So the Pfizer-Allergan deal has collapsed. The two companys are walking away from it, since under the new rules announced by the Treasury Department, there would be no tax advantages. And this one was all about the taxes – there was no particular drug development or business rationale other than saving a big bucket on taxes while being able to redeploy the company’s foreign earnings. There was really no point in trying to rework the terms of the merger, since the government would have countered with new rules to block whatever Pfizer might have come up with.
How you feel about this depends on your pre-existing point of view. My own feelings are mixed – on one side of the issue, I have absolutely no desire to see Pfizer do yet another mega-merger. I think that their merger history has been bad for the industry, certainly bad for a lot of former employees, and probably bad for Pfizer shareholders as well. On the other hand, I’m not so happy to see the coercive power of the state deployed so blatantly. The government’s behavior strikes me as akin to Calvinball; the rules will change to be whatever it takes for the government to win. Commenters who are marking this down as “a big win for the Obama administration” puzzle me – if you write the rules of the game, own the referee’s whistle, and are in charge of the scoreboard, you can get a big win any time you want. This wasn’t some hard-fought victory.
So all that Pfizer money that was earned overseas, and is sitting over there not being taxed under US corporate rates, will continue to sit over there not being taxed at US corporate rates, instead of moving to Ireland, where it would not be taxed by the US, either. I suppose that’s a win. What this does do is keep Pfizer’s future US earnings within the US, but if they were an Irish corporation, their US business income would be taxed at US rates, anyway. (There are other tax considerations, but that’s a big one).
What our tax structure does, in the end, is encourage US corporation with foreign branches to defer US taxation by keeping that money overseas. I realize that many US corporations actually pay a lower effective tax rate than the (high) US one, but that’s because they deliberately set themselves up to route as much income as possible through lower-tax countries – those lower effective rates are, in many cases, a symptom of the problem we’re talking about, not a refutation of it. People who are upset about domestic companies investing their money in other countries, rather than in the US itself, should look to the root cause of the problem: our tax code is something that the huge majority of large US companies take great pains to try to avoid, devoting time, money, and effort to this work that could presumably be used to do something more productive. And their overseas earnings, even when those could be used to do something productive in the US, will not be brought back here, because of our tax code.
This is particularly a problem for the US pharmaceutical industry, whose products are sold all over the world, but it affects the economy of the entire country. High-fiving each other over having rewritten the rules to perpetuate this system doesn’t seem appropriate to me, but whatever brings you happiness, I guess. In the same way that Donald Trump is one of the few people that could bring me to vote for Hillary Clinton, the US Treasury is one of the few organizations that can make me feel any sympathy at all for Pfizer. What a world!