Walgreen decides against high-profile tax-avoidance gimmick

Walgreen, the venerable U.S. drugstore chain, decided this week not to move its headquarters to Switzerland, after purchasing a smaller European counterpart called Alliance Boots. This simple fact — an American company staying in America — represents an unexpected victory for progressive organizations, which harped on the potential consequences of the merger for weeks.

By failing to shift its headquarters overseas, Walgreen gives up the ability to reduce its corporate tax rate, a maneuver known as an inversion. Forces on the left from the President on down have characterized inversions in recent weeks as the work of “Benedict Arnold corporations” who show a lack of “economic patriotism” by reaping the benefits of American infrastructure, but walking away from the responsibility to pay for those benefits. In particular, the umbrella coalition Americans for Tax Fairness led a highly public visibility campaign, pre-emptively denouncing Walgreen for running out on the country their stores depend on for much of their profits — a significant chunk of Walgreen’s business comes in the form of filling prescriptions for Medicare and Medicaid patients.

Frank Clemente, executive director of Americans for Tax Fairness, called Walgreen’s decision “a victory for American taxpayers” that keeps $4 billion in Walgreen corporate taxes flowing to the U.S. Treasury. And he pointed out what may have been the key determinant for Walgreen: “Executives must have realized that American consumers would consider abandoning the U.S. a betrayal and might decide to shop elsewhere.”

This is a critical point. When over two-thirds of Americans disapprove of tax inversions, retail companies must pay attention to public outcry. But companies like pharmaceuticals, whose brand names are less known to the general public, don’t necessarily have the same problem. Walgreen would have become the first major consumer brand to pursue an inversion. But their refusal does not necessarily signal an end to the practice; indeed, the Washington Post reports that “a wave of corporations” will engage in the tactic in the coming months. Presumably they will be the kinds of corporations that are more difficult to boycott.

As economist Dean Baker points out, the damage to the economy from inversions is in many ways greater than the damage to federal revenue. Wall Street firms have made billions financing mergers to facilitate inversions, moving their capital and workforce away from productive investments and toward the financial equivalent of digging holes and filling them up again. “The economic waste associated with tax loopholes … almost always makes the rich richer,” Baker writes.

The White House has begun to raise trial balloons about executive actions to discourage inversions. However, they don’t appear to be well thought-out, drawing criticism from liberal economist Brad DeLong, who wrote that no one should casually hint at a future change in tax policy for fear of sparking a wave of last-minute dodges.

But it seems that the Obama Administration wants to keep the issue front and center for the midterm elections, as well as put companies on notice over the scrutiny they will attract if they decide to renounce their corporate citizenship. Democratic Senators have asked the President to use his existing authority to stop inversions, as well.

Republicans profess concern about the issue, but typically suggest that it should be solved through a broad and complex rewrite of the corporate tax code, one that will inevitably lower nominal rates. Claims that a deal could have been struck before President Obama “politicized” the inversion issue must reckon with Republican efforts to use inversions as leverage to get the lower corporate rates they desire.

Meanwhile, the path still exists for an eventual solution, tied to the annual “tax extenders” bill of mostly corporate tax breaks. As many liberals have suggested, Democrats can simply refuse to pass this bill in the lame-duck session without companion legislation cracking down on inversions, and making whatever fix retroactive to prevent a rush overseas at the last minute. This has a decent chance of success, given how much corporations love their tax breaks.

Until that time, both sides appear to prefer to fight this issue out in the court of public opinion, one slamming corporate disloyalty and Republican obstruction, the other Democratic holdups on building a new corporate tax code. And the temptation for corporations to maximize profits by abandoning America grows.