Politics & Policy

Self-Destruction through Taxes

Medical-device taxes and noncompetitive corporate taxes are strangling American businesses and workers.

If ever there were good political reason for both parties finally to cooperate in passing at least one type of tax reform, two economic stories in the past fortnight provide that reason in abundance.

Two weeks ago, Medtronic, Inc., a major medical-device manufacturer in the U.S., agreed to merge with rival Covidien PLC, domiciled in Ireland. The companies merged largely to escape the outlandishly high American corporate-tax rates that are piled atop Obamacare’s senseless medical-device tax.

Last Wednesday, the Commerce Department made a stunning downward revision in its report of first-quarter gross domestic product, announcing that the economy contracted at a 2.9 percent annualized rate for the first three months of this year. This came after economic growth already had cooled to a 1.9 percent rate in 2013, down from 2.8 percent in 2012. In short, the already historically weak “recovery” under President Obama weakened even further last year, and the economy actually contracted from January through March of 2014.

The two stories are connected in this way: Obama’s high-tax, high-regulatory, anti-business policies have acted as a depressant on the natural recuperative powers of the American market economy. One result is that American companies such as Medtronic continue to outsource profits — and jobs — in order to thrive.

Medtronic is just the latest example of a growing trend of “tax inversion” mergers. The Wall Street Journal called attention this month to the “wave of recent moves,” and Senator Rob Portman (R., Ohio), in a Wall Street Journal opinion piece, noted that “more than 20 major American companies have reincorporated elsewhere in the past two years.” Attesting to the bipartisanship of lawmakers’ concern, Senator Ron Wyden (D., Ore.) also blames the high U.S. corporate tax rate for this wave of inversions.

The corporate tax rate of 39 percent, by far the highest in the developed world, is bad enough in itself. It’s even worse for the makers of life-saving medical devices such as pacemakers, vascular stents, asthma inhalers, and insulin pumps. That’s because it comes on top of the Obamacare device tax, which is assessed not on profits but on gross sales. This means that sometimes the tax actually exceeds the profits of these small start-up companies and pushes them into the red. Medtronic, one of the bigger and more profitable medical-device companies, pays an estimated $40 million to $60 million annually for Obamacare’s device tax alone.

The job losses in the industry have been staggering, as shown in this collection of headlines (this is one link you will definitely want to follow). One industry source tells me that since January 1, 2013, this tax has killed one American job every seven minutes. Less than a month ago, for example, Teleflex announced that it plans to close its plant in Asheboro, N.C., and lay off more than 600 workers while moving its operations to Mexico. And those are just the direct layoffs; the number of indirect jobs harmed by this one plant closing, according to the same industry source, approaches 1,800.

As bad as the job loss is, the potential losses for patients might be worse. Many med-device enterprises are start-up outfits that will never get off the ground if burdened by the gross-receipts tax. If they fold, their innovations never have the chance to save or improve a single life. Advances in care will be lost, as will potential savings from less invasive (and often more humane) forms of treatment.

All of this points to the conclusion that there is no real constituency for the medical-device tax other than Obama administration die-hards who are still fruitlessly trying to hold on to the long-disproved claim that Obamacare will at worst be revenue-neutral. If Democrats in the Senate were smart, they would see the increasing likelihood of their majority’s slipping away and reach out for a lifeline — for something, anything reasonable, that could separate them from the unpopular Obama administration and put them on the side of American workers and patients. Repealing the device tax would fill that bill.

Republicans, meanwhile, should gladly take the chance to show that they are capable not only of railing against the evils of Obamacare but also of effectively mitigating some of its ill effects.

The med-device tax, though, is small potatoes in comparison to the corporate-income tax. So devastatingly high is the top corporate-income rate that even Obama has long been on record for slicing it — although he has never lifted a pinkie finger to do so. As is recognized by Portman, Wyden, and a growing bipartisan coalition of analysts and business leaders (including leaders of companies with longstanding liberal ties, such as Nike and Disney), these rates, which keep some $2 trillion of profits parked overseas, act as sludge choking the engines of the American economy.

And, as both the decidedly anti-Lafferite economist Laurence Kotlikoff and the Congressional Budget Office have shown, it’s the workers who bear the brunt of the high corporate taxes, not investors or corporate chieftains. Even the most business-baiting Democrats should be able to see that cutting corporate tax rates while getting rid of special-interest tax breaks is the best way to “in-source” jobs back to Americans.

Granted, Democratic senators and House members won’t be able to go as far as I would like, or as incoming majority whip Steve Scalise, The Atlantic’s Megan McArdle, and others would like, and completely eliminate the corporate-income tax. But if vulnerable Democrats want to make a splash as free thinkers while shoring up moderate business support and appealing to intelligent workers at the same time, they could join with Republican reformers on a bold plan. To wit:

With appropriate moves to close tax loopholes and eliminate a number of deductions (such moves being politically necessary for Democratic “anti-special-interest” talking points), Congress this very year should pass a bill cutting the regular corporate-income tax to a flat 10 percent, retroactive to the beginning of 2014. It’s simple enough to sell on the stump, and nothing could be easier to implement: Businesses could simply determine their profits and then (in effect) move the decimal point one numeral to the left and send that amount to Uncle Sam.

The defibrillation of the economy would be almost immediate, if for no other reason than that investors and executives would anticipate that they could keep a much greater proportion of their profits — and this expectation in itself would jump-start growth. Businesses would probably rush to put the anticipated windfall to good use as fast as possible, to gain competitive advantage while they could. A gusher of productive investment and hiring would follow.

Otherwise, our own foolish government with foolishly punitive corporate taxes will continue to stifle economic growth, jobs, and income. In an editorial last week, the Wall Street Journal condemned the policies leading to a “corporate exodus,” asking: “What kind of country does this to itself?”

The answer is: our kind of country, a nation whose sloth causes acute economic atrophy. Unless we come to our senses and change our tax policies soon.

— Quin Hillyer is a contributing editor for National Review. Follow him on Twitter: @QuinHillyer.


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