So much so, in fact, that the pharmaceutical firm Pfizer decided not to go ahead with their planned merger with the “Irish” firm Allergan, a firm that, according to Bloomberg, “is run from New Jersey but has a legal domicile in Dublin.”
There are those who call these firms unpatriotic, who label such companies “corporate deserters” as opposed to inverters. I see where these folks are coming from, particularly in the sense that the firms in question continue to benefit from our markets, educated workforce, infrastructure, R&D, technology, established rules of law and justice system, and so on without paying their fair share of the bill. (In that regard, they’re more “freeloaders” than anything else.)
But I don’t see it that way. While I’m not suggesting that we provide these CEOs with medals for their civic pride, they’re simply responding to incentives in the tax code. Here’s how President Obama put it this week: “It’s not that they’re breaking the laws, it’s that the laws are so poorly designed that they allow people, if they’ve got enough lawyers and enough accountants, to wiggle out of responsibilities that ordinary citizens are having to abide by.”
I certainly don’t condone the player, but I blame the game. And the game is getting worse: there have been 23 corporate inversions since 2012 compared to three in 2010 and 2011.Therefore, what policymakers must do is change the game, and that’s precisely what Treasury did.
(Yes, it would be better to do so with Congress, in no small part because you want changes like this to be etched in the stone of the tax code. Administrative rule changes like this one can be reversed by the next president, if he or she is more moved by the bidding of the multinationals than the fairness issues Obama stressed. But congressional action doesn’t appear to be coming soon, which means that, for those of us who believe this game changer is crucial to bringing back some tax fairness, the stakes of the coming election just got even higher.)
Critics of the new rules argue that they are anti-competitive. They argue that, compared to other economies, our corporate tax rates are so high that firms must pursue tax avoidance measures like inversions in order to compete. In a CNBC debate yesterday, the folks with whom I was arguing seemed aghast that policymakers would try to block tax avoidance. It’s a successful business strategy, isn’t it?
In fact, the competitiveness of our businesses, especially our multinationals, is not hampered by our tax code, which provides them with so many loopholes that their effective tax rate (what they actually pay as a share of their income) is, at around 20 percent, far below the 35 percent statutory rate and similar to that in other advanced economies. On average, our businesses have been highly profitable over this expansion, especially compared to wage earners. Large firms with access to overseas markets and lots of tax lawyers are definitely not struggling. And when it comes to the hardware stores on the corner, their fates are closely tied to the paychecks of the folks in their neighborhoods.
If we hope to improve those neighborhoods, along with the paychecks of the people who live there and the prospects for their kids, we’re going to have to invest more in infrastructure, education and a robust safety net that can offset market failures. That takes tax revenue, and if the inverters keep freeloading, either somebody else is going to have to foot the bill or these public goods must deteriorate, along with the living standards of those who depend on them.
So, yeah, tax avoidance — or, for that matter, the massive tax evasion by wealthy elites across the globe that we’re beginning to learn more about — may be a “business strategy” for the beneficiaries of those tactics. But the costs fall on the rest of us, of whom there are many more, making inversion a strategy that’s a bad deal for America.
The fact that the administration took steps to block it should be viewed in that light. Capitalism works when the “invisible hand” of the market incentivizes individual actions that generate social benefits. But sometimes, as in the case of inversions, that hand is all thumbs.