The article discusses the current problems regarding the pharmaceutical industry and their efforts to avoid taxes and the indirect link to the current problems facing Puerto Rico. Ireland should take note.
Pfizer’s Long War on Taxation
Long before Pfizer conceived of merging with Allergan in a $150 billion deal to rid itself of what its chief executive called an “an uncompetitive tax rate” in the United States, the company was deploying various tax avoidance strategies dating back to at least 1976.
That’s when Pfizer, with the help of lobbyists for the pharmaceutical industry, sought to take advantage of an unusual tax credit program that legislators in Washington had passed to help spur investment in Puerto Rico. In that year, hoping to stimulate employment on the Caribbean island, Congress passed Section 936 of the Internal Revenue Code, a law that gave mainland companies a full tax exemption on profits earned in Puerto Rico. In addition, the local corporate tax code gave companies incentives to establish subsidiaries there.
Pfizer wasn’t alone. The pharmaceutical industry descended on Puerto Rico to take advantage of the savings. The tax break ultimately cost American taxpayers $24.7 billion in unpaid tax receipts, according to the General Accounting Office. After the tax law was scrapped in legislation signed by President Bill Clinton in 1996 that phased out the tax break over a 10-year period, Pfizer and its rivals pulled up their stakes in Puerto Rico, leading, in part, to the island’s current economic crisis.
All of this is said not to moralize about whether Pfizer owes a patriotic duty to pay a hefty tax bill. It is meant simply to highlight the lengths companies like Pfizer and others will go to reduce their taxes, even when they receive substantial benefits as American businesses. Pfizer has received at least $50 million in federal subsidies over nearly the last 15 years, according to the Corporate Research Project, a nonprofit that tracks corporate subsidies. And, still, it wants to leave the United States and move its headquarters to Ireland.
So long as United States companies feel as if they have to compete on an international stage against companies in countries with lower tax rates — in Pfizer’s case, GlaxoSmithKline and AstraZeneca in Britain, and Novartis in Switzerland — they will seek ways to leave the country to reduce their bill.
In 1934, Judge Learned Hand wrote what has become something of a mantra for those who believe there’s no obligation to pay high taxes. “Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the Treasury,” he wrote. “There is not even a patriotic duty to increase one’s taxes. Over and over again the courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible.”
I’ve argued in previous columns that the government should consider temporary measures to prevent some of these deals from happening. Last year and again last month, the Treasury Department issued new rules intended to curb these so-called inversion deals. Still, there are ways for companies to bypass these rules, as the structure of the Pfizer-Allergan merger demonstrated. (The combination is not technically structured as an inversion, though it achieves the same goal of securing a lower tax rate overseas.)
“Our actions can only slow the pace of these transactions,” Treasury Secretary Jacob J. Lew said last month after introducing new rules to curb inversions. “Only legislation can decisively stop them.”
There are all sorts of ideas percolating around Washington about how it could make it less attractive for drug companies like Pfizer to leave the United States, some more outlandish than others, but virtually all require being more protectionist and less open. For example, one idea making the rounds would be for Medicare or Medicaid to favor buying domestic drugs over foreign ones. Another would give domestic drug companies priority in the Food and Drug Administration approval process. All those punitive steps might work in the short term, but they would create their own complications and unintended consequences.
The only way to end the inversion craze, or whatever tax avoidance plan comes next, is to comprehensively reform the corporate tax code.
Does that mean companies’ tax rates will most likely fall? Yes. President Obama has long pushed for a simplified tax code that lowers corporate tax rates with fewer brackets, while cutting unfair tax breaks and loopholes. The White House, on its website, says, “Our system has one of the highest statutory tax rates among developed countries to generate about the same amount of corporate tax revenue as our developed country partners as a share of our economy; this, in turn, hurts our competitiveness in the world economy.”
Tax rates will most likely always be marginally higher in the United States than elsewhere, as they should be given the benefits accorded companies based here. But the gap between rates here and other developed countries cannot be so large that it drives American companies overseas.