President Obama last week lauded new Treasury regulations aimed at curbing so-called corporate inversions, in which U.S. companies merge with foreign firms to ease their tax burdens. Although the practice is legal, the president said companies “effectively renounce their citizenship” and “stick the rest of us with the bill” by performing such maneuvers.
The new rules have already scuttled a proposed $160 billion merger between Pfizer, based in New York City, and Allergan, a former U.S. firm now headquartered in Ireland. The merger was expected to save Pfizer, a pharmaceutical giant, about $35 billion in taxes.
What should the U.S. government do to discourage companies like Pfizer from moving overseas? Are more rules the answer? Ben Boychuk and Joel Mathis, the RedBlueAmerica columnists, weigh in.
Two numbers help shed light why a corporation such as Pfizer would want to merge with a company like Allergan and end up based in Dublin instead of New York: 35 and 12.5.
The United States has a corporate income tax rate of 35 percent — the highest in the developed world. Ireland’s tax is just 12.5 percent.
True, no American corporation with halfway competent tax attorneys and accountants will ever pay the full 35 percent. Pfizer’s effective tax rate was around 25.5 percent in its 2014 filings.
Why wouldn’t Pfizer go for the more favorable rate? Wouldn’t you?
The handwringing over corporate inversions is really a conflict over fundamental principles. President Obama and many Democrats treat paying taxes almost as a moral act. For a corporate giant like Pfizer to use existing laws to get a better deal is repugnant to them.
But for Pfizer’s corporate officers, it’s simply a matter of doing what’s best for the company’s shareholders. If you have a 401(k) or a government pension, you might be one of them.
Companies want to remain competitive. They seek every possible advantage. That’s simply what corporations do.
Remember: What Pfizer tried to do is perfectly legal under U.S. tax code.
Less clear, however, is whether the new Treasury regulations are legal. They probably aren’t. In order to find out, a company would need to challenge the rules in court. And in order to have standing to sue, that same company would need to spend several years and risk tens of millions of dollars tussling with the IRS.
What does seem clear, however, is that the rules will make it increasingly difficult for U.S. firms to do business.
Perhaps instead of punishing companies, the Obama administration should seek to make the tax code more competitive. Obvious, right? Even some Democrats believe the U.S. corporate tax rate is too high.
But the lowest rate Obama will entertain is 28 percent. Better to stick it to the corporations and settle for anemic economic growth than to entice companies to leave Dublin for New York with a better deal.
Here’s one underlying conundrum on the issue of business taxes: Are corporations people or aren’t they?
We already know the Republican answer to this question: “Corporations are people, my friend,” as Mitt Romney famously said in 2012. That point of view often means that corporations have the same rights as you or me — including the right to free speech, which in practice means that corporations have just as much right as you or I to spend thousands or millions of dollars to influence the workings of government.
Oddly, though, corporations rarely bear the same responsibilities as people.
Case in point: Crossing borders and adopting a new nationality is, in most cases, quite hard — and often illegal — for real people. Corporations, though, increasingly act as persons without a country, able to contort themselves to pick the country in which they can pay the lowest wages while picking another in which to pay the lowest taxes. The result: Big corporations can make millions in profits in the United States while doing relatively little to contribute to the community’s upkeep. And, oh yeah: Many of the companies still keep their top executives in the United States — making the whole thing a bit of a fiction.
The equivalent? If your family adopted a Canadian child and declared Canadian citizenship — all while staying snug at home in Peoria. It’s absurd. No wonder Bernie Sanders and Donald Trump have made a dent in this election year.
Republicans will tell you that companies flee — or do corporate inversions to transfer their citizenship abroad — because of America’s high corporate tax rate of 35 percent. Don’t believe them. A Reuters analysis last year of six such companies found they had an average effective tax rate of just 20.3 percent.
Is it wrong for companies to move overseas for tax breaks? It’s certainly unfair. Let’s give big corporations a choice. They can keep the tax advantages and international flexibility that real people don’t have, or they can have the legal personhood that gives them an outsized say in our politics. They shouldn’t have both.