WASHINGTON, Dec. 3, 2015 — U.S. drug manufacturer Pfizer recently announced it has agreed to purchase Irish drug maker Allergan. This will make Pfizer the world’s largest pharmaceutical company.
While executives of Pfizer explain that the deal makes good business sense, many analysts believe the move is just intended to reduce U.S. taxes paid by Pfizer. Acquiring Dublin-based Allergan will enable Pfizer to move its corporate headquarters to Ireland as well, resulting in a much lower corporate tax rate for the combined company in the process. This maneuver is known as a “tax inversion.”
Pfizer chief executive Ian Read said that his main priority for this deal was improve the value of Pfizer’s stock for the company’s shareholders. He explained that the purchase of Allergan will broaden the combined company’s product line and allow for some combination of efforts, resulting in cost efficiencies, but does acknowledge the transaction will significantly lower Pfizer’s corporate tax rate. He claims that the lower tax rate will permit the company to remain competitive in the global marketplace.
Allergan’s product focus is in areas where Pfizer has no product offerings. Allegan concentrates on dermatology and aesthetics. Its top-selling drug is Botox, which will generate well over $2 billion this year. Allergan also recently merged with Actavis. Already very active in the market for generics, Actavis boasted its own substantial portfolio of drugs that was further augmented when the company acquired a stable of similar pharmaceutical products from Proctor & Gamble.
While generics produce very low profit margins, they are still effective and profitable for a company once the patent on a drug has expired. From a strategic standpoint, then, the Pfizer-Allergan deal makes sense. But that was likely not the primary reason for the merger.
According to Pfizer’s income statements, it paid an effective U.S. tax rate of more than 25 percent last year, only slightly down from 27 percent the year before. On marginal income, their tax rate is 35 percent. Conversely Allergan paid about 5 percent in taxes last year, even though Ireland’s corporate tax rate is 12.5 percent on most income and 25 percent on some other types of income.
Pfizer estimates that the relocation of its headquarters to Ireland will reduce its tax rate to about 17 percent, saving billions in taxes annually. While the deal is good for Pfizer and its stockholders, many politicians and journalists strongly condemned the company’s transaction.
Hillary Clinton said, “We cannot delay in cracking down on inversions that erode our tax base.”
Donald Trump commented, “The fact that Pfizer is leaving our country with a tremendous loss of jobs is disgusting. Our politicians should be ashamed.”
The New York Times (which continues to baffle me with its editors’ and columnists’ apparent lack of understanding of economics) editorialized that the alleged need to have a lower tax rate to remain competitive is an argument that “does not stand up” since “multinationals routinely take advantage of write-offs that reduce the top rate to a much lower level.”
Everyone seems to agree that the solution to the overall corporate tax problem is to change U.S. tax laws to eliminate the advantage to relocating in another country. The problem is that Congress and the president cannot agree on how to overhaul the tax code. Most will agree that the corporate rate must fall. But how far is the burning question. And what about persistently high personal tax rates?
The president and Democrats in Congress want to make the tax code more progressive by raising the rates on the highest income earners. They claim that the wealthy should pay their “fair share” which is more than they are now paying. They argue that this will reduce the deficit and reduce income inequality.
The Republicans argue exactly the opposite. They say the tax code should be far less progressive (flatter) and the tax rates should be lowered for all Americans. They claim this will stimulate economic growth, which ultimately raises more tax revenue.
The result of this difference in opinion is that Congress and the president have done nothing since 2011, the year when the Bush tax cuts were made permanent for all Americans except the highest income earners. These individuals saw a 10 percent increase in their taxes. At that time our elected officials promised there would next be an overhaul of this country’s overly complex, counter-productive and grossly inefficient tax code.
As previously noted in this space, there is a simple solution to the tax inversion problem and all of the other tax code problems. The Busler Single Rate tax plan taxes all individual income above a livable minimum (twice the poverty rate) at 15 percent. All income is treated the same no matter how it is earned. This includes wages and salaries, rent, interest, profit, dividends and capital gains. There are no deductions for anything. Corporations also pay 15 percent, but they pay the entire 12.4 percent Social Security Tax.
The 15 percent corporate tax rate would not only end corporate inversions. It would likely incentivize foreign companies to relocate to the U.S., which in turn would eventually raise more tax revenue.