American Elephants

The Business of Business. They Respond to Incentives Too. by The Elephant's Child

Everyone responds to incentives, the people will recognize the incentives that work for them; but in many a law or many a regulation there are incentives that are not at first apparent. When you write up over two thousand pages of regulations, there are bound to be a lot of incentives that may astound those who put the thing together.

U.S. pharmaceutical giant Pfizer Inc. wants to buy AstraZeneca not just because the British company has a pipeline of cancer drugs. Acquiring AstraZeneca would give Pfizer shareholders relief from a U.S. corporate tax rate that is among the world’s highest. Pfizer can get a better return paying $100 billion or so to buy a foreign company than  paying punitive rates to return its money to the U.S.

Pfizer Chairman and CEO Ian Read told securities analysts that the primary drivers behind his merger attempt are “improved growth prospects in innovative businesses and redundancies they can take out.” The combined firm would aim for leading positions in immunology, oncology, vaccines and chronic diseases. The Wall Street Journal  said “this is what companies always say, and it may turn out to be true.” Pfizer also noted that the deal would be “structured to achieve an efficient tax structure.” The combined state-federal corporate income tax rate in the U.S. is nearly 40% while it is only 21% in the UK.

Pfizer is a U.S. company, but more than 70 of its cash— amounting to more than $35 billion—is sitting overseas. Bringing it home would cost the shareholders a bundle. Incentives. Unplanned by those who thought a 40% tax rate was fine for evil corporations.

A group of Walgreens’ investors are urging the company to ‘re-domicile’ overseas to lessen its U.S. corporate income tax hit. Walgreens has purchased nearly half the Swiss-based Alliance Boots, a health and beauty, and is scheduled to buy the rest next year. Boots tax rate would be about 20% in Switzerland. Walgreen’s earnings per share could be increased by 75%.

U.S based Questor Pharmaceuticals was recently purchased by Mallinckrodt, which is based in Dublin, Ireland, where the corporate rate is 12.5%.

ObamaCare is creating uncertainty about how much programs like Medicare and Medicaid will pay for new medicines. ObamaCare wants to sign people up, get them dependent on the program, and then cut costs dramatically so they can afford the program they created. Pharmaceutical companies original ideas often don’t pan out, but companies eventually succeed because the learn from each step of discovery, but the process is expensive and often long.

Toyota just announced that they are moving their corporate headquarters from California to Texas. Taxes and regulation. Incentives. California, Illinois, New York, states run by Democrats, are all losing businesses—and jobs—to states the have lower taxes and fewer punitive regulations.

After I wrote this, I heard someone discussing Walgreens and Pfizer on the radio, and going on about the corporations having no loyalty, and they had an obligation to stay in this country and pay higher taxes. That it was somehow ignoble to consider moving for mere money. Is it then wrong for Toyota to move from California to Texas to avoid punitive taxes and regulations? Or is it a message to California that they are killing business and jobs with their unwise policies. I’ll vote for the latter.

The Obama administration has been advised frequently that their corporate taxes are the highest in the world, and that it would be helpful to business and for job growth to reduce the tax to a more moderate level, and ideally to remove the corporate tax entirely. Corporations don’t pay those taxes, they are passed on to consumers, and simply raise the cost of living.

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