Donald Trump hates it. So do Marco Rubio, Hillary Clinton and Bernie Sanders. That’s a pretty broad swath of the political spectrum opposed to drug giant Pfizer’s purchase of Irish competitor Allergan—a so-called tax inversion that will technically move Pfizer’s headquarters out of its longtime home in the United States.
The jurisdictional change will lower the tax rate for the newly formed company from 25% in the United States to 17% or 18% in Ireland. That could save the company $2 billion per year, or so. Most of that money would come from the U.S. Treasury in the form of taxes Pfizer would have paid as an American company, but will no longer have to as an Irish entity.
Using a tax inversion to skirt U.S. taxes is a strategy more than two-dozen big companies have attempted since 2009, with most succeeding. Inversions—which typically involve a smaller foreign company buying a bigger U.S. firm—are perfectly legal, as long as the deal meets certain conditions. But they also violate the spirit of U.S. law, which was never meant to provide a back-door exit for companies hoping to lower their tax bill. Congress actually passed a law meant to stop inversions in 2004—but it included a loophole that allowed companies to change tactics somewhat and still relocate overseas.
In the aftermath of a global financial meltdown triggered by Wall Street greed, one might expect a populist revolt against Pfizer and other corporations evading taxes in ways most ordinary people can never take advantage of. But there’s no revolt, and little pressure on lawmakers to pass a new law to stop the practice for good, which Congress could do in a day. Americans tell pollsters they don’t like inversions and want Congress to ban them, which is why politicians pay lip service to the phenomenon. But Congress has rebuffed efforts by the Obama administration to ban inversions through new legislation, saying any such law must be part of a broader tax-reform package.
What gives? Why is there no real pressure on politicians to stop a practice many Americans find odious? And why don’t companies fear any kind of backlash from consumers? Here are three theories that explain why inversions continue despite public opposition:
The perceived loser is the government, not ordinary taxpayers. That’s the theory anyway, and Americans don’t think very highly of the federal government. Only 19% said they trust the government in Gallup’s most recent survey, down from 60% after the 9-11 terrorist attacks of 2001, and 42% right before 9-11. Three-quarters of Americans think the government is corrupt. And the average person thinks Washington wastes half of what it spends.
Americans rate big companies more highly than the government, and tend to think businesses are overregulated to start with. So it seems like no big deal if a private-sector institution gets to keep more money, while the government gets less. In reality, however, individual taxpayers cover the shortfall when companies pay less in taxes, and there’s been a substantial shift in the tax burden during the last 40 years away from companies, with individuals paying more. Washington also borrows to cover the shortfall, which pushes the burden onto future taxpayers. If tax inversions were a crime, they’d be anything but victimless.
Inversions don’t seem directly related to jobs. Some inversions require headquarters staff to leave American locales for foreign ones, but the impact on jobs is usually more subtle. Normally, there’s not a wholesale shuttering of offices, as when an outdated factory is closed and production moved somewhere else. Inverted companies often keep a sizable staff at the prior HQ, while shifting jobs in small numbers, without big layoff notices. Still, a job lost is a job lost–and often more, since one good-paying job typically supports two or three others through spending on goods and services. Other spending on HQ functions—from legal fees to messenger service to office and party supplies—is lost as well when staff shrinks.
Americans aren’t that bad off, after all. Remember the Occupy movement? If you don’t, that’s because it began as a protest against corporate greed when joblessness in the aftermath of the Great Recession was at its worst. But unemployment has dropped from 10% in 2009 to 5% now, with wages rising modestly and the ranks of the long-term unemployed thinning. The job market is still squishy, but the Occupy movement dwindled in 2012 after a year or so of prominent demonstrations, and the outrage directed at big, profitable companies has subsided. That’s where the jobs are, after all. Since companies are finally hiring again, who really cares where they pay their taxes?
Rick Newman’s latest book is Liberty for All: A Manifesto for Reclaiming Financial and Political Freedom. Follow him on Twitter: @rickjnewman.
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