Dick Durbin bullies Walgreen’s against tax inversion

Tax inversion is currently being demonized, in Washington, as a “clever tax dodge” and an “unpatriotic” move by corporations that don’t care about this country.  The charge these politicians make is that these companies just want profits, and they say that word in the most condescending manner possible.  Their goal, apparently, is to fortify and build the “They didn’t build that” meme.

523Walgreen Overseas MoveTax inversion is a maneuver that corporations make to try and avoid paying the highest corporate tax rate in the world, that of the United States of America, that is currently listed at 35%, and to avoid being taxed twice on their foreign profits.  This “clever tax dodge” has been successfully accomplished by forty-seven different U.S. companies in the past decade, according to the Congressional Research Service, and another recent attempt has been made by Burger King.

The most recent attempt by a corporation seeking to relieve itself of this onerous tax burden was attempted by Walgreen’s.  Their goal was to cut their effective tax burden from 40% to the high 20% range, a move that would’ve translated into significant savings in the next few years. 

To achieve this goal, Walgreen’s moved to complete a proposed purchase of the Switzerland-based company Alliance Boots GmbH, and they planed to begin moving their headquarters out of the onerous taxation policies in the Chicago area to the more business friendly tax climate in Switzerland.  Is such a move illegal?  Not yet.  Is it unpatriotic?  Some, including Dick Durbin (D-Ill), John Kerry (D-MA), and President Barack Obama, would have you believe so.  

Conservatives, like George Will, would argue that independent companies do not have a responsibility to be patriotic, or to “patriotically” pay taxes, and that their primary, fiduciary responsibility –in our entrepreneurial, and capitalist system— is to its shareholders, and to do everything possible to maximize shareholders’ investments.

“If businesses supposedly have other responsibilities, who decides what they are? Presumably politicians such as Sen. Dick Durbin, the Illinois Democrat, who must have learned economics from the nursery story Rumpelstiltskin.”

Two other dirty, little secrets that George Will reveals in his August 15, 2014 column for the Washington Post, on the subject of inversion, is that:

“The U.S. system, unlike those of most major nations, taxes the profits that domestic corporations earn overseas, even though these profits are also taxed overseas. This double taxation is one reason that approximately $2 trillion in U.S. corporate earnings is being kept abroad rather than brought home for domestic investment.

“Inversions strengthen the U.S. economy by increasing the after-tax profits that U.S. corporations have for investment, by increasing the pool of profits available for the wages of U.S. workers and by making the companies’ U.S. shareholders wealthier. Which is why the sensible corporate tax rate would be zero. This is so because corporations do not pay taxes, they collect them, necessarily passing on the burden as a cost of doing business. And studies suggest that corporations’ workers bear a significant portion of the burden.”{1}

As detailed in a previous blog on this site, corporations do not pay taxes, they collect them, in what has been labeled an incidence tax by economists.  This gist of the incidence tax is that when a Walgreen’s is taxed as a corporation, they embed those taxes in every item the consumer purchases at Walgreen’s.  This act of embedding taxes is Washington-approved for it allows politicians to continue to tax corporations at this rate, under the guise of “Sticking it to the man” to the highest levels in the world, while protecting you “the little guy” from paying taxes that you might otherwise have to pay if Walgreen’s didn’t … Except that you do, in this little shell game economists call the incidence tax.

No one calls politicians, like Durbin, out for fighting to keep the corporate tax rate where it is, because no one –other than a rich, corporate, fat cat Republican— would fight for the rights of a corporation, “Unless they were getting some kind of under the table, sweetheart deal to do so.”  Except for the dirty, little secret that politicians, like Durbin, have found a politically pleasing way to tax you more without you knowing, because most people don’t understand the complicated accounting involved in the incidence tax.  And they never will, not on the level they do income taxes, property taxes, and to some degree payroll taxes.   It’s a win win for all involved, except for the fact that the consumer is unknowingly contributing to the record breaking revenues the federal government now routinely sees in tax receipts.

Decades ago, a proposed move by an independent company, like Walgreen’s, would’ve embarrassed those legislators that set —and could subsequently affect— the tax rate imposed on the corporation.  Decades ago, those legislators would’ve scrambled, in behind-the-scenes negotiations with the corporation, to keep the base of their operations in that legislator’s locale. Decades ago, the legislators that represent the people of that locale (be it city, state, or federal), would’ve been embarrassed by the business climate of their locale, and the fact that it is obviously no longer competitive in the arena of attracting new business, or relocating businesses.  Decades ago, it was deemed one of the legislator’s duties to keep the taxable revenue the corporation generated in their locale, the jobs the corporation provided to their community, and the overall reputation of their locale as a “business friendly” locale.  And if they didn’t, they would’ve been verbally pilloried in the town square, until they fixed whatever caused the corporation to seek another locale for its base operations, and if those legislators remained steadfast, for whatever reason, they would’ve been voted out of office by those citizens that followed every step of the process.

In the present tense, the corporations are the bad guys.  In the present tense, it’s the profit motive of these corporations that fall under suspicion, as their corporate boards attempt to do whatever is necessary to secure greater profits for their company, the shareholders, and any prospective shareholders.  In the present tense, it’s the corporations that are being pilloried in the town square, and the one in charge of the pillorying is the legislator, or in the case of Walgreen’s: Dick Durbin.

In the Walgreen’s saga, Dick Durbin engaged in what Stephen Moore, of the National Review Online, characterized as an:

“Intimidation campaign against Walgreen’s (that) was so heavy-handed that it would make Richard Nixon blush. Walgreen’s was set to move in order to reduce its tax liability and avoid the 40 percent income tax rate it pays as an Illinois-based corporation.  This would have saved the company and its mostly American shareholders an estimated $4 billion over five years.”

“In a letter, Senator Durbin wrote to Walgreen’s CEO Gregory Wasson, Durbin characterized the planned move as a “clever tax dodge” and threatened that “deeply patriotic” customers would not “support Walgreen’s decision to turn its back on the United States.” He added, subtly, that “nearly all of your $2.5 billion in profits earned last year were from sales to U.S. taxpaying customers.”

“That was followed by other threats of political retaliation. “Much of Walgreen’s financial success was built on programs and infrastructure provided by the U.S. government” and “the future success of Walgreen’s will continue to depend on U.S. taxpayers and government-funded programs.” Just in case Mr. Wasson didn’t get the point, Durbin reminded him that “nearly 25% of Walgreen’s profits were from U.S-funded Medicare and Medicaid programs.”{2}

It would be one thing if Senator Durbin had simply organized a grass roots campaign against the Walgreen’s move.  It would have been diametrically opposed to the manner in which business was normally done between politicians and corporations back in the day, but he probably would’ve escaped too much flak among the citizenry even then.  He probably also would’ve escaped too much negative scrutiny with his “clever tax dodge” and “unpatriotic” characterizations of Walgreen’s planned inversion.  Some may have declared his actions as unsuitable for a sitting Senator, but most would’ve seen it as Durbin following his ideological world view, and the “If you don’t care for the way he operates, don’t vote for him” response to naysayers would’ve been applied.  The public intimidation of a private corporation from a man implicitly using his power in the Senate to intimidate, with the “reminder” sent to the Walgreen’s CEO that much of their profit came from those U.S. funded programs, would’ve surely been seen as, at least, unscrupulous.  Especially when there are other companies, Teva pharmaceuticals, Novartis’ Sandoz, and Mylan, that are all headquartered overseas and participating in Medicare and Medicaid.

Walgreen’s folded under the pressure, and they decided to keep the base of their operations in the state Durbin represents: Illinois.  Hooray!  A big victory for the Chicago area right?  Jobs and taxable revenue stay in Illinois.  Durbin did his job.  Walgreen’s may lose the taxable revenue they would have seen with the move, to the tune of 4 billion dollars.  The shareholders of Walgreen’s –including retirees that have Walgreen’s’ stock as their primary holding— may have lost at least 6 billion dollars as a result of Walgreen’s being intimidated by the Senator.  As Stephen Moore states: “That’s a lot of financial wreckage from one single senator.”  But who cares about Walgreen’s, and their shareholders right?  All politics is local right?   And Durbin gets to bathe in the glory of these bullying tactics, in front of Walgreen’s, praising them for their decision”, and he probably gets to coast to a fourth reelection to the Senate.

Even decades ago, Durbin may have been applauded for these strong arm, hard-ball, and shakedown politics.  For those people that applauded him could have countered any naysayers with a statement like: “Bottom line Walgreen’s is staying, and Durbin spearheaded that movement, and that means those jobs stay in the Chicago-area, and he didn’t even have to adjust tax rates for them in some kind of backroom, sweetheart deal, and taxes have even risen in Illinois by nine percent … a move Durbin encouraged,” and Durbin probably would’ve left that stage with applause, and probably tears, resounding in his background, even decades ago.

Decades ago, a competitor seeking to unseat Dick Durbin, like a sitting state senator, from west suburban Sugar Grove, Jim Oberweis (Republican) would’ve probably had more than a fighting chance to unseat the four-term Senator with the charge the Chicago Tribune reported he made:

“The Walgreen’s saga symbolizes Dick Durbin’s 32-year career in Washington.  His bullying of Walgreen’s was a political stunt designed to help only one person: Dick Durbin.  It didn’t create any jobs.  It didn’t reform our job-killing tax code. … Instead of praise, Dick Durbin deserves our scorn.”

Decades ago, an Oberweis could’ve stepped to the mike to make the suggestion that Illinois voters should consider whether or not Durbin’s intimidation of an independent corporation was a good, long-term move for Illinois, or if it was simply a short game to get Dick Durbin reelected.  Oberweis could’ve added something along the lines of, “Walgreen’s is staying, but who else is coming?  Even future companies that may find our governor’s proposed package for a new plant pleasing, are going to have to factor Dick Durbin, and the Walgreen’s saga, into their decision.  They’re going to know that anytime they ponder a move, they will be forced to seek Durbin’s seal of approval, lest they face his wrath.  What new, or relocating company, is going to want to deal with all that?  What company is going to want to continue to pay the 35% federal corporate rate that Durbin has worked hard to maintain, combined with the 9% Illinois state tax rate he supported?  What new, or relocating company, is going to want do business in a state that has now been called the most expensive area to do business in the world?  What we’re celebrating today amounts to cheering on the fact that Durbin bullied a company into preventing one of the worst unemployment rates in the nation, 6.8%, from getting higher, but when you close that curtain behind you, in November, and make that final decision on what we’re celebrating today, you’ll need to ask yourself if Dick Durbin did anything to attract future, or relocating corporations to Illinois, thus making life for Illinois residents better?”

In the current climate, we read writers, like Natasha Korecki, of the Chicago Tribune characterizing anyone that would see Durbin’s actions as anything but an absolute victory as so confusing, they can only write:

“Okay,” Ms. Korecki writes, specifically addressing Oberweis’ comments, “That’s different.”  She then basically characterizes Oberweis’ words as those of some kind of party pooper that is unwilling to join in on the celebration, because he is “painting this as an empty victory.”{3}   

To those of us that remember a day when politicians saw themselves as representatives of the people, and the people that ran those corporations, and if they didn’t look out for their state in a manner that stretched beyond the next election, they were punished for it in elections, we can only say, “It is different, a lot different.”

{1} http://www.washingtonpost.com/opinions/george-f-will-in-a-stew-over-inversions/2014/08/15/9c2cf564-23d3-11e4-958c-268a320a60ce_story.html




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