On an almost weekly basis, a U.S. corporation announces that it is merging with a small foreign firm and re-incorporating in the foreign country, in what is known as a corporate inversion. Corporate executives and their apologists argue that the main cause of corporate inversions is the anti-competitive U.S. tax environment. For proof, they point out that, at 39.1 percent, the United States has the highest statutory corporate tax rate in the developed world. The average statutory rate for 16 other economically advanced countries (weighted by their relative economic importance) is 29.6 percent.

Defenders of inversions, however, conveniently ignore all the other features of the tax code that affect how much a corporation actually pays in corporate income taxes, such as deductions, exemptions, and tax credits. What is important to a taxpayer is how much they pay in taxes, not just the statutory tax rate they might face. The effective tax rate—the tax rate that firms actually pay—is lower than the statutory tax rate. As the figure shows, due to loopholes and tax breaks, the average effective U.S. corporate tax rate is 27.7 percent. This is not different from the average of 16 similar, economically advanced countries. (Like the United States, these countries are long time democracies with reasonably well developed legal protections.)

The bottom line is U.S. corporations are not inverting because the United States has a high statutory corporate tax rate. They are inverting to get tax-free access to their stash of tax-deferred offshore earnings—in other words, they do not want to pay taxes they already owe. As explained in the new EPI report Policy Responses to Corporate Inversions: Close the Barn Door Before the Horse Bolts, the recent uptick in inversions is threatening to cost the American taxpayer billions in lost revenue.