Tuesday, September 01, 2009

Pharmaceutical Follies — Redux

On more occasions than not, a current news item gains some notoriety but then quickly disappears from memory. Every so often however, an unexpected something occurs that resurrects history, and once more excites public interest. What follows is such an incident

Here is a story of duplicity and deceit; influence peddling and arm twisting; virtual bribery and extortion; lies and broken promises; tax evasion and profiteering. If this sounds like a movie plot it probably would not work. For one thing, there is no sex (although some of the participants have been exposed with personal issues), and there are no heroes, only villains. No! This is not the story of Bernie Madoff whose scheme affected and devastated thousands of victims. The dupes of this particular plot were some 300 million U.S. citizens –– and you know what? It was all perfectly legal since the scheme bore the imprimatur of the U.S. Congress.

If you truly believe that you live in a democracy in which your elected representatives always vote in favor of legislation that promotes the well-being of their constituents, dream on. If this story does not change your mind, naiveté triumphs reality.

It all started in early 2003 when several large corporations sensed that a pliant Congress might be receptive (or persuaded) to the idea of rewriting the tax code in their favor. This resulted in the creation of four different coalitions that would promote the plan by lobbying the lawmakers involved in crafting tax legislation.

Remember, that Congressional Committees are constituted of both parties, so this is not a Republican vs. Democrats matter –– it’s much deeper than that. The real issue is the degree to which big money interests influence lawmakers’ decisions, and the extent to which lobbyists and lobbying campaign contributions determine how laws are formulated and which laws are enacted.

One of the four major coalitions went under the name of Homeland Investor Coalition (HIC). It represented some 63 companies and trade associations, most from high tech and pharmaceutical companies. One of the principal objectives of the group was to enable these multi-national companies that were hoarding huge profits from overseas subsidiaries, to repatriate these profits back to the United Sates without incurring the high 35 percent tax rate that would normally apply. The lobbying effort pitched the idea of a “tax holiday” that would instead impose a ridiculously low 5.25 percent rate. This was no small or cheap undertaking. In the first half of 2003 the 21 members of the Senate Finance Committee received more than $750,000 from the coalitions lobbying for such a bill, and the 41 members of the House Ways and Means Committee collected more than $700,000.

By early 2004, a bill had been designed, titled the American Jobs Creation Act that apparently satisfied the lobbying coalitions. If this sounds familiar, you memory retention function is remarkable. In July 2005, the second of a three part series of articles appeared in this column. Probably the most prescient aspect of the article was the title I suggested be assigned to replace the “jobs creation” concept. I wrote, “A more recent lobbyist effort resulted in a piece of legislation that few are even aware of and even if you did read about it, the ramifications, especially as it affects the pharmaceutical companies, is virtually unknown. With a most appealing title, certain to resonate with every logically inclined citizen, the underlying impact of the legislation is totally hidden. How can anyone argue against the ‘American Jobs Creation Act,’ that was ultimately signed into law by President Bush in October 2004? The more appropriate and realistic title should have read ‘The Foreign Tax Giveaway to Big Pharma Act.’” Unfortunately, my concern about the legitimacy of this bill proved to be most all too prophetic. However, little did I know then how much I underestimated the dimensions of the efforts to get the bill enacted. Nor did I anticipate the consequences to be as dramatically profitable in one sense, and so wrenchingly deceptive and disheartening in another.

What brought this whole episode back into the news was an effort by three professors at the University of Kansas to do an empirical analysis that measured the rates of return, or return on investment, for lobbying expenditures. To put it more bluntly, does lobbying money spent, pay off for the spenders? Coincidence of coincidences; the lobbying effort used as the basis for the study was the American Jobs Creation Act highlighted here in Viewpointe in 2005.

The results of the study were published this past April, and concluded that as a result of the huge amounts of campaign contributions provided by the lobbyists to key legislators, for every one dollar spent, the multi-national corporations involved earned $220. While that number is astounding, the magnitude of the dollar amounts involved is even more so. It was estimated that of the 834 corporations that participated in the repatriation of overseas profits, 93 actually engaged in lobbying for the tax rate reduction. These companies spent over $282 million on lobbying expenditures. What did they get in return? $62.5 billion in tax savings. That’s a 220:1 return on investment, or 22,000%. There’s an old truism: “Advertising pays. Obviously, lobbying pays more.” Imagine if you can, the almost incomprehensible expenditure of close to $300 million being spent on the lobbying of just one piece of legislation. Wouldn’t you think that the magnitude of this incident would have generated some front page headlines?

But there’s much more to this scandalous episode. Remember the name of this bill: The American Job Creation act. The rationale promoted by the vested lobbing interests was that the increased profits generated by the lower tax rate would be invested by the corporations in creating a huge number of new jobs for Americans in this country. While critics argued that the bill would benefit multinational corporations to the detriment of domestic firms, how could a patriotic legislator resist the type of hype (and huge campaign contributions doled out by the multitudinous lobbying groups?

By 2006 the dimensions of this scam on the American taxpayer began to emerge. While reaping enormous benefits form the 2004 tax reduction legislation, instead of creating jobs, as was heralded by the lobbyists, many of the corporations initiated very substantial layoffs. Major beneficiaries of what some called the “Owellian” named “Job Creation Act,” were the aforementioned drug companies as well as those in the technology industry.

Here are just a few that participated in what became a “job deduction act”: Pfizer repatriated $36 billion at the discounted tax rate, but instead of hiring more Americans workers, the company laid off 8,000 employees in 2006, and announced 10,000 future layoffs to come. Eli Lilly and Schering Plough also repatriated billions while laying off thousands. In December of 2004, just after the new law was approved, Colgate-Palmolive announced plans to cut more than 4,000 jobs and then repatriated $800 million of overseas profits.

According to Slate magazine, in the technology field, “IBM is banking a $2,8 billion refund…on $4.4 billion in overseas profits. [However] According to its annual report for 2005, the company added fewer than 400 jobs worldwide…and shed five million square feet of space in the United States. Intel repatriated $6.2 billion and announced it was cutting 10,500 jobs. Hewlett Packard announced layoffs amounting to 14,500 jobs while bringing $14.5 billion of profits back. It also announced stock buyouts amounting to $4 billion. The latter action was not uncommon in that nearly all the profits were uses for stock buybacks, dividends and some were actually used to pay for the expenses associated with the many thousands of layoffs. Thus, the legislation actually incentivized layoffs instead of job creation. And you know what? It was all legal.

In retrospect the winners in this massive scam seem to be obvious –– the multinational companies that funded the lobbying, of course. The big losers are American citizens who have to make up the lost tax revenues that were gobbled up by industry. However there are unseen and unrecognized winners as well. Think about it. In whose pockets did the $282 million of lobbying money end up? Certainly the K Street lobbyists got their share. The rest? Why to campaign contributions to our, legislators that were spent by so that they can remain in office to do the same thing over again –– like on health care legislation perhaps?

Does all this sound overly cynical? Perhaps, but next month’s article will name some names that might surprise and disappoint you.


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