Corporate inversion, also known as “tax inversion,” is the practice of “Re-incorporating a company overseas in order to reduce the tax burden on income earned abroad.” (for more on this, see my article “Citizens for Tax Justice” vs. Rational Patriotism in The Objective Standard.)
Tax inversion has become somewhat of a trend among large U.S.-based companies in recent years. Pfizer, the big American pharmaceutical company, is the latest and one of the most high profile companies to do so. Through a merger with Allergan, the Irish drug maker, Pfizer will re-incorporate in Dublin, thus lowering its U.S. tax rate.
To be sure, there are other non-tax reasons for Pfizer’s decision to merge. But attention, especially from the Left, has been focussed on the tax inversion. For example, The New Jersey Star-Ledger condemned Pfizer’s move in an editorial titled Pfizer’s tax-dodge is nothing but blarney. It is totally one-sided. Here are some excerpts:
There’s a pot of gold at the end of every rainbow for a shameless corporate tax evader.
If you’re looking for a concrete example of how big money influences American politics, you’ll find it right here. This abusive tax dodge could have been prevented, but bills currently in the Republican-controlled House and Senate that would put an end to it haven’t been passed because of powerful special interests.
In the meantime, Pfizer executives are actually trying to sell this as a good deal for the United States. They’re excusing their blatant tax avoidance with the tired old promise that the money saved and increased profits of its shareholders will —you guessed it — create new jobs.
Please. The reason we have corporate taxes in the first place is because companies such as Pfizer directly benefit from public spending in America. Pfizer profits from government research on drugs and patent protections. The main ingredient in its arthritis drug, Xeljanz, was discovered by a government scientist in a taxpayer-funded laboratory and given to Pfizer for further development and licensing. Now Pfizer is selling the drug for nearly $25,000 per patient per year.
Even absent deals like that, its workforce is educated in our public schools. Its employees take public roads and transportation to their jobs. These are all things that Pfizer is now not paying its fair share for. Where is the taxpayer’s return on these investments?
The only inversion evident here is a moral one; the Star-Ledger blaming the victim rather than the guilty party. And you can throw in a healthy dose of evasion, to boot.
I left these comments:
First, Pfizer is not “a shameless corporate tax evader.” It’s action is perfectly legal, which makes their action tax avoidance, not evasion. Tax avoidance is commendable. Who reading this editorial would deny using every available legal means to minimize their income tax bill?
At issue is not U.S. corporate taxes, which Pfizer will continue to pay on its U.S.-generated profits. At issue is taxes earned in foreign-generated profits. It’s interesting that the editors don’t even mention a Bloomberg article published in the Star-Ledger on 11/23/15 that observed, “The U.S. has the highest tax rate for businesses in the world, at 35 percent, and is one of the only countries to tax corporate profits wherever they are earned.”
Is this fair? Pfizer is not trying to avoid taxes. It is trying to avoid unfair taxation. That is perfectly moral and courageous. After the inversion, it will continue to pay U.S taxes at U.S. rates on its U.S. operations—which leads to the next issue; tax-funded government benefits. As U.S. taxpayers, Pfizer and its employees have every right to “directly benefit from public spending in America,” including the “government research on drugs” like “the main ingredient in its arthritis drug, Xeljanz.” It has a right to patent protections. It has a right to access the public schools, public roads and public transportation. “The taxpayers” is not some disembodied collective, separate from the people who actually pay the taxes. Taxpayers are the people who pay taxes, and Pfizer and its employees are taxpayers who are entitled to the benefits its government provides, just like everybody else, precisely because “the taxpayers” pay for them. What is not fair is for our government to grab taxes from profits earned in other countries.
Furthermore, Pfizer has a moral right to spend its dollars on American politics in order to influence tax legislation for the purpose of protecting its interests. In fact, to the extent the company succeeds in influencing congress to end America’s taxation of foreign profits and get America’s tax rate down to competitive levels, the company will have ended the rational incentive for corporate tax inversions. That’s more than you can say for tax-crazed “liberals,” who only want to make inversions illegal rather than reform the tax code and make it less confiscatory and perverse, in effect building a “Berlin Wall” to keep great American corporations trapped in the politicians’ tax hell. Constitutionally, Pfizer’s political contributions are protected by the First Amendment, which sanctions “the right of the people peaceably to assemble, and to petition the government for a redress of grievances.” Statists would love for the politicians to have carte blanche power to legislate over the citizenry without having to be “influenced by those pesky private constituents. But we are, after all, a representative republic, not a royal dictatorship ruling over its subjects.
An objective look at Pfizer’s inversion paints a completely different picture than this editorial presents. Corporate taxes, if not eliminated, should be made much less unfair; e.g., a flat, much lower rate unencumbered by the myriad exclusion, write offs, credits, and other crony structures. The epithet “shameless” should be pinned on our political leadership for the shabby treatment it accords America's corporations, many of whom must invert to escape from the unfair foreign tax grab. Pfizer’s inversion is not an “abusive tax dodge.” The shoe is on the other foot. America’s corporate tax structure is an abusive tax grab.
The only thing shameful about Pfizer’s tax inversion is its lame excuse for doing it—the tired old collectivist justification that the inversion is “a good deal for the United States.” It is, because the inversion will allow Pfizer to reinvest back into the U.S. without paying draconian taxes. Investment does lead to more jobs, not to mention new and better products. But this justification makes Pfizer look evasive and phony and gives undeserved legitimacy to the company’s statist enemies. The company should proudly announce that it is moving to protect its own interests by legally avoiding America’s draconian tax grab of its well-earned profits; that it refuses to be exploited any longer, and it’s not going to take it any longer. Pfizer should say it, because it has the moral high ground on this issue.
Pfizer’s “tax dodge” is bad for America only from the statist perspective of private citizens as subjects to the collective. From a pro-liberty perspective, Pfizer’s corporate inversion is quintessentially American. Kudos to Pfizer.
There is an immense irony here. Reuters reports that “Under U.S. law, corporations do not have to pay income tax on most of their overseas profits until they are brought into the United States. These earnings can be held offshore for years if they are classified as indefinitely invested abroad.”
Bloomberg estimates that American companies have $2.1 trillion in foreign-generated profits “parked” overseas. All of this money has been taxed already in the country in which it was earned. The irony is that if these companies really wanted to invest all of this money abroad, they wouldn’t have to pay the taxes—which means there would be no incentive to invert. The incentive to invert arises when U.S. companies want to invest their overseas profits back in the U.S. But the tax burden inhibits this re-investment. For example, consider Apple. As CRN reports, in 2013 Apple, which then had $145 billion in cash (it’s more now), borrowed $17 billion for corporate purposes. Why? Because borrowing was cheaper than repatriating cash from abroad. If Apple had tapped its overseas horde, it would have paid $6 billion in U.S. taxes; taxes on profits earned abroad and already taxed once by foreign countries.
If Apple were to invert, the inversion would actually have made it easier to reinvest its foreign-generated cash in America. Grubby American politicians, especially on the Left, don’t care about jobs or fairness. They want the loot to fund their pet projects, hand out to freeloaders, or just fund their statist, central planning schemes.
Tax Inversion: “Fiduciary Duty to Shareholders” vs. “Duty to Society”