Walgreen Co. Did the Right Thing, But Most Corporations Won't Without a Change in Tax Rules

I experienced a brief moment of joy when news broke last week that pharmacy chain Walgreens has, for now, set aside plans to invert, which is a euphemism for using paperwork to reincorporate as a foreign company for tax purposes. But my joy lasted for about one minute.

While Walgreen Co. has decided to remain American for tax purposes, a lot of what consumers buy in Walgreens drug stores may come from companies that are not such outstanding corporate citizens. The prescriptions you have filled there may be made by AbbVie, which plans to become a British company for tax purposes, or Mylan, which plans to become a Dutch company, or Pfizer which is also considering a corporate inversion.

Perhaps you are not on any prescriptions but just want to pursue a healthy lifestyle. Walgreens has superstores in some cities that sell groceries including produce, but remember that if you buy any bananas there, well, Chiquita is planning to become an Irish company for tax purposes. If you pick up some yogurt, well, remember that an Illinois company called Hospira hopes to become European for tax purposes by merging with a division of Danone (known in the U.S. as Dannon).

Walgreen Co. may have done the right thing because it feared public outcry and a backlash from consumers who could choose to go to CVS or Rite-Aide. But the same cannot be said about these other corporations. Can someone realistically forego getting a prescription filled because it's made by a bad corporate citizen? Probably not. Only Congress and the Obama administration can truly stop corporate inversions.

And this is one problem that Congress could reasonably be expected to resolve in a bipartisan way. The parties came together in 2004 to prevent inversions, when before then often entailed Bermuda-based shell companies acquiring American corporations.

The 2004 rules require that any such arrangement must now have at least a sheen of legitimacy. That's why AbbVie, Mylan, Chiquita and Hospira are all merging with real offshore corporations based in Europe to make it appear that something more than paperwork has occurred. But the new, supposedly restructured companies that result from these mergers will be American companies -- there will typically be no move of headquarters or personnel -- even as they claim to be foreign for tax purposes.

Obviously, corporate tax rules need to be further tightened. It's one thing if an American company merges with a foreign one and the newly merged company really is restructured as a foreign corporation with a headquarters outside the United States. But the rules must be changed so that the IRS is not forced to recognize a "move" offshore by a corporation that has not moved at all in real life. The Stop Corporate Inversions Act, introduced by Rep. Sander Levin in the House of Representatives and Sen. Carl Levin in the Senate, would accomplish this.

Of course, corporate lobbyists and their friends in Congress have made all sorts of arguments to stop or slow down any legislative effort to end the inversion crisis. For example, they claim that the official U.S. corporate tax rate of 35 percent is so high that corporations have no choice but to find some way to avoid it.

But this is a distraction. Few American corporations actually pay anything close to 35 percent of their profits in federal income taxes thanks to all sorts of loopholes, and lowering the tax rate would accomplish nothing because the ultimate goal of many inversions is to shift profits to countries like Bermuda or the Cayman Islands where the tax rate is zero. So many companies are inverting to Ireland and the Netherlands because those countries have famously lax rules when it comes to using more paperwork to make profits appear to be earned in these zero-tax countries.

If this sounds a little complicated, well, that's why it's the sort of policy issue that Congress is supposed to resolve. It would be nice if everyone deciding which bananas or yogurt to buy could brush up on inversions and avoid companies that engage in these tax dodges, and perhaps these consumer discontent would pressure these companies to do the right thing as did Walgreen. But my guess is that this crisis will only grow worse until Congress and President Obama act to end it.