A New Plan For Corporate Tax Inversion

Corporate tax inversions occur when a corporation decides to re-incorporate overseas either by merger or acquisition with a foreign corporation. Primarily, this is beneficial if the corporation generates a large portion of income overseas, since income is taxed overseas and in the country of incorporation. Therefore, a corporation would invert in order to lower their tax liability.

Inversions Erode Federal Tax Base

When a corporation re-incorporates overseas, the corporation is not subject to U.S. corporate tax on foreign generated income. However, a U.S. based corporation has to pay federal corporate taxes on income generated overseas unless they stockpile the income overseas and not on U.S. soil. Carl Icahn, a well-known activist investor, said in this article that “companies are currently holding $2.2 trillion abroad that could otherwise be invested in the U.S.” This creates a burden on the U.S. Government, which relies on the federal tax base as a primary asset.

Inversions Hurt Shareholder Value

Following this sequence of events, when a corporation stockpiles income overseas to avoid taxes, then foreign generated income is unable to be returned to the shareholders of a U.S. based corporation. Found in this article, one of the largest companies with billions in foreign generated income is Apple Inc. Effectively, Apple is unable to utilize their large sums of cash overseas to finance share buybacks and dividends that will benefit shareholders. Ultimately, decreasing potential shareholder value.

As described in this article, corporations that undergo inversions effectively lower their tax rate, but shareholders of inverted corporations incur capital gains tax on all shares owned as if they sold them.

Increasing shareholder value is a prime goal of U.S. corporations and inversions deteriorate shareholder value by decreasing buybacks and dividends and increasing taxes borne by shareholders.

Donald Trump

Donald Trump Will Stop Inversions

Who will stop inversions and return value to shareholders?

The current leader for the Republican presidential nomination, Donald Trump, has directly addressed corporate tax inversions in his tax-reform plan. Trump plans to cut the corporate tax rate from 35% down to 15% , as described in this article. This creates an incentive for corporations to remain incorporated in the U.S. and also makes incorporation in the U.S. more attractive for corporations abroad. Also cited in the article, Trump will make this corporate tax cut feasible by instituting a “one-time tax of 10% on overseas profits for U.S. corporations”. Overall, Trump’s plan will make the U.S. globally competitive in the realm of corporate taxes.

Hillary Clinton Causes Biotech Turmoil

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Democratic Presidential Nominee, Hillary Clinton, announced her plans, via Twitter on September 21, for increased regulation in the healthcare industry. Mrs. Clinton sought to fulfill this need after a The New York Times article, found here, was published citing a drug with a price increase from $13.50 to $750 overnight. This “price gouging” by pharmaceutical companies is at the forefront of reform in Mrs. Clinton’s plan for increased regulation. But, what does this mean for investors?

Comments Spook Investors

IBB

In a week following the tweet by Mrs. Clinton, major biotech indices were down more than 20%, according to this article published in the Wall Street Journal. In the chart to the right of the iShares Biotech ETF (IBB), which seeks to track NASDAQ listed biotechnology and pharmaceutical securities, and the NASDAQ Composite, a market index for healthcare and technology securities, the IBB declined 11.72% more than the NASDAQ Composite. This discrepancy of 11.72% creates a unique event centered around the effects of Mrs. Clinton’s tweet. Meaning her announcement, via Twitter, was unexpected by the market and the securities exposed to such regulation were impacted more than the broad market.

Therefore, investor portfolios with exposure to biotechnology were largely affected by Mrs. Clinton’s tweet.

Price Gouging Is Necessary

Although supporters of Mrs. Clinton would disagree, price gouging is a necessary tool used by the healthcare industry for the sale of prescription drugs. By using price gouging, firms account for the following:

  • Risk compensation, for the uncertainty of FDA drug approval rates
  • Research and development (R&D), the most important driver for innovation and success of healthcare companies
  • Marketing costs, which are heavily utilized for market exposure of newly patented drugs.

Without higher prices to drive R&D and marketing, these companies would be unable to research and develop leading treatments and cures in areas like immuno-oncology.

Hilary Clinton is Misdirected 

The proposed policy changes by Mrs. Clinton, found in this article, are centered around new medicines on the forefront of disease transformation. Since,according to the article, roughly 70% of new drug developments are completely new approaches in fighting disease, then Mrs. Clinton’s plan to restrict price gouging will subsequently affect the budgeting and allocation of capital to R&D spending for new drug development projects. This lowers the incentive for new drug development, putting significant pressure on companies determined to find a cure for rare diseases. Just think if the developments toward hepatitis C and metastatic melanoma were never funded, then treatment would never have been developed and these diseases would still be considered a death sentence.

Instead, Mrs. Clinton should focus her efforts away from price gouging in new medicine and toward helping patients by lowering costs and market timing for more generic drugs, thus saturating the generic drug market and eliminating “perpetual monopolies for old, off patent drugs like Daraprim”, as described in this article.