The Treasury no doubt felt that it could chalk one up in the win column early in April 2016 when, following its release of a veritable carpet bombing of new regulations designed to blow up inversion transactions, the primary target, Pfizer Inc., chose to wave the white flag and cancel—at least for the time being—its efforts to merge with Allergan PLC.

Hey, click here to get a sweet discount on the Tax Guy's tax guideOne can easily imagine, deep in the bowels of the IRS headquarters at 1111 Constitution Avenue in Washington, D.C., giddiness reigning supreme, with elated tax policy wonks exchanging awkward “high fives.” Let’s not go there.

Unfortunately, a more sober assessment is that the Treasury’s “victory” was Pyrrhic at best and catastrophic at worst, as the Treasury “doubled down” on a U.S. corporate income tax policy that is in a shambles. Pfizer was trying to leave the U.S. for precisely the same reason that so many corporations have already left, and many others would be delighted to follow.

The U.S. has one of the highest corporate tax rates in the world, and, moreover, asserts (almost uniquely among major countries) the right to tax the worldwide income of every U.S. corporation, including every multinational corporate group with a U.S. parent corporation, regardless of how minimal or tangential the U.S. relationship may otherwise be to that income.

Put it this way: Having a multinational corporate group with substantial worldwide operations owned beneath a U.S. corporation is not merely a “questionable” strategy, or even a “poor” idea; it is provably, mathematically the wrong structure if your goal is to operate the corporation in the best interests of its owners, employees, and other stakeholders.

Distilled to its basics, the current Treasury policy is both bullying and wrong-headed. Treasury has signaled that it will do all it can to stop U.S. corporations from leaving—even when the law is not necessarily on the Treasury’s side.

Some people think current U.S. policy is accurately described using a “Hotel California” metaphor—you can check out anytime you like, but you can never leave—but the better analogy, precisely because it so clearly illustrates the melding of bad policy and all-but-certain failure, is the Berlin Wall. Khrushchev built the Berlin Wall in 1961 because growing hordes of East Germans were fleeing, and it grew increasingly awkward to try and defend the workers’ paradise of the Eastern Bloc when large swatches of workers were intent on bailing out. So too with U.S. tax policy: Treasury thinks the natural answer to the fact that many U.S. corporations want to escape the U.S. is to make them stay unwillingly, by building the corporate tax equivalent of the Berlin Wall.

Ironically, the current U.S. tax mess is easily fixable, and indeed the United Kingdom, which itself was hemorrhaging corporations to Ireland just a few years ago, has provided an exact blue-print: Bring the corporate tax rate down, and stop trying to tax the repatriation of foreign earnings. But accepting this simple, obvious solution and the related consequences seems oddly anathema in Washington D.C. these days.

So, in the meantime, we are where we are, which is more or less on the wrong side of 1961 Berlin. How this will all shake out in the short- and medium-term is far from clear—politics hangs like a heavy fog—but one thing seems self-evident: In the long term, current U.S. tax policy seems likely to work out every bit as well for the U.S. as building the Berlin Wall did for Khrushchev. It will, eventually, need to come down. 

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Joe Darby, a tax law expert, is also the author of Practical Guide to Mergers, Acquisitions and Business Sales, 2nd Edition, published by The National Underwriter Company, a division of ALM Media. ThinkAdvisor readers can get this resource at a 10% discount. Go there now.