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How Tax Laws Distort the Pfizer Deal

But the clearest distortion is not size, but location. For multinational corporations based in the United States, taxes create an incentive to expand overseas operations by opening foreign subsidiaries, expanding foreign operations and acquiring foreign companies. Unlike a pure tax…

Baucus Cost Recovery Proposal

A tax proposal released on Thursday by the chairman of the Senate Finance Committee, Max Baucus, addresses a topic that tends to make my students’ eyes glaze over: cost recovery.Cost recovery is a technical topic but one that may shape…

Baucus International Tax Proposal

Changes to the tax code always create winners and losers. An ambitious plan to revise the system for taxing multinational corporations, released on Tuesday by the Senate Finance Committee chairman, Max Baucus, would hit technology companies and large pharmaceutical companies especially hard. Companies like Pfizer, Apple, Hewlett-Packard and Microsoft have become masters at reducing their tax liability in the United States by shifting income overseas.

These companies often hoard cash in offshore subsidiaries, and in the past they have successfully lobbied for a tax holiday to repatriate cash at lower tax rates. The Baucus proposal would, among many changes, end this practice of tax deferral and impose a minimum tax of about 20 percent on overseas profits — whether those profits are repatriated to the United States or not.

An Offbeat Merger

Other methods of tax avoidance have received less news media attention but are no less troubling. A recent deal by LIN Media, a media company backed by the private equity firm HM Capital Partners and the investment manager Royal W.…

A Holiday From Taxes

Large multinationals based in the United States – among them General Electric, Pfizer, Apple and Citigroup – have been hoarding record amounts of cash overseas, mainly because of the 35 percent tax they would have to pay if they brought it back to the United States.

The American Jobs Creation Act of 2004 offered a temporary tax holiday that allowed firms to repatriate cash at about a 5 percent tax rate, but there were strings attached. The repatriated money was to be used only on permissible activities like research and development, capital expenditures and pension funding. It was not to be used for shareholder dividends or share repurchases.

The purported goal of the legislation was to create jobs, not simply to enrich shareholders at the expense of federal tax revenue. In recent years, companies have lobbied for another tax holiday.

Tax policy experts are suspicious of tax holidays, and most experts question the effectiveness of attaching strings to such legislation. Because cash is fungible, companies might be expected to use the repatriated money for permitted domestic activities that they would have conducted anyway, freeing up other cash to be used for dividends and stock buybacks. If companies merely reshuffle the use of cash without changing behavior, then the tax holiday amounts to a windfall to shareholders, not an effective economic stimulus.

The 2004 tax holiday brought back $312 billion in extraordinary cash dividends from foreign subsidiaries. How much of that cash was used for permitted activities, and how much for impermissible dividends and stock buybacks? A 2011 paper by Dhammika Dharmapala, C. Fritz Foley and Kristen J. Forbes, published in The Journal of Finance, estimated that 60 cents to 92 cents of every repatriated dollar was spent on shareholder payouts in 2005. The paper is Exhibit A in the case against future tax holidays.

A new paper by Thomas J. Brennan of the Northwestern University School of Law challenges that study and finds that, for the 20 companies that repatriated the most cash, 78 cents of every dollar was spent on permissible uses, and just 22 cents on impermissible shareholder payouts. Extending the analysis to 341 companies outside the top 20, Mr. Brennan estimates that about 40 cents of every dollar was spent on impermissible shareholder payouts, still much lower than the earlier estimate.

Bezos’s acquisition of Wa Po

Jeff Bezos’s purchase of The Washington Post raises the possibility that he acquired the paper as a trophy to celebrate his success as the founder and chief executive of Amazon.com. The acquisition comes after the purchase of The Boston Globe by John W. Henry, the owner of the Boston Red Sox and a trading firm billionaire. The purchases are part of a broader trend toward private ownership of media companies.

A classic economic study by Harold Demsetz and Kenneth Lehn finds that concentrated ownership might be explained by the “amenity potential” of certain companies, including mass media and sports teams. John Henry’s holdings nicely illustrate both. As the authors explain, winning the World Series or “believing that one is systematically influencing public opinion” may provide consumption benefits to the owners even if profits are diminished.

The study raises another possibility, however. Concentrated ownership works better in highly volatile environments, where rapid change and external forces make it difficult for public shareholders to monitor and judge the performance of managers. In such “high agency cost” environments, it may be more efficient for a single owner or a dominant shareholder to keep an eye on how managers are dealing with rapid change and disruptive innovation. “The noisier a firm’s environment, the greater the payoff to owners in maintaining tighter control,” the paper explains. “Hence, noisier environments should give rise to more concentrated ownership structures.”

Pension Reform Could Disrupt Investment Funds

Detroit’s financial woes, exacerbated by underfunded pension liabilities, have brought renewed scrutiny to public pension plans. Senator Orrin Hatch, Republican of Utah, and others have suggested overhauling these plans to shift more responsibility to the private sector. Private insurance companies would assume responsibility for these defined benefit plans, offering annuities to beneficiaries in exchange for employer-paid premiums.

Proponents argue that privatization could reduce the risk of municipal bankruptcy and federal bailouts. One downside is the possible increase in fees associated with external management of retirement savings; it creates another way for Wall Street to extract wealth from Main Street.

Merits aside, overhauling the public pension system would cause some interesting and presumably unintended consequences.

First, phasing out public pension funds could cut off an important source of financing for venture capital and private equity. Pension funds like the California Public Employees’ Retirement System, or Calpers, and the Teachers Retirement System of Texas are among the largest and most powerful institutional investors in venture capital and private equity.