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The EditorsMay 03, 2016

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.


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Joseph J Dunn
8 years 2 months ago
I agree with the overall premise of the Editors here, that our tax system is in drastic need of reform. The corporate inversions (essentially, moving the corporate address to another country) that Elizabeth Warren so dislikes are valuable not just because the U.S. effective tax rate on profits is so high, but also because the U.S. (almost alone among developed countries) taxes profits that are repatriated from foreign lands where they were earned. So, U.S.-based companies leave overseas $2 trillion on which local foreign tax has already been paid. If that U.S. tax on repatriated profits were repealed, then most of that money would return to the U.S., to be distributed as dividends to the 47 percent of U.S. households that own shares of stock directly or through mutual funds, and to pension funds and non-profits that also own stock. Or it might be used to develop new jobs, or build new plants. That money, circulating through the U.S. economy as purchases, wages, dividends, etc., would produce revenue to the government via payroll taxes, income taxes, etc. But today, government gets no bite at those 2 trillion apples. The Editors’ comment, “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” prompts another thought. A corporation is an association of people. So moral law no doubt applies to decisions made by corporations (actually, by their board, or officers). But the logic here is very close to the logic of the Supreme Court in Citizens United. http://www.supremecourt.gov/opinions/09pdf/08-205.pdf. See especially Syllabus, Held, 2 (a). Do the Editors really want to go there? Maybe Robert Reich, who served as President Bill Clinton’s Secretary of Labor, has a better idea, which he sets out in his book, Supercapitalism. He suggests abolishing the corporate tax system altogether. Radical, but worth considering.

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