Capitalism Under Siege

Global U.S. businesses, hampered by high corporate taxes and onerous regulation, face an uphill battle for growth, as well as image, noted Bob Iger, Disney chairman and CEO and the recipient of the 2014 CEO of the Year Award. “When you’re running, as many of us are, a big, global company that is being scrutinized on a regular basis by all sorts of different entities, you are under extraordinary pressure not only just to deliver the bottom line but to deliver growth quarter after quarter after quarter. You’re looking for any angle you possibly can—never sacrificing integrity, of course—to reduce your expenses to grow your revenue. That puts a huge amount of pressure on us in many, many different directions,” he said.

That pressure has led to more inversions, like Medtronic’s proposed acquisition of Dublin-based Covidien, which would give it an Irish address for tax purposes and free up $14 billion of the company’s foreign income that would otherwise be taxed at 35 percent. “Part of competing globally is recognizing that U.S. companies are at a disadvantage on tax,” noted Steve Howe, managing partner for Ernst & Young in the Americas, adding that inversion strategies are not usually driven solely by tax imbalance but that it’s all a part of the equation for maximizing value. “Let’s not put a law in place regarding tax inversions. That’s the symptom, not the problem.”

Fred Hassan, chairman of Bausch & Lomb, agreed. “We are the only major country in the world that taxes foreign income. It’s really out of date and creates artificial patterns of behavior [such as the Medtronic deal]. It has really reflected a lack of leadership for the last several years in terms of not talking about it.”

A lack of introspection is one of the country’s biggest hindrances to growth, added Farooq Kathwari, CEO of Ethan Allen Interiors. “I think one of the challenges that we should think about is, what are the things we are doing internally to ourselves [that are] weakening us? We should spend a lot of time [discussing]—and I think it’s a good debate—what we are doing right here in the United States that’s weakening the country. Russia is doing it. Argentina is doing it. China is doing it. We need to be doing it.”

Although several participants agreed that a 25 percent flat foreign income tax might help U.S. businesses keep their American addresses, Medtronic, as a medical-device company, was also facing a 2.3 percent tax on revenue, pointed out Christine Jacobs, former CEO of Theragenics, also a medical-device maker. “That is a tough hurdle for any $17 billion company.”