I believe it was the legendary economist Milton Friedman who said, “If you want less of something, tax it.” This maxim has always proven true with the U.S. tax code. Periodically, liberals try to prove that, in fact, the laws of gravity don’t apply to them by raising tax rates in an attempt to create more of something. It doesn’t work. Ever. Interestingly, when I went to the Google Machine to confirm the origin of the quote above, I found an entire article devoted to “20 Inspirational Quotes About Taxes.” Talk about having too much time on your hands! But, even more interesting, I found the following quote
“It is a paradoxical truth that tax rates are too high today and tax revenues are too low, and the soundest way to raise the revenues in the long run is to cut the tax rates.”
Any guess who said that one? Ronald Reagan? Donald Trump? George W. Bush? Nope. Nope. Nope. That insightful quote is from liberal icon John F. Kennedy. But, I digress.
The purpose of this blog is to take on the spectacularly arcane topic of tax inversion mergers, but in a way that is understandable to the average 3rd grader (or to the average liberal, since their understanding of economics tends to operate on about a 3rd grade level, with all apologies due to this nation’s fine cadre of hard-working 3rd graders). Tax inversion mergers are a current scourge of U.S. liberals because they move taxes overseas, while, at the same time lowering rates. As recently as last week, U.S. Treasury Secretary Jack Lew threw yet another tantrum about these deals and ranted about prohibiting them. With the highest corporate tax rate in the developed world, U.S. liberals are simply learning that by taxing something more (corporate earnings), they are getting less of it. Their answer is to try to tax it more. Uh, OK.
The question I want to answer here is the inverse of the Friedman quote. If taxing something more leads to less of it, exactly what do we get more of when we tax it less? The recent mega-inversion merger of Pfizer and Allergan provides a window into that question. First some numbers. Pre-merger, Pfizer’s average corporate tax rate was 25%. After the inversion merger with Ireland-based Allergan, Pfizer’s tax rate will drop to about 17-18%, resulting in tax savings of about $2 billion (with a B) per year for the combined entity? OK, so there’s the “more” we are looking for. $2 billion MORE. But, we’re not finished yet. We need to better understand where that $2 billion goes and what it means for society. $2 billion more of what?
In 2014, Pfizer spent 17% of revenue on research and development. So, for every dollar that comes in, they spend 17 cents on new life-saving drugs. Thus, a tax savings of $2 billion per year frees up about $340 million each and every year for Pfizer to spend on new drugs to improve healthcare ($340 million is 17% of $2 billion). Over the next 20 years, that adds up to about $7 billion (SEVEN BILLION DOLLARS) dedicated to developing new drugs that us aging baby boomers will desperately need.
Thus, without even considering all the downstream economic benefits of leaving $7 billion in the hands of a private company (more jobs, new plants, new equipment purchases, etc.) this is great news. Ironically, it’s great news even for aging liberals in Washington. These life-saving medicines, developed with the tax savings Pfizer realizes in this inversion transaction will likely be available at their local pharmacies, not just the ones in Dublin!