One can only hope the spate of tax-motivated mergers in the pharmaceutical and medical-device industries finally will motivate Congress to reform the corporate tax code—a long-sought goal of the business community.
Some healthcare-related firms have a lot to lose from tax reform, and their maneuverings to avoid the tax man have drawn justifiable anger from the Obama administration.
For the mainstream business community, the issue driving reform is the U.S.' nominal 35% tax rate on corporate profits—the highest among advanced industrial countries. Switzerland, Ireland and Germany, for instance, have tax rates of 15% or less.
But there is less to those nominal rates than meets the eye, especially in the healthcare sector. Health insurers, for-profit hospital chains and other providers, drug and devicemakers, distributors and suppliers pay very different effective tax rates depending on the nature of their business.
For most healthcare providers, corporate taxes are not a major issue. About 80% of hospital capacity is housed in not-for-profit organizations and most non-salaried physicians are not incorporated.
But for the rest of the for-profit healthcare sector whose operations are almost entirely domestic—think hospital chains, post-acute-care provider chains, pharmacy retailers and supply distributors, for instance—high nominal tax rates matter a lot. They have small research and development budgets and are labor-intensive, not capital-intensive.
Drug, device and medical-equipment firms, on the other hand, tend to have global operations and sales. They spend up to 20% of their total budgets on researching new products. Their manufacturing processes usually require lots of capital equipment.
The current tax code provides numerous advantages for these globally oriented firms. It gives special tax breaks for R&D and capital investment. The code also doesn't tax overseas profits until they are repatriated to the U.S.