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June 2012
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OVER THERE Punitive tax policy has Walgreens eyeing exit

Two stories on the front page of the April 14 Financial Times comprise a good illustration of the problems with the American economy, or more specifically, the political policies that continue to drag it down.

The first was a story about American icon Walgreens, which according to the newspaper "has come under pressure from an influential group of its shareholders, who want the U.S. pharmacy chain to consider relocating (its domicile) to Europe â ¦ ."

The reason, says the FT, is that this would "dramatically reduce Walgreens' taxable income in the U.S., which has among the highest corporate tax rates in the world."

The newspaper says such major shareholders as Goldman Sachs Investment Partners want the company to do a type of reverse merger called an "inversion" with Swiss-based Alliance Boots, which Walgreens recently took over in a $16 billion deal. The FT quoted analysts at UBS as saying Walgreens' current effective tax rate in the U.S. is 37.5 percent compared with the 20 percent Alliance Boots pays in Europe. Doing an inversion would boost Walgreens' earnings per share by an estimated 75 percent because it would pay the lower European tax rates.

It's perfectly legal, and numerous American companies have made similar moves over recent years. But Walgreens would be one of the largest to do so, and it would be a high-profile move because of Walgreens' status as a household name for many generations of Americans. The company is said to be resisting for just that reason - it is concerned about the "politics" of such a move. But it may not have much choice in the end, since corporate boards have a legal duty to act in the best financial interest of shareholders.

The second FT story talks about how U.S. companies continue to hoard huge amounts of cash abroad to avoid the punitive U.S. corporate tax rate. At the same time, they have piled on debt at home. Ratings agency Standard & Poors says 1,100 companies it covers have collectively increased their overseas cash hoards from $204 billion to $1.3 trillion from 2010 through 2013. But they have added debt even faster, from $748 billion to $4 trillion during the same period.

Why? It's a way to get money into the hands of shareholders without repatriating foreign funds and paying punitive taxes. The companies borrow money in the U.S., using their foreign cash as collateral, and pay dividends with the borrowings.

It's not, of course, a very efficient way to do business. Whether it is for paying dividends or investing in capital, the cost of funds when using debt over cash makes companies less efficient and vulnerable to turmoil in the credit markets.

This is the outcome of the Cain versus Abel politics that President Obama and the Democrats have successfully parlayed into control of the White House and substantial control of Congress since 2008. We have gone from a nation where a majority respected success to one where a majority resents it. Rhetoric about "corporate welfare" and "not paying their fair share" has taken root with voters, many of whom don't realize they've been lied to by politicians playing on one of the darkest and oldest of human failings - envy.

The result is the zombie economy we find ourselves in, with extended high unemployment, historic declines in workforce participation, and a middle class that is being slowly financially eradicated. It is rather stunning that our politicians have succeeded in creating a scenario where a company like Walgreens would be better off as a European entity. But that's the reality, and such moves will only accelerate as long as the Democrats' strategy of demonizing success and punishing the job-providers holds sway. 

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