In the mid-1840s, cousins Charles Pfizer and Charles Erhard immigrated to the United States from Germany with the dream of building a chemical company. Thus was born what is today Pfizer Inc., the 48th-largest corporation in America.
Charles Pfizer’s youngest daughter, Alice, would later write that her father had been unhappy with his prospects in Europe. “But there,” she wrote, “on the other side of that great Atlantic Ocean, was a new country not only full of countless opportunities but also opening its arms to all those who would come and help upbuild it.”
Pfizer itself was upbuilt first with the help of protective U.S. tariffs, then with the ingenuity of scientists and researchers educated in U.S. schools and universities, then with the help of U.S. patent laws and legal protections, then with the assistance of U.S. taxpayers who purchase, at premium prices, billions of dollars’ worth of Pfizer drugs through the Medicare and Medicaid programs.
It is a great company that has made invaluable contributions to America’s health and wellness.
But now the people who run Pfizer have decided it is time to head back across the Atlantic. Reason: To further enrich themselves and their shareholders by dodging their fair share of the taxes on which their company was upbuilt.
In January, Pfizer announced it would seek a friendly merger with London-based AstraZeneca. The suspicion is that Pfizer’s chief interest is the tax advantages of the deal. What if it was structured as an “inversion,” a deal where a larger U.S. company merges with a smaller foreign competitor? The merged entity would have its tax domicile in London, allowing Pfizer to pay taxes at Great Britain’s 21 percent rate (soon to drop to 20 percent), instead of at its current nominal U.S. rate of 27 percent. The New York Times reports that since 2008, about two dozen U.S. companies have used inversion mergers to move their legal residences abroad.
Here’s the truly beautiful part: Pfizer, according to its 2013 annual report, has banked $69 billion in foreign profits overseas. If and when this U.S. company returned those profits to the United States, it would owe taxes on them at 35 percent. But there’s no law against using all or part of that $69 billion to help pay for AstraZeneca, thus depriving the Treasury not only of future taxes, but past taxes, too.
It should be noted that all of this is perfectly legal. On paper, the United States’ top corporate tax rate of 35 percent is the highest in the world. But after deductions, exclusions, deferrals and other loopholes, the average effective overall rate is 12.6 percent, according to the Government Accountability Office. That’s less than most middle-class households pay. Corporate income taxes as a percentage of gross domestic product have shrunk from 7.2 percent to 1.3 percent in the past five decades.
The U.S. tax code is so perverse that it actually encourages some firms to expand overseas. Last July, President Obama proposed a remedy as part of a “grand bargain for the middle class.”
The president would lower the top corporate tax rate to 28 percent, with a lower 25 percent rate for manufacturers. He would remove most special tax exclusions, loopholes and deals that encourage U.S. companies to move jobs offshore.
The president also signaled that he was open to a deal that would allow firms to “repatriate” some of the estimated $2 trillion in foreign profits currently held offshore without subjecting them to a 35 percent tax. The condition would be that the money is invested in infrastructure and school construction that would put middle-class Americans to work.
Pfizer’s proposed AstraZeneca deal is such a blatant tax-avoidance scheme that it could reignite talk in Congress — if not about the “grand bargain,” at least about pieces of it.
The idea of tax forgiveness in return for buying, say, special infrastructure bonds is worthwhile, but only if the tax forgiveness doesn’t heavily outweigh the investment. Some congressional proposals have suggested forgiving $6 in taxes for every $1 of infrastructure bonds. To borrow a Republican word, that amounts to amnesty.
If we had a billion dollars to spend on free speech, here’s a law we’d like to see: U.S. companies that want to stash profits or set up headquarters overseas — in London, say — may do so. But only if the executives move, too.
Unconstitutional? OK, they could still live here and keep their U.S. citizenship, but they’d have to pay personal taxes at the rate charged in the headquarters nation.
The marginal personal tax rate in Great Britain for income over £116,210 (about $197,151) is 60 percent. You shouldn’t rip off American taxpayers without feeling a little pain.