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The Tax Takeover Craze
Last year Team Obama changed tax rules to prevent companies from leaving the U.S. But that hasn’t stopped foreign acquisitions of U.S. firms.
By JAMES FREEMAN
May 19, 2015 9:23 a.m. ET

The shopping spree continues for companies that have fled the United States. Endo International PLC, which used to be based in Pennsylvania and is now headquartered in Ireland, has agreed to pay $8 billion for New Jersey drug maker Par Pharmaceutical Holdings Inc. Despite an Obama Administration effort to prevent escape from the industrialized world’s most oppressive corporate income tax system, tax-driven takeovers continue to roll across U.S. borders.

Endo, just like rival drug makers Actavis PLC and Valeant Pharmaceuticals International Inc., moved its headquarters out of the U.S. before last year’s decision by the Obama Treasury to reinterpret long-standing tax rules to discourage such so-called inversions. But the rules don’t prevent these now foreign companies from buying U.S. firms. All three have been buying American companies since moving their official homes. As the Journal notes, the tax advantages of being domiciled outside the U.S. mean that “all other things being equal, they can wring more profits from companies than a U.S. owner can.”

It’s not just that U.S.-based firms face a combined state and federal income tax rate of 40%, roughly double the average in Europe and Asia. This same staggering burden still applies to the U.S. earnings of businesses with foreign owners. But Washington is one of just a handful of governments worldwide that also taxes the money its companies make overseas, on top of the income taxes already paid to other countries. Moving out of the U.S. prevents such additional taxation. Ironically then, a foreign headquarters makes it easier to invest in the U.S., because it means the money earned elsewhere can be reinvested here without paying the IRS for the privilege of creating U.S. jobs.

U.S. Treasury Secretary Jack Lew ENLARGE
U.S. Treasury Secretary Jack Lew PHOTO: JOSHUA ROBERTS/REUTERS
The Obama effort to bolt the tax door to prevent corporate escapes was bad policy for a country that aspires to achieve faster growth and job creation. But now it’s failing on its own terms of ensuring higher government revenues, as foreign-based firms afford the Treasury fewer opportunities to seize profits.

The latest merger deal also provides more evidence exposing a classic liberal canard. The left likes to argue that high tax rates don’t matter because companies don’t pay anything close to the headline rate. While it’s true that some firms, especially those benefiting from green-energy subsidies, pay little in taxes, that’s not the story here. The Journal reports that Par Pharmaceutical “paid 41% of its profit in taxes last year and 37% in 2013.”

Let’s hope that the next President develops tax policy with the goal of encouraging businesses to come to the U.S., rather than trying to punish them for leaving. Is that too much to ask?