Thursday, May 1, 2014

Politics, Taxes and Economic Reality

I don't know anyone who enjoys paying more in taxes than is required but taxes are important and vital to our country.  So is the necessity of creating an environment where business can compete and win.  The Wall Street Journal noted that Pfizer is changing its headquarters from the US to enjoy a considerably lower tax rate abroad.  The article goes on to note that these inversions, as they are called, are created by merging into a company in a different country and are becoming more plentiful.

Many things remain the same for Pfizer.  It will still use New York as its operational headquarters, for example, and still widely market its products in the US.  One thing that will change is the lower tax revenue the United States will receive.

The article notes that Pfizer is fully complying with all laws and will continue to pay taxes as required in the United States.  Nevertheless, I fully expect we will hear more from politicians about Pfizer and other companies initiating these moves.  In other circumstances, politicians have created laws forbidding actions 'undesirable to the state' or heavily taxing 'undesirable' actions.  Indeed, such laws are one of the motivations for Pfizer's shift: the move will permit more tax favorable flexibility in utilizing off-shore funds rather than face hefty US taxes under current law.  It has long been argued that more reasonable and creative laws for the use of off shore funds would aid companies and increase tax revenue for the US, but changes have not been forthcoming.  

Many politicians seem to believe that the laws of economics can be ignored or worse, that their own laws are superior in creating  a more desirable world.  In the worst cases, laws are created by politicians without full analysis of the details or even recognition of possible unintended consequences.

In the end, the laws of economics prevail and the countries of those who ignore these laws suffer the consequences.  Instead of creating barriers or lamenting loss of business, energy would be better spent in working to make the business environment of our country more competitive.   That includes a hard look at the tax codes and the economic reality of the world.

All the best,


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