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Business practices that hurt the country

By       Message Seymour Patterson       (Page 1 of 1 pages)     Permalink

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"Pfizer Inc on Monday said it would buy Botox maker Allergan Plc in a deal worth $160 billion to slash its U.S. tax bill, rekindling a fierce political debate over the financial maneuver." (See Reuters) This open admission of intent--namely to avoid taxes--altogether highlights the perfidy of CEOs whose quest for profits outweighs all sense of civic responsibility. Gracken-like corporations dubbed in a series of rulings as persons by SCOTUS are equally motivated by human greed. From the point of view of the CEO with a mandate to increase stockholder value, reincorporating offshore to maximize stockholder profits is a business sensible strategy. Pfizer also wants to spread the tax savings from operating in the U.K. over among other things R&D and dividends. This sort of merger is what Donald Trump railed against with respect to U.S. automakers spending billions in Mexico. He understands the loss of jobs and wages that the actions of Pfizer will mean to U.S. workers while Ireland will benefit an uptick in jobs and worker remunerations from what Trump labels a "disgusting" move. The windfalls that will accrue to Pfizer from the merger are the result of something called "inversion" by which a corporation gets around paying U.S. tax from taking its corporate base offshore simply stated (in fact the details are a bit more nuanced).

My own initial reaction to learning about the merger of Pfizer and Allergan Plc was "disgusting" like Trump and "unpatriotic" like President Obama. And like both of them, I was giving flight to emotions. If a U.S. company wants to sell its goods in the lucrative U.S. market, it should be prepared to play by U.S. terms. If the Pfizer does not like these terms, it is certainly free to move overseas to Ireland and save billions of dollars in tax. That's their prerogative: And it is probably good business. Yet, it is difficult to see how such moves serve the country best. Thus, the negative reaction to Pfizer's action is quite understandable.

Pfizer earned billions of dollars from its operations abroad. This might be a mitigating point for the company whose action both causes disgust and unpatriotic charges. "Pfizer has amassed an offshore cash pile totaling more than $60 billion from profits generated overseas." (See Money) With some stretch, we could argue that Pfizer grew on the back of this country's infrastructure--both human and physical capital. It is not unreasonable for U.S. citizens who enabled that infrastructure to expect a return on the investment. Hying off to the U.K. to escape the tax amounts to denying the country a "just" return on her investment. There is also something unseemly (and perhaps even unpatriotic) about the unwillingness of some CEOs to put profitability above civic responsibility: Profitability and civic responsibility needn't be mutually exclusive goals of a company. But whether this argument holds up under close scrutiny is a conversation to be had at a future date.

State governments bribe companies to move to their cities by offering them sweetheart tax deals--such as sports stadiums, which are not good economic investments--financed by taxpayers, even as they are cutting back on spending on educations, the poor, the infrastructure, in the name of budgetary restraints. But why should state governments subsidize private businesses that socialize costs and privatize profits? The market place environment that includes existing government regulations and taxation (and the structure of the corporate tax) should determine the viability for a firm. Corporations (i.e. persons) should be allowed to stand or fall on their own petard. Stadiums are expensive and they divert funds from other public goods--roads, teachers, firefighters, etc. (See Think Progress). The point is if a company cannot make it on its own--lacking the wherewithal in administration, management, product, vision, and clientele to be a successful enterprise--it is misusing society's scarce resources if it doesn't close its doors. The business is operating in the wrong milieu and it should move on to another business for which it is better suited.

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Moving a corporation base overseas is a drain on the country. It is the traditional concept of "brain drain" where a poor country invests its resources in the development of its citizens--converting them into doctors, engineers, pilots, teachers, and a host of other productive agents--only to lose them to developed foreign countries in the West. This is not a knock on the doctor or the teacher or the engineer who considers the opportunity costs of the skills she brings to the labor market. Nor it is a knock on the West for taking skilled workers in. Yet, brain drain explains part of the malady of anemic economic growth that besets many developing countries.

Business migration to tax favorable foreign countries should not be construed as a new phenomenon: Pfizer is in the company of 47 companies that have done so for the decade. This year in the same pursuit of tax avoidance, some big named companies, unwilling to pay the 35 percent tax on profits, have gone offshore. "Eight of the biggest U.S. technology companies added a combined $69 billion to their stockpiled offshore profits over the past year . . ." Among the behemoths: "Microsoft Corp., Apple Inc., Google Inc. and five other tech firms now account for more than a fifth of the $2.10 trillion in profits that U.S. companies are holding overseas, according to a Bloomberg News review of the securities filings of 304 corporations." (See Bloomberg News) It would seem this flight of U.S. companies and the implicit (and explicit) loss of good jobs and wages cannot be sustainable in the long term. As a result, the U.S. government is under considerable pressure to reduce the corporate tax rate to staunch the business hemorrhage. If one of the leading republican presidential candidates ascends to the highest office of the land, there is a great likelihood the corporate tax rate would go under the knife. How can that be good for the country?

 

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Seymour Patterson received a Ph.D. in economics from the University of Oklahoma in 1980. He has taught courses and done research in international economics and economic development. He has been the recipient of two Fulbright awards--the first in (more...)
 

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