as multiple parties, various governments, and heterogeneous constituencies jockey for influence. While inversions often undermine state power, easily controverted solutions like walls will continue to prove futile. The tax code has failed to stop firms from leaving the United States, and non-tax law alternatives as of yet show little chance of success.

As states hold less and less power in our globalized and interconnected world, both states and citizens prefer to avoid the frank assessment of national decline, which only confirms their collective powerlessness and impotence with regard to mass capital. Close attention to limiting inversions may yield pluralist approaches that embrace both cross-border cooperation and sophisticated domestic legislation—remedies that may yet revive the state’s potency in the face of its seemingly unstoppable “prey.”

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"Inversions subvert sovereignty and upend the relationship between the public and the private."
Or perhaps they provide a needed checks and balance in the power differential between the public and the private. Sovereign states tend to hold all the cards without the private sector ability to walk away and find another game. Anything that helps limit state power can't be all bad.

Posted by: ruralcounsel | Jun 20, 2019 4:02:50 AM