Walgreens and the morality of taxes

Walgreens and the morality of taxes



There’s been quite a bit of chatter on Facebook and in the investment community concerning Walgreens’ (WAG) announcement that it does not intend to take advantage of the tax breaks its potential acquisition of Alliance Boots in the UK would allow under the tax code, a strategy which could save it and thus its shareholders hundreds of millions of dollars each year. The announcement has been met with much moral posturing from all sides and has subsequently sent shares tumbling, loosing as much as $5 billion in market capitalization.

Many on Facebook have professed support for this position. Walgreens has two options:

1)   Take advantage of the legal tax breaks afforded to it through this potential acquisition, retaining more income for its shareholder, which are primarily Americans. This would result in more money in the private sector.

2)   Take money away from their shareholders and give it to the federal government in the form of taxes.   This would result in more money in the public sector.

Which option is better, 1 or 2? Depends on what you are looking to achieve. If what you are looking to achieve is more growth in the economy, then you simply choose the option that generates greater growth. So far, the evidence is fairly clear that the private sector generates more growth per dollar spent than the public sector, you can read about this here, here, here and here, (there are countless more, but I think you get the point.)

This is fairly intuitive if you think about it.

In the private sector, a company has a finite amount of money to invest in order to generate growth. By definition, if a company wants to remain in business it has to generate more money that it uses to operate. If it fails to do so, it will go out of business, thus will no longer be able to siphon money away from those ventures that do generate more than they consume.

In the public sector there is no such feedback loop. Programs within the government grow by garnering themselves more and more attention and by convincing those who hold the purse strings that they need more funds. There is no weighing of value generated vs value consumed. In fact there is more of a negative feedback loop by which a program that is shown to be failing miserably is more likely to get significantly more funds if it projects the impression of impending doom than one that is showing efficacy with the funds it already has been allocated.

Before cheering on Walgreens for taking money out of the pockets of its shareholders, think about whether you or Congress make better decisions with the money in your pocket. Given that according to a recent NBC/WSJ poll, Congressional approval rating is down to a staggering 14%, I’m guessing most believe that the money is best served in your pocket.

That being said, the main problem here is the ludicrously complicated tax code and excessively high tax rates which incentivize the private sector to seek out ways to minimize taxes. The Laffer Curve illustrates how lower tax rates, (and a simple tax code) would ultimately result in higher tax receipts and less money wasted in utterly non-productive pursuit of means to minimize taxes. Money spent on lawyers and accountants could instead be spent in ways that would productively grow the economy.