Last month’s announcement of the $160 billion combination of pharmaceutical giant Pfizer and the smaller Irish cousin Allergan drew a harrumph from the US Treasury on so called ‘inversion’ deals.
But Pfizer’s move was legitimate, good for its shareholders and likely beneficial for US drug consumers, and highlights key tax problems being ignored by the Treasury Secretary.
Pfizer-Allergan’s headquarters move to Ireland will significantly reduce the company’s worldwide and US tax burden, benefiting Pfizer’s shareholders.
Excoriated by some politicians Pfizer CEO Ian Read is absolutely correct to lead the charge to advantage Pfizer’s shareholders. The company’s gain in cash flows also enables greater support for funding drug discovery and development, benefiting consumers, too.
The transaction lays bare the idea that the United States, in a globally competitive market for capital, can defend the highest corporate tax rate of any industrialized nation.
The US statutory rate – 10 percentage points greater than the median among OECD countries– has discouraged investment and employment in the United States.
In addition, the United States is one of six OECD countries that tax overseas profits of their companies, a key factor in those companies trapping over $2 trillion overseas.
Accompanying these impediments is the re-domiciling of businesses outside the United States, including inversions (though in this case Pfizer will retain a substantial US-based work force).
A lower corporate tax rate would signal an ‘invest in America’ policy at home and abroad that would lead companies to keep more plants, workers, and profits in the United States.
A corporate rate of 20% would make the nation a much more competitive destination for investment. In addition, US firms should not have to pay additional US taxes on funds earned abroad, freeing up more funds to send back home for shareholders and corporate purposes. Within the corporate sector, the revenue costs of such a tax change can be accomplished by broadening the tax base (removing many special interest provisions) and taking into account incremental revenue from greater economic activity in the United States.
The Treasury’s opposition to constructive reform exposes four problems:
First, as the Pfizer-Allergan transaction and other large transactions show, the Treasury’s baseline for forecasting corporate tax revenue may be overly optimistic, as it ignores rationally pursued self-help tax reform.
Second, the Treasury’s failure to lead on corporate tax reform consigns many smaller corporations not able to pursue costly inversions and other M&A strategies to a higher tax rate.
Third, it is the administration’s opposition to reform of the individual income tax to reduce marginal tax rates on non-corporate business income that puts a nail in the coffin of corporate tax reform: Without reforming both systems, business tax base broadening to facilitate a corporate cut would raise taxes on businesses that pay taxes at individual rates.
Finally, and quite significant, contemporary economic research suggest that much of the burden of the corporate tax is borne by labor – in reduced wages for US workers – rather than entirely by owners of capital. As a consequence, the administration’s anti-tax-reform stance is a headache for US workers, not just for the Pfizer CEO and his colleagues at the Business Roundtable.
Pfizer has pursued its forward-looking business interests well in the Allergan transaction. By contrast, the Treasury’s logic of obstruction hails from a 1960s view of corporate taxation, in which the United States could dictate terms in capital markets to the rest of the world. The resulting blow struck against America as a place to invest is a bitter pill.
This op-ed appeared in Business Insider on December 14, 2015.