Matthew Hoffman—Corporations Are Not Bluffing: They Are Moving Out

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I am pleased to host another student guest post, this time by Matthew Hoffman. This is the 17th student guest post this semester. You can see all the student guest posts from my “Monetary and Financial Theory” class at this link.

I have written many posts this year regarding taxes, and how for many decades this topic has been hotly debated. Many of my posts have argued for decreasing taxes, as they generally hurt business, cause corporations to increase prices, reduce employment, etc. I understand that we do need taxes to pay for public goods, military products, social benefits, and many more government costs, but the magnitude of these goods and the tax dollars spent for them is a separate debate from which taxes are the least distortionary. Recently, the tax debate has turned towards corporations.

According to the articles Elizabeth Warren’s Tax Warning and Warren wants to hike taxes on big business to raise revenue Democratic Senator Elizabeth Warren has been a staunch opponent to other Democrats who desire to decrease the corporate tax rate. A decrease in the tax would make “the U.S. economy more competitive,” however Senator Warren is not convinced by the corporations’ strategy, in which they “tell a story about high U.S. taxes, demand tax cuts from the U.S. Congress, and threaten to leave the U.S. for good if they don’t get what they want.” In Warren’s opinion, this argument is just a bluff, in which the corporations are simply looking for a decrease in taxes. Instead, Warren argues for an increase in corporate taxes, in order to gain more revenue for the US government. However, as the authors argue, this is no bluff, as corporations have been leaving the US

Recently, in the Wall Street Journal, the article Pfizer and Allergan to Merge in $155 Billion Inversion Deal discusses the merger between two large pharmaceutical corporations: Pfizer and Allergan. This is an example of how I corporations are in fact moving their headquarters to other countries since taxes are too high in the United States. A useful comparison is to how companies so often move their headquarters to Delaware within the United State. Corporations move their headquarters to Delaware becuase corporate taxes are known to be low there. Similarly, corporations will continue by moving headquarters out of the country where corporate taxes are even lower.

The article discusses how the Allergan/Pfizer deal “brings together a diverse stable of drugs, from Pfizer’s cancer medicines and vaccines, to Allergan’s skin-care treatments and eye drugs.” Additionally, given the magnitude of the new company, it is unsure whether the company can be properly managed. It has been hypothesized that the new company will again be split, where the strengths of each new company will be delegated appropriately.

However, this deal supports my argument concerning corporate taxes and ultimately dismantles Senator Warren’s theory. As part of the deal, Pfizer will shift its tax base to Allergan’s home base in Ireland. Even though Pfizer is the larger of the two companies, Pfizer structured the deal so that Allergan would absorb Pfizer in order to pay fewer taxes. In the US, Pfizer was paying a rate of roughly 25%, but in Ireland they will pay about 17-18%. As a result of this move to a foreign country, American jobs will be lost since the headquarters of the company are no longer located in the US.

I don’t understand how Senator Warren can say corporations are bluffing in order to achieve lower taxes, when we see so many corporate inversions. Increasing corporate taxes is not the solution. There is good reason to think decreasing corporate taxes will result in more jobs, more corporations staying in the US, and more foreign investment in the US.