Why Pfizer's Plan To Move To Ireland May Cost You Money

The Viagra maker isn't just moving there for the Guinness draught.
University of California, Berkeley

NEW YORK -- Pfizer's bid to buy Irish rival Allegan may end up costing you money, according to economist Gabriel Zucman.

The move would allow the New York-based pharmaceutical giant to slash its corporate tax rate by reincorporating in low-tax Ireland, in what is known as a corporate tax inversion. Most other aspects of its business would stay the same, but the company would avoid U.S. taxes and more easily access cash stashed overseas.

That means the tax dollars in the U.S. have to come from somewhere else, Zucman said.

"Tax inversions are a bad thing, because they erode corporate tax revenue," Zucman, a protégé of rockstar French economist Thomas Piketty, told The Huffington Post in an email. "Tax inversions reduce effective corporate tax rates, which means in the end less taxes for shareholders, and probably more taxes for everybody else."

Pfizer, founded 166 years ago in Brooklyn, has long reduced its U.S. tax bill using foreign loopholes. The Viagra maker keeps $74 billion in 151 foreign subsidiaries. A move to Ireland or another low-tax country would allow it to access that cash more easily. Last year, the company aggressively tried to buy British rival AstraZeneca in a $119 billion bid.

Zucman published last month The Hidden Wealth of Nations, a 116-page primer on the role tax havens play in exacerbating income inequality. In it, he warns that countries that allow the super-rich to stash their assets in secretive overseas accounts -- Switzerland, Bermuda and, now, even the United States -- are helping widen the gap between the rich and rest to levels that echo those of 19th-century European aristocracy.

Tax inversions are a subset of that larger corporate tax problem. A series of attempted inversions last year spurred protests and sparked rare public outrage over the schemes.

Facing boycotts, Walgreen Co., owner of the Walgreens drugstore chain, backed off a deal that would have saved $4 billion by moving its headquarters to Switzerland. Banana giant Chiquita, under similar political and financial pressure, dropped its bid to move to Ireland by buying rival Fyffes. Burger King, which successfully adopted Canadian corporate citizenship last year after it merged with coffee-and-doughnut chain Tim Hortons, faced (largely unheeded) calls to boycott its fast food.

That doesn't mean corporate giants that stay in the United States don't find other ways to lower their tax bills through wealth havens. U.S. companies stash about $2.1 trillion in cash overseas to avoid U.S. taxes, according to Bloomberg. Microsoft, Apple, Google and five other big tech firms account for more than one-fifth of that number.

You can't necessarily blame companies for trying to maximize profits. At 35 percent, the U.S. corporate tax rate is among the highest in the developed world, though a litany of loopholes allow most firms to drastically reduce that rate. Tax inversions, despite new restrictions being finalized by the Treasury Department, remain legal. And, if a company is already stashing cash overseas, swapping the stars-and-stripes for an Irish flag only allows it to have more access to that money.

David Wessel, director of the Hutchins Center at the Brookings Institution, explained it nicely on NPR earlier this week:

So basically the U.S. statutory tax rate for companies is 35 percent, although a lot of companies find ways to pay less than that. The U.S. taxes all of a multinational company like Pfizer's profits. Other companies tax only the profits earned in that country. And those foreign profits are taxed only when they're brought back to the United States. American companies have $2 trillion in taxes parked overseas. And if they go through this inversion, they can use them more freely. And I think what's happened is a lot of companies are noticing that a few companies have done this and they're all saying to their executives, well, if they can save money on taxes, why can't we?

So what can be done? In his book, Zucman recommends a complete overhaul in how we tax corporations. Rather than set national tax rates based on total profits, he suggests that corporations should be taxed on the revenues earned within a country's geographical borders.

"So if Pfizer makes 50 percent of its sales in the U.S., 50 percent of its global consolidated profits would be taxable in the U.S., independently of where Pfizer’s headquarter is located," Zucman said. "This would make inversions (and all other forms of corporate tax dodging) irrelevant."

Pfzier did not immediately respond to The Huffington Post's request for comment.

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