Illustration by Miguel Gallardo

The biggest corporate deal of 2015 was also, in the view of many, the shadiest: Pfizer’s $160-billion merger with the Irish drug company Allergan. It’s a “tax inversion”—Pfizer will in effect be reconstituting itself as an Irish company, in order to lower its taxes—and that’s why so many people found it so offensive. Hillary Clinton said that ending inversions wasn’t just about fairness but about “patriotism”; Donald Trump called the deal “disgusting.” It’s got to make you wonder when even Trump finds your moneymaking schemes repugnant.

Meanwhile, the inversion train seems only to be picking up speed. Such deals were once exceedingly rare—according to the Congressional Research Service, there was just one in the nineteen-eighties—but there have been more than fifty in the past decade, most since 2009. Although in the past couple of years both the Treasury Department and the I.R.S. have issued new rules designed to make inversions more difficult, the trend continued apace in 2015. It’s a predictable, if dismaying response both to the current U.S. tax code and to the changing nature of big corporations.

Two features of American tax policy make inversions attractive: a relatively high corporate tax rate and what’s called a worldwide tax system—American corporations have to pay that tax rate on all their global income. That makes the U.S. unusual; every other country in the G-8, and eighty per cent of the countries in the O.E.C.D. (the club of industrialized democracies), has adopted some form of what’s known as a territorial tax system, in which companies largely pay taxes only on the income they earn in a country.

To be sure, the U.S. system has an important provision called deferral—American companies don’t have to pay taxes on their foreign profits until they bring them back to the U.S. But that just means they hold their money overseas rather than bring it home; American companies are estimated to be keeping more than two trillion dollars abroad. This so-called “lockout effect” means that companies invest less in the U.S. and distribute less cash to shareholders. In some ways, we’ve ended up with the worst of both worlds. Since so much of what companies earn remains abroad and untaxable, we raise only a small amount of revenue from our global system. At the same time, the fact that those foreign earnings are in exile encourages inversions, so companies can get access to all that locked-up cash and a lower tax rate thereafter.

One answer to this problem, endorsed by Bernie Sanders, is simply to do away with deferral—make corporations pay taxes on their foreign profits as soon as they’re earned. This would increase tax revenue in the short term. But it would make inversions all the more alluring and, in the long run, would likely reduce the number of new companies incorporating themselves in the U.S.

A more plausible alternative is to follow the lead of countries like Germany and Japan and adopt a hybrid territorial system. Although the details are complicated, you’d start with the “territorial” principle that profits would be taxed where they’re earned. But since any territorial system is vulnerable to tax-avoidance schemes—like shifting income abroad to make it look as if profits were being earned abroad—you’d also need tough anti-abuse provisions, like taxing at least a fixed percentage of foreign earnings and limiting companies’ ability to channel income to subsidiaries in low-tax countries. And, as part of any such change, companies should be required to pay taxes on all the cash they’re currently holding abroad. In theory, such a system could keep companies (and more of their workers) at home and bring foreign earnings back, without putting a real dent in U.S. tax revenue. This strategy also has some bipartisan appeal; versions of this type of reform have been offered by both the Obama Administration and Republicans in Congress.

But why give corporations any sort of tax break at all? The reality is that America’s global taxation system is a legacy of a bygone era. In the past, the fact that our tax system was “worldwide” mattered less, both because the U.S. was such a huge part of the world economy and because being incorporated in the U.S. made companies more appealing to stockholders. But those advantages are diminishing. Investing abroad is more attractive and easier than ever before, and capital is more mobile. “As the economic differences between the United States and other countries narrow,” a 2015 study of tax systems concluded, “the ability of the United States to sustain US tax exceptionalism will also decline.”

And then companies are far less tied to their country of origin than they once were. Look at Pfizer. Its C.E.O. was born in Scotland and raised in Rhodesia. More than sixty per cent of its revenue comes from overseas, and most of its employees work abroad as well. It’s hard to know what makes a company like that genuinely “American.” True, many U.S. companies, including big pharma, have drawn heavily on government-funded research, but foreign companies have been able to profit from that research just as easily—without the extra taxes.

Corporations certainly play the patriotism card when it suits their purposes. But their real loyalty is to the bottom line. And while Congress could take measures to curb inversions in the short run—Hillary Clinton, for instance, has proposed a steep “exit tax” on any company that inverts—those measures merely postpone a necessary reckoning. The world economy has changed. The U.S. tax system needs to change, too. ♦