Overwhelming Senate Support Not to Tax Fat Profits

Sahil Kapur reports on more disappointing news from the U.S. Senate:

Thirty-four Democratic senators joined every Republican Thursday night in voting for a nonbinding budget amendment to repeal the law’s 2.3 percent sales tax on medical devices. It passed 79-20 — a victory for the powerful device industry, which has raised hell over the tax … While opponents of the fee contend that it’ll stifle innovation and cost jobs, supporters argue that it’ll have a minimal effect on employment or manufacturing, and that the device industry wasn’t singled out.

I’ve seen those “studies” that claimed that the Medical Device Excise Tax (MDET) would stifle jobs. These studies were not even worth space over at the National Review. And I doubt the tax would affect employment or production that much. What it would likely do is to cut in the profits of companies like Medtronic and Johnson & Johnson. I just looked at both of their Annual Reports. Note MDET applies only to US sales and is a 2.3% on a constructive price which is tax law speak for the intercompany price between the manufacturing division and the wholesale distribution division. My guess is that the Big Four hacks representing the large medical device companies will argue that the constructive price = 50% of sales while the IRS will argue that it should equal 70% of sales. Not to get into the technicalities here but let’s assume they settle at 60% so the effective tax rate = 1.4% of sales. Medtronics had $16.2 billion in sales last year with $8.9 billion being domestic sales. So let’s assume they paid $125 million in MDET. Its profits before taxes were $4.1 billion of which they paid only 17.5% in income taxes (more transfer pricing games). So MDET represents an increase in taxes that is less than 3% of profits. Johnson & Johnson had about $12 billion in US sales of medical devices so its MDET would be around $170 million. Its profits before taxes were $13.8 billion of which they paid only 23% in income taxes. MDET represents an increase in taxes that is only 1.2% of taxes. But hey – the Senate will not stand for taxing the fat cats!