Consequences from the inability of Congress to function come
in many forms, and one of the most glaring emerged again with the $160 billion
merger of two giant drug companies to avoid U.S. taxes this month.
The reverse merger of Pfizer, the maker of Viagra and
Lipitor, and the significantly smaller Allergan, maker of Botox, so that Pfizer
can relocate to Dublin and pay the lower corporate tax rate there is the latest
and biggest example of what is called tax inversion — a legal tail wagging the
dog trick that takes place mostly on paper.
It results in the U.S. losing billions of dollars in tax
revenue each year – and U.S. shareholders taking a capital gains hit.
It also undermines the reputation of the U.S. as a place to
do business and in the longer term will inevitably divert the relocated
company's investment and job creation outside the U.S.
The Pfizer-Allergan deal is particularly provocative because
it comes just days after the U.S. Treasury Department issued a second set of
directives designed to block just this kind of inversion.
It seems likely, however, that this deal will slip under the
wire of the various thresholds in ownership and revenue set by Treasury and
evades these efforts to limit the benefits of this kind of relocation for tax
purposes.
It shows once again the limits of what regulation can do to
solve a fundamental problem that requires legislation.
As Treasury Secretary Jack Lew ruefully acknowledged in
introducing the new rules last week, "There is only so much the Treasury
Department can do to prevent these tax-avoidance transactions," he said in
a statement. "Only legislation can decisively stop inversions."
In a conference call with reporters, Lew added hopefully
that Treasury would continue to work with Congress "in a bipartisan manner
to reform our broken business tax system and to eliminate inversions for
good."
The reason companies like Pfizer take this drastic step is
because U.S. corporate taxes are way too high, well out of line with the rates
in other industrial countries. The top U.S. tax rate is 39%, for instance,
while the tax in Ireland for most corporate income is 12.5%.
While all those famous loopholes that every politician
promises to close reduce the effective tax rate in the U.S., it is still much
higher than in other countries.
So the solution has been obvious for some time — reduce the
U.S. corporate tax rate. The Obama administration proposed such a measure in
2012, but it got caught up in the partisan wrangling that has marked every such
measure in recent years.
The timing of the Pfizer-Allergan deal seemed to show
corporate America thumbing its nose at Treasury, and the fact that Allergan
itself is now based in Dublin due to one of the original tax inversion deals
only underscores the flagrant disregard for the government's efforts to rein in
the tactic.
But these companies are only doing what companies do —
maximizing profit by minimizing costs, including taxes.
They are essentially voting with their feet, to the
detriment of U.S. business and employment.
But it is not their fault. The fault lies with lawmakers who
fail to grasp the simplest facts of a global economy and get so involved in the
political scrum that they lose sight of the goal.
Which is why President Obama missed the point in a weekly
address last year when he accused these companies of being
"unpatriotic."
Corporations may well be "people" in some senses
of the word, but in a global economy they can hardly afford the luxury of being
"patriotic."
Comparing them to individuals, as Obama did in his address,
who should not be able to pick and choose what rules they follow, shows a
failure to grasp some of the basic fundamentals of an open global economy.
And introducing a putative moral element into the mix only
distracts from what really needs to be done – a legislative tax reform that
enables U.S.-based companies to remain competitive internationally.
So while presidential hopefuls scrambled to condemn the new
deal, they carefully avoided placing the blame where it belongs — on
themselves, to the extent that they are or have been members of the U.S.
Congress.
If politicians are serious about stopping this drain of
economic resources, they would come together and finally get corporate tax
reform done.
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