By Senator Orrin Hatch (R-UT), Senate Finance Committee Chair   

Most of the talk in Washington about taxes these days sadly has not been about the need to reform our broken tax code. Most of the discussions have been about what to do about so-called “corporate inversions,” or when a multinational firm moves its legal home to a country with a lower corporate tax rate and a territorial tax system.

The number of American companies in the worldwide list of Fortune 500 companies has declined dramatically over the past decade, which is very unfortunate. This decline means less capital and investment in the United States, a smaller tax base, and most importantly, it means more jobs that should be created here in America are being created elsewhere.

Over the past few months, we’ve seen a handful of legislative proposals to address the issue of corporate inversions. Unfortunately, most of them have been punitive and retroactive and would build walls around U.S. corporations in order to keep them from inverting. This approach, in my view, completely misses the mark.

Ultimately, the best way to prevent corporate inversions is to reform our corporate and international tax system to make U.S. corporations more competitive.

Under current law, U.S. corporations are taxed on their worldwide income. But foreign corporations are subject to U.S. tax only on income arising from the United States. In other words, we subject our own corporations to a worldwide tax system, while subjecting foreign corporations to a territorial tax system.  On top of that, most of our major trading partners tax companies domiciled in their own countries on a territorial basis as well.

Our system of worldwide taxation places us at a competitive disadvantage and makes the United States a less than optimal place for companies to locate their businesses. That being the case, as important as it is to get the corporate tax rate down, no matter how low we get the rate, we still need to scrap and replace our outdated worldwide taxation system.

That is why tax reform is so important. Tax reform, if it’s done right, will get at the root problem, rather than simply dealing with symptoms.

Instead of imposing arbitrary inversion restrictions on companies retroactively and thereby further complicating the goal of comprehensive tax reform, we should first keep our focus on where we can

agree. By uniting around the goal to create an internationally competitive tax code, we can keep American job-creators from looking to leave in the first place.

Tax reform can reverse the trend of corporate inversions, make the United States an attractive place to locate businesses and global headquarters, and prove a base for more jobs in America.

But in order to achieve meaningful, comprehensive tax reform, we need a commitment on all sides – from the President on down – that they will work to achieve this critically important goal. Instead, what I received the other week was a politically-charged letter from Treasury Secretary Jack Lew, which indicated that the Obama Administration seems more focused on trying to make corporate inversions a political issue rather than working with Congress to address the issue in a meaningful way. What’s more, the Obama Administration proposal could cause US-based businesses to shift management operations overseas or make US firms more attractive targets for foreign takeover.

In his letter, Secretary Lew wrote to me that “[w]hat we need now is a new sense of economic patriotism.” I wrote back to Secretary Lew and said that I hope his “definition of ‘economic patriotism’ is not so narrow as to only include a particular business practice that happens to be the tax topic of the month in the political echo chamber.” I added that “I hope that [Secretary Lew] shares my view that ‘economic patriotism’ includes a desire to fix the problems that are truly ailing our country and threatening the livelihoods of future generations.”

The simple fact is that, if we only act to address this problem with a short-term punitive fix, and not work on a long-term solution to fundamentally reform our tax code, we will be right back in this position again soon.  However, there may be steps that Congress can take to at least partially address this issue in the interim. While I don’t support the anti-inversion bills we’ve seen thus far, I am open to considering alternative approaches, though I do have a few stipulations as to what proposals I’ll consider.

For example, whatever approach we take, it should not be retroactive or punitive. And, it should be revenue neutral. Our approach should move us towards, or at least not away from, a territorial tax system and should not enhance the bias to foreign acquisitions. Most importantly, it should not impede our overall progress toward comprehensive tax reform.

I hope the Obama Administration gets serious about finding a long-term solution and stops playing these political games. The reality is that if we work together on comprehensive tax reform, we can address corporate inversions and make our tax code work for both American businesses and hard-working families. ♦