Clinton's Shrewd Plan to Stop Inversions

Political campaigns are not generally known as ideal laboratories for devising sensible, innovative policies. Yet Hillary Clinton’s proposals to combat corporate inversions -- in which U.S. companies move their tax homes abroad -- are just that. They would largely eliminate the tax incentives to invert.

A U.S. company currently has many such incentives. It can lower its taxes by creating a home base in a low-tax country, even if it leaves its headquarters and other operations in the U.S., and even if the U.S. operations represent as much as 79.9 percent of the new combined company (though the rules are stricter if the share is 60 percent to 80 percent). In many cases, the re-domiciled company can avoid tax on profits that it accumulated tax-free abroad while it was still a U.S. company. And it can further reduce its U.S. taxes through “earnings stripping,” in which the U.S. company loads up on debt owed to the parent; the payments on such debts are deductible in the U.S., even as the corresponding income is received in the low-tax country.