The house is on fire and the occupants are eating dinner and not paying attention. While our tax base is being whittled away by large American corporations, members of Congress are twiddling their thumbs and doing nothing. The willingness of Congress to allow these “inversions” to occur is another sign of the dysfunction in Washington and the “perversion” in the American political system.
To escape higher corporate taxes in the U.S., American corporations are merging with foreign companies and incorporating in their countries, taking advantage of lower tax rates abroad. This results in America losing billions of dollars in tax revenue because of these corporate moves. Many of the companies pursuing this strategy are in medically related industries and make most of their money in America. In fact, the federal government is the largest supporter of most of these companies through the Medicare, Medicaid, and other federally sponsored programs.
While revenues made in the United States may continue to be taxed by our government, the total company profits will be taxed in the countries in which they are incorporated. Though Treasury Secretary Jacob Lew and the Obama administration has urged Congress to stop the bleeding, thus far nothing has been done to insure that American companies do not flee abroad, and to financially penalize the ones that have already done so. Whether or not this will be done in the future remains to be seen and many companies will have already departed for greener pastures (or pastures where they can keep more of their green). Some lawmakers are considering legislation that will have retroactive clauses to capture some of the lost taxes, but the legality of this and the ethical ramifications will be questioned. After all, these American corporations have not been breaking the law as it now stands. It is really the stupidity of Congress in not changing the law that is to blame.
The latest company to leave the U.S. is the drug company AbbVie which is acquiring another drug company Shire based in Ireland. By doing this AbbVie’s effective tax rate will drop from 22.6% in 2013 to 13% in 2016, saving the company (executives and shareholders) significant sums of money. The generic drug company Mylan is also leaving the country for the Netherlands by buying Abbot’s European assets for $5.3 billion. Pfizer also went after AstraZenica earlier this year to relocate in England but were rebuffed in their bid. Other companies who followed the inversion path include Medtronics, Chiquita, and Applied Materials. Walgreen’s has also been seeking a partner to move abroad.
The fact that these companies, that were founded in America and owe their growth to payments from American citizens and the federal government, are now leaving America so they can pay lower taxes is disgusting. But they are not breaking any current laws. The executives of these companies will certainly get an increase in pay and bonuses for raising company revenues by lowering their tax burden.
The inertia of Congress in allowing these inversions to occur is almost beyond belief. No matter what conflicts exist between the Republicans and Democrats, this should be a straight-forward issue in not allowing revenues that support federal programs to disappear. Will some members of Congress from both parties step forward and put their fingers in the dike to halt the outflow of cash to other countries. Given the way Congress functions, I wouldn’t bet on it.