As capital comes back home to the U.S., we are seeing President Trump’s tax reform pay off bigly for our country.
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U.S.-based Pfizer this week announced that it will combine its off-patent drug business with Dutch company Mylan and form a new U.S.-based company. And Illinois-headquartered AbbVie recently announced it would acquire the Irish company Allergan PLC.
These are both fresh new demonstrations that President Trump’s tax reform enacted at the end of 2017 is clearly doing what it was intended to do – making the U.S. more competitive.
Not so long ago, companies viewed the U.S. as a poor choice for headquartering international business operations. This was because the U.S. had one of the highest corporate income tax rates in the world and a worldwide tax system that compared unfavorably with the territorial systems in 28 of the other 33 OECD countries. This territorial system allowed active business income to be repatriated with little or no additional home country tax.
Because the U.S. taxed active foreign earnings once they were repatriated to the U.S., corporations had a strong incentive to leave earnings of foreign subsidiaries offshore. In 2016, U.S. companies held more than $2 trillion offshore while borrowing in the U.S. to fund domestic investments.
The pre-tax reform out-of-step U.S. rules were also causing U.S. companies to engage in heavily criticized “inversion” transactions in which they reincorporated as foreign companies through cross-border mergers.
President Trump’s 2017 tax reform bill changed all of that. It lowered the corporate tax rate to 21 percent and allowed U.S. companies to repatriate foreign subsidiary income at greatly reduced U.S. tax rates. The tax reform bill also included provisions removing the incentive to locate intellectual property in low-tax foreign jurisdictions rather than the U.S.
The new law substantially eliminated incentives for corporate inversions and created an environment in which the U.S. is a more competitive location from which to hold international business operations. The AbbVie acquisition of Allergan and the new Pfizer-Mylan combination prove it.
Allergan was previously a U.S. company, but in 2015, it became an Irish company through a merger with Actavis. Mylan also was previously a U.S. company, but in 2015, it became a Dutch company. The adverse U.S. tax rules, coupled with low foreign tax rates and territorial tax systems, made it advantageous for the companies to shield non-U.S. income from the reach of the U.S. tax system by becoming incorporated and headquartered overseas.
AbbVie itself tried to invert in 2014, but the Treasury Department blocked its effort. A recent Bloomberg story noted, “A few years ago, this deal would likely have gone differently – Allergan would be the one buying AbbVie.”
The 2017 tax reform has changed that. Representative Kevin Brady (R-TX), who shepherded tax reform as Chairman of the House Ways and Means Committee, said following the announcement of the AbbVie-Allergan transaction that, as a result of 2017 tax reform, “companies can domicile here and stay competitive throughout the world.” As Bloomberg reported, after the acquisition, under the reformed U.S. tax rules, Allergan’s foreign income will now generate meaningful U.S. income tax that wouldn’t have been paid before. The same will now be true of future income from Mylan’s operations.
Back in the 1970s I developed an economic concept that later came to be called the Laffer Curve. Under that concept, a country could potentially increase its tax revenues by lowering tax rates. At the risk of being immodest, I will post that the AbbVie/Allergan and Pfizer/Mylan transactions show that the Laffer Curve is not constrained by international borders.
Arthur B. Laffer, Ph.D. is a recent recipient of the Presidential Medal of Freedom. He is Founder and Chairman of Laffer Associates, an economic research and consulting firm based in Nashville, TN.