Regulations on Inversions and the Consequences

      The trend in which companies move their operations abroad for tax incentives and favorable regulation abroad, and which still receive U.S. Treasury contracts is a problematic business tactic for the U.S. society but is very beneficial to these firms. These tax incentives to move headquarters abroad are known as inversions, yet the U.S. Treasury still pays out "millions of dollars" in contracts to these firms, a practice which Democrats are keen to stop while Republicans fear cutting contracts would cause inverted companies to move more of their business operations abroad. For example, the article gives the instance of the security firm Tyco, who moved operations from the U.S. to Bermuda and then to Switzerland, and who received about $4.8 million between 2012-14 from the U.S. Treasury. This indicates how integrated some offshore firms are in the U.S. economy.
     There are, however, some anti-inversion rules that the Treasury follows that make it more difficult for companies that move abroad to get away without paying taxes. For example, AbbVie, a U.S. pharmaceutical company failed to make a $55 billion merger to move abroad blaming the Treasury department for reinterpreting "longstanding tax principles in a uniquely selective manner designed specifically to destroy the financial benefits of these types of transactions." This indicates that the regulations in place are favorable to some firms and industries while selectively unfavorable to others. Although there may be other factors involved, the inverted firms that are still benefitting from Treasury contracts have been able to maintain their positions even during the Obama Administration's aim to cut down on this type of activity.
     So then what is the difference in between the firms who benefit from the Treasury's regulation and the firms that don't benefit? According the Stigler, while there may be motives of benefiting public interests or it may just be an irrational outcome of the political process, the most likely cause for some firms benefiting from Treasury regulation is because they were able to lobby and find a favorable position in the system. This rent-seeking activity is of course is a problem because it increases dead weight loss through lobbying and other actions to secure favorable positions, and is wasteful when the most cost efficient options would be for firms headquartered in the U.S. to bid for contracts with the U.S. treasury and in this way cut dead weight loss.