You work hard. You pay your bills. You pay your taxes. Quick question:
A new tax break for corporations is allowing the biggest American drug makers to return as much as $75 billion in profits from international havens to the United States while paying a fraction of the normal tax rate.
The break is part of the American Jobs Creation Act, signed into law by President Bush in October, which allows companies a one-year window to return foreign profits to the United States at a 5.25 percent tax rate, compared with the standard 35 percent rate…
Though the companies stand behind their accounting, financial analysts and tax lawyers say that the drug makers’ claim defies reality and that their profits come mostly from sales in the United States. But the I.R.S. lacks the resources to challenge the companies effectively, the analysts and lawyers say. As a result, the six major companies – Pfizer, Johnson & Johnson, Merck, Bristol-Myers Squibb, Wyeth and Lilly – collectively pay a federal tax rate of less than 15 percent on their worldwide profits, with some companies paying much less…
During this window, returning money to the United States is to the advantage of the companies because they can spend the cash here rather than having to use it overseas as tax laws generally require. Lawmakers have said their main intention for the law was to encourage American companies to build new operations and hire workers. Congress passed the law in response to pressure from the European Union to resolve a long-running trade dispute.
Although the act is intended to create jobs, Pfizer said last month that it would cut its annual costs by $4 billion over the next three years. Pfizer, which will repatriate at least $28 billion under the act, did not say how many jobs it planned to eliminate, but analysts expect the company to shrink its work force by thousands of people. Mr. Senyek said the law would create an insignificant number of jobs because companies can easily work around provisions in the law meant to stop them from using the money for dividends to shareholders rather than new hiring.
After the break expires, companies will probably go back to stockpiling profits overseas as they wait for another tax holiday in a few years, tax lawyers say.
You charge outrageously high prices for drugs in the United States (spare me the R&D nonsense), fight anything that stands in your way- like government negotiating power in the Prescription Drug Pill, you stash your profits overseas in tax shelters by lying about where you profits arise (understating them domestically and padding them overseas)- and in return, our elected representatives allow you to get a complete pass on your tax dodge, in fact, they even go so far as to pass a law telling you to “Come on back now, you hear?” And you do, where you dump your profits, trim your workforce to increase the profit margin, and then wait for this bill to sunset, at which point you start stashing profits overseas again.
Corporations are already soulless whores without a conscience. Is it too much to ask that the administration and Congress not aid and abet them?
I fully expect some idiot, within two comments, to make the following statement in the comments section:
“Without the drug companies, we wouldn’t have drug X, so you should stop railing against them.”
Nonsense- without the current drug companies, there would be new drug companies. You think if we quit coddling a few big corporations the demand for medicine is going to stop?
*** Update ***
This is the absurd nonsense I am talking about:
John Cole decides that normal economics doesn’t apply when it’s all about the evil drug companies. I’m not particularly happy with using fascist economics to counteract communist economics but it’s somewhat better than the “Atlas Shrugged” alternatives of just letting the companies go down the tubes.
You aren’t letting normal economics apply. Otherwise you wouldn’t be creating tax holidays so they could sneak home their profits.
And notice the silly rhetoric- if you think lying to the IRS, hiding profits, fudging the books- all that good stuff this legislation now tacitly endorses, if you think that is wrong- you think drug companies are ‘evil’ and you are using ‘fascist economics.’
Bullshit.
From the story:
Though the companies stand behind their accounting, financial analysts and tax lawyers say that the drug makers’ claim defies reality and that their profits come mostly from sales in the United States. But the I.R.S. lacks the resources to challenge the companies effectively, the analysts and lawyers say…
Pfizer, the world’s largest drug company, said that in 2004 it had only $4.4 billion in pretax profits in the United States, compared with $9.6 billion internationally, though most of its sales came in the United States. The company says that its profit margins on international sales were almost three times as high as on American sales.
Exporting ProfitsOther companies reported similar trends. The biggest imbalance occurred at Eli Lilly, which reported that it had about $200 million in profits from United States sales in 2004, compared with $2.8 billion in profits from sales everywhere else.
Because they report relatively low United States profits, the companies pay little in American taxes compared to their profits. Pfizer reported paying only $1.2 billion in state and federal income taxes in 2004, 9 percent of its worldwide pretax profit. Excluding a one-time payment related to its plans to repatriate money it has sheltered overseas, Lilly reported paying just $37 million in state and federal taxes last year, only 1 percent of its worldwide pretax profit.
If you find that offensive, and you think the government legislation legitimizing this behavior is wrong, congratulations. You are a fascist.
More here.
TM Lutas
To say “without the current drug companies, there would be new drug companies” is nonsense. That’s functionally saying that without the current railroad companies, we’d just have new ones. We proved the latter wrong at the creation of Amtrack because there were no private companies left to take over the bankrupt ones. The prior century’s idiotic railroad regulation made sure of that.
Drug companies are the creation of bright inventors combined with capitalists who think that, globally, they can achieve at least an average return. Globally, they have to accept a below average return in most markets.
The US is the last major holdout in free market pricing and the one reason keeping the capitalists from withdrawing their capital and redeploying it elsewhere. For the green eyeshade types that invest the bulk of money everywhere, they go to jail if they purposefully deploy capital at lower returns for non-financial reasons. This is called fiduciary duty. It’s not reasonable to expect somebody to go to jail just because your particular disease hasn’t got a cure yet.
If you have globally above average returns, you attract new capital and you get new companies entering into the market. If you have below average returns or government mandated losses, people won’t invest and you won’t have new company formation.
Generic producers aren’t affected by this reasoning. They make their money off of production, not new pills. We won’t lose our current crop of cures. What we will lose is the financing to push forward our new ones. That is likely to cut down the introduction of new drugs by about 50% (public research will still be around).
We can only hope that our neverending race against the drug resistance is winnable with the remaining 50%. If it’s not, you can add advocating mass casualties in a pandemic to the current sin of bad economics.
John Cole
Nonsense. Your position is absurd.
You are telling me that venture capitalists would turn down 75 billion in profits taxed at the legitimate 35% rate because they can not get away with being taxed at a 5% rate?
I’m not buying that. BTW- this is 75 bn in PROFIT. This is after R&D. I have no problem with that whatsoever- if they were not hinding their profits, lying to the IRS and generally cheating the country they extract the majority of their wealth from…
John Cole
You know, in general, I am just sick of these scare tactics that amount to utter bullshit-
We have to loosen regulations on credit cards, allow them to charge whatever they want, engage in deceptive practices, allow them to have the majority of their profits come from penalties, and have usurious interest rates, or ALL CREDIT WILL DRY UP.
We have to let drug companies get away with hiding profits overseas, lying to the IRS, provide them with special tax holidays, not allow collective government negotiating power, OR NO MORE NEW DRUGS WILL BE MADE.
Bullshit. And the railroad analogy was just plain stupid. Railroads are not unprofitable because of regulations…
Rick
John,
This would seem to be an effort to capture more tax revenue. It avails the treasury nothing to maintain a 35% (WTF? Why don’t you grumble about that extortionate rate?) tax rate on zero bucks.
So now, the g-men get their skim. Oh, I mean, we get to wet our beaks in their money.
Cordially…
Brad R.
That’s functionally saying that without the current railroad companies, we’d just have new ones. We proved the latter wrong at the creation of Amtrack because there were no private companies left to take over the bankrupt ones. The prior century’s idiotic railroad regulation made sure of that.
Not to mention that, you know, airplanes overtook rail as the best way to travel in the 20th Century… *rolls eyes*
Christie S.
Wild idea here, I give you warning, as I do not know much about corporate tax structures.
If, as Rick says, the 35% bracket is too much for the companies and the 9% figure is actual tax (local, state, fed) paid by at least the one company…
What would be the impact if we instituted a 20% rate, but allowed the deduction of taxes paid to foreign govts from the tax bill on the portion of profits earned overseas?
Would something like that work, or is it already in place?
I’ll confess myself clueless, but I’d like to learn.
Kimmitt
Realistically, we shouldn’t have a corporate income tax and should tax dividends and capital gains more heavily. The result is less distortionary.
That said, people — and quasi-people — should pay their goddamn taxes.
Christie S.
Kimmit, as I said before I know virtually nothing about corporate tax structure.
Why shouldn’t we tax corps directly? Why only on dividends and cap gains? Why would that be less distortionary? Could you expound?
I agree, folks need to pay their taxes.
Thanks,
John Cole
I am not arguing about the relative merits of the tax structure at all- I don;t know enough to advocate for that policy. All I am saying is that I find it disgusting that a corporation is given legal sanction to lie and cheat the IRS.. And under the ruse that they are going to create more jobs.
Nonsense.
I do, however, find it absurd that all drug research will shut down if profits are taxed at 35%. At that rate, it leaves close to 49 billion in profit for these companies… I bet you could find some entrepeneuers to fill the void of those who think that profit margin is not large enough.
Christie S.
John, no, I wasn’t disagreeing with your position. I agree with it. The after-tax profit is damned near obscene. I know I’d be pretty happy with it.
I believe American corporations should pay tax on all income; wherever they earned it. I just was wondering if there was a way to make the companies more willing to pay their fair share, instead of looking for tax dodges.
And if there’s that much money in it after taxes, you can bet I’m gonna push my daughter to major in Bio-chemistry. She can be one of the entrepreneurs to take up the slack. I’m pretty sure that much money would give her a cushy life.
KC
Amen, John. I’m not an economist, but being diabetic and having lousy insurance, I can’t help but to think that I’m getting scammed, especially when I read articles like this. I remember when Humalogue, a better and faster acting insulin came out. It was, of course, considerably more expensive than the older stuff. Since I was in college and poor at the time, all I could afford was the old stuff sometimes. Unfortunately, after the new stuff came out, I realized the price of the old stuff went up considerably too. When I asked the pharmacist why this was happening his only reply was, “because it can.” I’ve had the same conversation since then dozens of times, but I’ll never forget hearing those words. So this article is just another little thing reminding me that I’m getting screwed.
Mister Fascist
You work hard. You pay your bills. You pay your taxes. Quick question:
Why?
Good question. Why do you pay your taxes? And why do you get so upset at those who don’t?
Jay
When are people going to get it through their heads that corporations do not pay taxes! They merely collect them. The actual cost of whatever taxes a corporation collects is passed along to others in a combination of lower dividends and/or profits for shareholders. There is also higher prices for consumers, or lower wages and benefits for employees.
Only individuals can be taxed.
Here’s a perfect illustration of how it all works.
Ireland lowered their corporate taxes. What was once a sputtering economy is now referred to I believe as the “Celtic Tiger.” Why? Because corporations flocked there to take advantage of lower tax rates.
John Cole
Jay- I am not arguing with you, I am erely furious that they avoided the law and are now being rewarded for it.
Max
Drug companies’ profit rates are well above-average, suggesting they could operate at lower rates and still function. As things stand, they are the beneficiaries of huge govt subsidies by having a license to cannibalize govt-funded research.
There’s a story today about the Defense Dept taking the “little purple pill” off their list of approved (reimbursable) drugs. Turns out that the LPP is basically a knock-off of prilosec, which is dirt cheap but whose patent has run out. There’s a lot of hot air in drug prices.
The existing corporate income tax (CIT) is an ungodly mess, jammed with exceptions and corporate-welfare complexities. The basic rule of tax reform — broaden the base, lower the rate — is salient.
Every new hole punched in the CIT and the taxation of dividends, capital gains, and (eventually) interest pushes our system closer to a wage tax, which I suspect or hope that nobody here favors.
We of the VLWC are pleased to see Comrade Cole evolving into an anti-corporatist warrior. Hoo-wah!
Kimmitt
Why only on dividends and cap gains? Why would that be less distortionary? Could you expound?
Because corporations, not being people, can “move” more easily than people can. Also, they are much larger and therefore much harder to assign profit/income numbers to.
Thomas Jackson
Does anyone believe that corporations pay taxes? give us a break sir. This lie ranks up there with the existence of a social security trust fund; the government is here to help us; and I never had sex with that woman.
Thomas Jackson
Does anyone believe that corporations pay taxes? Give us a break sir. This lie ranks up there with the existence of a social security trust fund; the government is here to help us; and I never had sex with that woman.
Dave Munger
I don’t think that guy was calling your economics fascist, I think he was calling it communistic. I’m pretty sure that what he was calling fascistic was the alternative to that, which he favors.
Congress dosen’t like the political consequences of not passing certain legislation, or the economic consequences of enforcing that legislation, so it naturally goes for a little of column A and a little of column B. How much profit is too much, and why is the R&D bs not addmissable?
John Cole
The R&D, presumably, has already been subtracted from these figures- we are not talking about their total revenue, but their profit…
At any rate, it just pisses me off. What would happen if I hid my income for several years overseas. Would congress write legislation for me to get taxed at a reduced rate and no penalty if I promise to keep working?
Aaron
While I can see someone saying that corporations should pay no tax at all since the profits are eventually taxed later as someone’s income, I cannot see any reason why this particular industry gets a special low tax break.
Who voted for this?
Also, the way to solve these problems is to have a flat tax for corporations with no “breaks.”
Aaron
Kimmitt and me agreeing….scary.
nitish
could you give me a scorecard when you believe analysts to be trustworthy (this article) and when you don’t.
the foreign subsidiaries do not have the burden of the $7.7 billion of r&d expense you appear to dismiss as “nonsense”, while several likely don’t even have manufacturing expenses. this means any revenue generated (even price controlled revenue) in these countries is marginally profitable.
i have a post on my blog about this ny times article
btw, the last sentence of your original post also greatly underestimates the barriers to entry in the drug industry. the fact that drug companies are consolidating not multiplying belies your point that new companies can spring up easily.
Max
Of course corporations pay taxes. They have to file tax returns, report net income, and pay tax on it. Duh. What Mr J means of course is that corps do not bear the burden of taxes, since they are merely an instrument of their owners (and other stakeholders).
The fact remains that the CIT is usually thought to be a tax on capital, or if you like owners of capital. Like other types of capital income — dividends and capital gains — its tax exposure is being reduced bit by bit over time. Increasingly the tax base is wages, which is not good unless your income does not depend on wages.
Kimmitt
What Mr J means of course is that corps do not bear the burden of taxes, since they are merely an instrument of their owners (and other stakeholders).
Right, it is the owners of corporations who pay those taxes in the form of lost dividends, which is why I’m in favor of cutting out the middleman.
Aaron
Let’s tax consumption and stop punishing those who save.