A copy of the following letter, written on White House stationery, was found at a table at a Starbucks on Pennsylvania Avenue last week. Its authenticity could not be confirmed.
Chairman and Chief Executive
I was naturally surprised and disappointed to read that Medtronic, a great American success story and one of the world’s leading medical device companies, has decided to renounce its U.S. citizenship to avoid paying U.S. taxes on a large and growing stash of overseas profits.
No doubt about it, the tax code needs a thorough overhaul, one that would lower the 35 percent corporate tax rate and eliminate economically distortive loopholes and preferences without reducing the total amount of revenue flowing into the Treasury. The table for just such a reform was set this year by the chairmen of the congressional tax-writing committees. Unfortunately, the congressional leadership, with encouragement of certain special interests, ultimately prevented the parties from coming to the table.
In the face of this political stalemate, you and your directors have apparently concluded that you now have a fiduciary duty to your shareholders to “free” the roughly $14 billion profits now “trapped” in overseas subsidiaries — money that you say cannot be distributed as dividends or reinvested back home in American jobs and technology. But you and I know that is not true. The only thing stopping you from repatriating that money is your stubborn determination not to pay the $2 billion or so in taxes that would be owed if you did.
The tax-avoidance scheme you have chosen is known as an “inversion.” It involves buying a competitor, Covidien, for a premium price of $43 billion and then taking its legal headquarters in Dublin as your own. In reality, Covidien is no more Irish than Medtronic. The majority of the sales, employees and profits (properly calculated) of both companies are still in the United States. The only reason Covidien has its legal address in Ireland is that its previous home, Bermuda, was so transparently a tax dodge that a better cover was needed when the company was spun off from Tyco International in 2007.
From what I read, you have convinced yourselves that this renunciation of American citizenship — a choice that, by the way, is separate from the decision to buy Covidien — is not only good for Medtronic shareholders but good for the United States as well. You claim the inversion will only result in a modest decrease to the 18 percent effective tax rate that the company now pays (very sporting of you) while making it possible for billions of additional dollars to be reinvested in the United States. The same “more-money-for-us-is-more-money-for-you” alchemy has been used to rationalize every tax cut or tax holiday since the founding of the Republic.
I hope it won’t offend you when I say that Medtronic’s credibility on tax issues is already pretty well shot. Back when we were drafting the health-care reform bill, the White House and congressional leaders asked everyone in the health-care sector to come up with a financial concession to help pay for the legislation, in return for significantly enlarging the size of the sector.
Doctors, hospitals, drug companies, labs and the insurers all responded positively to the challenge — everyone, that is, except the medical device makers. In the face of your industry’s refusal, a modest tax on all medical devices was included in the final bill. And ever since, you and other firms have been lobbying to repeal the tax with specious and exaggerated claims about how it would destroy American jobs and drive the industry overseas. In fact, industry sales have continued to grow and share prices have continued to climb — so much so that you are now promising to invest an additional $10 billion in the American market.
According to your own annual report, the impact on this onerous tax on your company amounts to less than $150 million annually, hardly a material sum for a company with nearly $17 billion in annual sales and $4 billion in pretax profits.
(Covidien, with billions of dollars now at stake in tax disputes with the IRS, doesn’t have much credibility on tax issues, either.)
If anything, Omar, it is you who will be driving companies and jobs overseas. Once Medtronic completes the biggest tax inversion in history, the lawyers and investment bankers and “activist investors” will be out in force trying to convince every corporate director and executive that they, too, have a fiduciary duty to move their corporate address to some tax haven. It won’t be long before Treasury will be looking to fill an annual budget hole of tens of billions of dollars.
As I see it, the nub of the issue is this: Medtronic wants all the rights and privileges of being an American company without the full complement of responsibilities that go along with it.
You want the peace and security guaranteed by a muscular military and intelligence apparatus that make it possible for you to operate and market in all the advanced economies of the world. You want the world’s most sophisticated and enforceable patent system to protect your intellectual property. You want a fair and efficient judicial system to enforce contracts.
You want a well-educated workforce to design and make your products, based on basic research done through an extensive network of government-funded institutes and laboratories. You want modern ports and highways and airports to ship your products to market, and an efficient border operation to speed them through customs.
You want an honest, efficient financial system that can provide you with cheap and plentiful capital. You demand a professional, credible regulatory agency that can expeditiously evaluate your products and ensure customers that they are safe and effective. And you insist on government-funded health care for the poor, the elderly and the disabled that will pay you more for your devices than any other country in the world.
All that takes tax revenue, lots of it, including the very corporate income tax that you now consider it your fiduciary duty to avoid.
As it happens, I also have a fiduciary duty to shareholders — the 300 million citizens and taxpayers who are shareholders in the U.S. government. Unlike your shareholders, however, mine actually get to vote for their “directors” in open, competitive elections, and through that democratic process they decide what the appropriate tax rate on corporate profits will be. For better or worse, those directors have decided that the tax rate should be 35 percent and that it should apply to all profits, whether earned at home or abroad.
If you don’t like the tax laws, of course, you and your directors are free to move your company or its headquarters somewhere else. It’s a global economy after all. But, please, don’t expect that you can enjoy all the benefits and privileges of being an American company while paying taxes at Irish or Swiss or Cayman Island rates.
To put it bluntly, Omar, you may have discretion to decide what’s best for your people, but so do I.
That includes discretion in deciding which of your products and patents will be approved and how quickly.
There’s the discretion over how to resolve allegations that your employees have paid kickbacks to doctors and hospitals, like the recent one that resulted in a $9.9 million settlement.
There’s the discretion in deciding what Medicare will pay for your products, if it will pay anything at all.
And discretion over whether your interests, and those of your industry, will be favored in trade negotiations with Europe and Asia.
There’s the discretion in setting the rules that companies like yours can use in establishing international transfer prices for the purpose of calculating your taxable profit. We’ve had some disagreements on that in the past.
And let’s not forget the discretion we have in deciding which of your many mergers and acquisitions harm consumers by substantially reducing competition.
Economic and political systems tend to be successful when there is widespread trust, a sense of mutual responsibility and an expectation that those in charge will not abuse their discretion just because it may be in their short-term interest to do so. I hope you and your shareholders will keep that in mind as you decide whether Medtronic will renounce its citizenship or continue, as it has been, a proudly American company.