By Dave Oberting

A “corporate inversion” takes place when an American company merges with a foreign enterprise and reincorporates in that company’s home country in order to minimize its U.S. tax bill. This is driven primarily by our country’s unwillingness or inability to reform at least the corporate tax code. U.S. corporate marginal tax rates are among the highest in the world. While inversions are an unfortunate development, the maneuver was entirely predictable based on our current tax code. There are however, more pernicious forces at work, which we’ll explore below.

The inversion problem will not be solved by coercion. What we need to do in the short run is make the U.S. a better, easier and less expensive place to do business. We’ll improve the business climate by completing a real tax and regulatory overhaul. This may require one party control of Congress and the White House, but it shouldn’t. Anyone who’s been following along knows the outlines of a successful deal — broader base, lower rates, no loopholes, fewer exemptions. The regulatory piece would include reform of our immigration system to prepare for the day when we have a deficit of working age residents. A functional and more effective Congress would recognize the long-term risks and act with some foresight.

There is a longer-term trend loosely linked to corporate inversions that has larger implications and is potentially far more dangerous than a few inversions: as this article by Dr. George Friedman at Stratfor points out, what many have called the “hollowing out of the middle class” is real and it may be happening faster than we think. We think it also represents a hidden rationale for moving overseas.

Through the elimination of millions of good jobs here in the U.S. due to automation and globalization, the median U.S. wage has declined by $4,000 to $49,103 since 2000. The median means half of incomes are above that figure and half below. This in turn means many millions of households have slipped into the lower-middle class or worse.

Median Income Chart

It’s possible within a decade or two that we could have a majority of U.S. households that are unable to afford the amazing assortment of high-value products and services U.S. companies make — from financial services products, to cars, to smart phones. We could be on the road to a significant degree of cannibalization of what is currently the largest consumer market in the world. If the purchasing power of that market is substantially diminished, it becomes less important to U.S. companies and the need to be U.S. based declines.

If you’re GE and you sell a lot of washing machines, but the number of washing machines you sell in the U.S. is declining, but skyrocketing in Asia, Singapore becomes a comparatively more attractive place to base your business. Companies want to be close to their most important customers.

So it seems, in the long run, globalization, automation and the managerial revolution that’s taken place over the last thirty years that has made American producers dramatically more efficient and productive, has seriously damaged its largest market. This could provide an additional incentive to American companies to move out of the country.

How do we rectify the situation?

Here’s an answer we give quite frequently: with the faster economic growth that’s required to create the number and kinds of middle-income jobs we’ll need in the first half of the 21st century, a radically improved and employer-driven job training system, and much more dramatic gains in all forms of education — K-12, higher ed, technical training, vocational education, apprenticeships and other forms work-driven education.

Education and workforce development are core government functions. We must get much better at providing more Americans with the knowledge, skills and abilities required to to earn a real middle-class wage.

We should also remember the wisdom of Henry Ford. He paid his employees enough so that they would be able to afford the cars his company made. There’s no way to coerce employers into paying higher wages — the minimum wage is not even close to a real living wage — but, if our education and workforce systems produce citizens that are prepared for and capable of higher-skill work, the good jobs will be there.

Loss of Middle Income Jobs

As to the question of how corporate inversions might impact DC, most of our largest private sector employers are healthcare companies and government contractors. It will be much more difficult for them to invert, but it’s not outside the realm of possibility especially if we don’t change course.

Dave Oberting is the executive director of Economic Growth DC, a political and economic advocacy organization focused on the District and its economy. Follow him on Twitter @GrowthDC, and write to him at dave.oberting@economicgrowthdc.org.