In early April, a $160-billion deal between the pharma-ceutical giants Allergan and Pfizer fell apart when its tax advantages disappeared. Originally, Pfizer had planned the merger as a tax inversion—a maneuver that would have shifted Pfizer’s tax residency to Ireland, where Allergan is headquartered and subject to a 14 percent corporate tax rate instead of the 35 percent rate Pfizer faces in the United States. New Treasury Department rules, however, would have prevented Pfizer from escaping the higher domestic tax rates.
The failed merger is indicative of a larger problem. The current regulatory environment makes tax avoidance a primary component of global corporate strategy. Financial rewards are linked not with productive activity but with artificial constructs: tax residencies that are polite legal cover stories rather than actual investments in places where they are headquartered. But this is not surprising. After all, why should a corporation, seeking the benefit of its shareholders, volunteer to pay taxes it can legally avoid?
The answer, of course, is that those tax revenues help bolster the common good. Senator Elizabeth Warren has argued that the problem of transnational tax avoidance is not that U.S. rates are too high but that the revenues generated from corporate taxes are too low. But the fix for both these problems may be related. Lower corporate rates could be traded for reforming the tax code—both to reduce the incentives for tax avoidance and to increase overall revenue. There are moral reasons for corporations to pay their fair share of taxes. We should also reform the tax code to give them an economic incentive to do so.