A Financial Incentive Backfires, Big Time

CITIES, COUNTIES, AND STATES in the U.S. are known for offering generous financial incentives to companies to encourage them to relocate or expand (or sometimes, just to stay put) in their area. The argument as to whether the forsaken revenue (usually through various taxes) is less than the increase in revenue from the added jobs and investment created by the company is an argument that will go on much longer than this blog post. But everyone agrees that incentives do not work 100% of the time; a company may promise new jobs with the best of intentions, but market conditions may force it to scale back its plans unexpectedly. Or in the worst case, a company may have had no real intention of creating those jobs in the first place. (That's why many argue in favor of "clawback" incentives, which only deliver the reduced/rebated taxes, etc. to a company after it meets its job creation and investment obligations.)
The New York Times today published an article casting doubt on the intentions of some very big companies taking advantage of one very big incentive (one without clawbacks, it seems). In this case, the body offering the incentive was none other than the federal government of the United States:

"If [multinationals] bring the [money they earned overseas] back to the United States to distribute to their shareholders, they still have to pay American taxes on it.

"But those rules were temporarily suspended when President Bush signed legislation in 2004 to let companies return overseas profits at a rate of 5.25 percent, far below the official tax rate of 35 percent, if they moved the money back by 2006."

I remember when this was happening--the upshot was that this year or so of tax vacation would bring a swell of cash back into the U.S., creating jobs though investment. The very biggest users of the tax break were large pharmaceutical companies, who, although they quite obviously charge Americans the highest amount for their products, are allowed under complex accounting rules to account for their profits by declaring profit margins to be incredibly high in the countries with the lowest taxes, while claiming profit margins in the U.S. were small. (The article cites claimed profit margins of only 15% in the U.S. but as high as 100% in places like Ireland or The Netherlands, which use low taxes to attract pharmaceutical companies among other industries. I'm not sure I even want to know what the real margin made on sick people in America is.)
You should read the article for yourself, but in case you want to know how this story ends right away:

"During that period, multinational companies of all stripes moved a total of about $300 billion into the United States, avoiding about $90 billion in taxes. Among them, the pharmaceutical industry was the largest single beneficiary. Leading the pack was Pfizer, the worldÕs largest drug company, which repatriated $36 billion.

"The quid pro quo was supposed to be that the drug industry would invest some of its tax windfall in American operations and jobs. Instead, struggling with a dearth of new blockbuster drugs, they have had mass layoffs. Again, Pfizer has been the leader, reducing its work force by about 8,000 in 2006 and saying early this year that it would lay off an additional 10,000 employees."

You win some, you lose some.