Sen Levin has a new target in the war against our large budget deficits–corporations that legally flee the U.S. to avoid paying taxes:

It’s become increasingly clear that a loophole in our tax laws allowing these inversions threatens to devastate federal tax receipts. We have to close that loophole,” said Levin in a statement.

This is the typical illustration of government creating a problem, then when people try to mitigate the harm, the government takes further actions which create yet more problems.  Let’s begin with the problem:  why do corporations find it in their interest to flee the U.S.?  It is primarily because the U.S. has the HIGHEST corporate tax rate in the OECD–yes, you can say it–the U.S. of A. is #1 (click on the figure above from the Tax Foundation to see the U.S. position)!  Does that mean we collect a great deal of corporate tax revenue?  No!  Further, both Republicans and Democrats in general agree that rates ought to be lowered and the tax base broadened.  But Mr. Levin doesn’t introduce legislation which everyone agrees would be a good idea–no, he would rather try to have further control on the economy.  The mark of the good economist, as Hazlitt taught us long ago, is to look at not just the immediate reaction to an action, but what the long term result might be–both the seen and the unseen.  So let’s assume Mr. Levin’s bill becomes law.  What would be the likely impact?  I would predict that based on changing incentives, at the margin there would be corporations that would otherwise have incorporated in the U.S. that will never come here.  There will be a corresponding reduction in U.S. growth, leading to lower tax revenues, leading to higher rates, leading to more companies fleeing, leading to more laws, leading to fewer U.S. incorporations……yes you can see the death spiral.  (For reasons why corporate tax reform that everyone agrees with doesn’t happen, click here).

This is a partial illustration of Hayek’s warning in The Road to Serfdom.  Central planning of necessity will require increasing government control of life as individual agents will try to avoid the government rules when it is not in their interest.  This leads the bureaucrat to introduce further controls, which will result in more avoidance of the government rules, leading ultimately to a brutal dictatorship, IF THE CENTRAL PLAN IS TO SUCCEED.  Not that government controls necessarily lead to dictatorship, but a dictatorship is ultimately required if the plan is to succeed.

Mr. Levin, if you’d like to find out why companies would leave the U.S., you can ask them.  The answer is capital goes where it is welcomed, and stays where it is well-treated.  We are not treating capital well, and we are reaping what we are sowing.

EDIT UPDATE 5/9:  Today Democratic Senator Ron Wyden has an op-ed worth reading on the same subject.  Says Mr. Wyden,

It would be easy to point a finger at these runaway corporations alone and simply question their morality or patriotism, but that would be ignoring our own failure to bring the tax code into the 21st century. An uncompetitive tax code strains our economy, and we should not be surprised when corporations fight to get out from under antiquated tax rules. Congress has a responsibility to reverse the tide—now.