Over the past year there has been a sudden flurry of U.S. companies taking advantage of a loophole that allows them to avoid paying U.S. corporate taxes by reincorporating overseas. Called “inversion”, large companies such as Pfizer and Omnicom Group have already tried to employ this gimmick to shore up their bottom lines, while leaving U.S. taxpayers holding the bag. Now one of the most American of companies, Walgreens, which in some areas of the U.S. has stores every few miles or even every few blocks, is considering joining the fray.
Inversion typically involves the buyout of a foreign company by one incorporated in the U.S., followed by a “restructuring” to change its national identify (like reflagging a ship) for tax purposes. Walgreens, which recently acquired a majority share in pharmacy chain Alliance Boots, is proposing to use the acquisition to move its headquarters to Switzerland. Analysts say the move could save the drugstore giant $4 billion in federal taxes over the next five years.
Developing schemes to avoid paying U.S. corporate taxes has become anything but a patriotic duty for some corporate boards, but in the case of Walgreens the move is particularly egregious. That’s because Walgreens gets nearly a quarter of its revenue from U.S. taxpayer-funded Medicare and Medicaid programs. The state of Illinois, the current “legal” location of Walgreens, has also given the company $46 million in corporate income tax credits over 10 years in order to employ 500 people, as well as an additional $625,000 in employee training money and $875,000 in other tax incentives.
Walgreens proposed tax strategy seems completely counter to a company that claims as their guiding values; “honesty, trust, and integrity with our customers, our shareholders, suppliers, [and] the communities we serve”. Moving overseas will not only hurt the communities they purport to serve, but would cost U.S. taxpayers $2.35 billion in the first three years after the transaction.).
So why the move to “invert” if it is seen by so many critics as un-American, including politicians on the left and right. As usual, the answer can be found by applying the old dictum, “follow the money.” According to the Financial Times, three hedge funds and a Goldman Sachs investment fund, which together own about 5% of the company’s stock, are pushing the company to consider a tax “inversion” and move to Europe. They argue that such a move will lower the company’s tax rate to 20% and increase earnings per share by 75 cents. It appears that when Wall Street speaks, Walgreen listens, even if it means sacrificing its reputation and values.
Conservatives and Wall Street analysts continue to support such tax avoidance schemes by claiming that U.S. companies face the highest official corporate tax rate in the world. While is it true that the marginal rate of 35% is high relative to other countries, the plethora of deductions and tax credits now available to corporations make this point completely moot. There is a big difference between the rates set out by law and the taxes companies actually pay.
For example the Government Accountability Office (GAO) found that in 2010, profitable corporations based in the United States had an effective federal tax rate of 13 percent on their worldwide income, 17 percent including state and local taxes. The Congressional Research Service reports a higher effective corporate tax rate in the US of 27.1 percent, but this is still lower than rates for the rest of the world.
Corporations and investors depend upon government services funded by tax revenues, including law enforcement, market regulation, judicial systems, infrastructure maintenance, public education, poverty alleviation, environmental protection, national defense and scientific research. These indispensable public services cannot be funded by corporate philanthropy or a rise in share price.
Large-scale corporate tax avoidance costs U.S. taxpayers an estimated $90 billion annually, and burdens working families and small businesses, who ultimately pick up a portion of the tab through higher taxes. In the long run, these taxes end up being paid by the same people that Walgreen expects to buy their products. Simple math would suggest that if you take money out of the pockets of consumers to pay for the mess you leave behind, there is going to be less money left over to buy the services you sell. I wonder if the hedge fund analysts at Goldman Sachs factored that economic impact into their predictions of stock valuation?