How terribly dysfunctional is the corporate tax code of the United States? Last week, you could easily find an example of its deleterious nature on 42st Street in Manhattan, in the very heart of New York City.
That’s where the pharmaceutical giant Pfizer Inc. announced its pursuit of its British competitor Astra Zeneca. Although it cited several strategic and operational reasons for the proposed acquisition, it acknowledged that the transaction would yield attractive tax benefits as well.
As a firm that is headquartered in the United States, Pfizer is subject to a top income tax bracket of 35%. But as a firm that is headquartered in Britain, Astra Zeneca is only subject to a top bracket of 21%, a rate that will fall to 20% next year.
Because of these differential tax rates, Pfizer acknowledged that it would complete its acquisition transaction by merging its 42nd Street corporate headquarters office into Astra’s London location.
Such a transaction, known as a tax inversion, would not actually require Pfizer’s executive management team or other New York based Pfizer employees to move to London. Only the “official” corporate headquarters location would need to shift to Britain, and a few legal corporate meetings each year would need to be held there as well.
Pfizer, of course, has been headquartered in the Big Apple since it was founded in Williamsburg, Brooklyn in 1849. If its acquisition and headquarters relocation strategies are executed as planned, Pfizer would follow in the footsteps of insurance giant Aon, which was founded in the American Midwest in 1919 but which moved its headquarters address from Chicago to London two years ago.
How is the public interest of the United States served by regulations that slash the tax rates of iconic American firms that shift their corporate headquarters overseas while maintaining their U.S. operations?