Tuesday, October 1, 2013

George Will’s Reasoning to Repeal the Medical Device Tax

I guess I’m a bit late to the party as George Will penned this back in May of 2012:
In 2010, however, Congress, ravenous for revenue to fund Obamacare, included in the legislation a 2.3 percent tax on gross revenue — which generally amounts to about a 15 percent tax on most manufacturers’ profits — from U.S. sales of medical devices beginning in 2013. This will be piled on top of the 35 percent federal corporate tax, and state and local taxes ... Covidien, now based in Ireland, has cited the tax in explaining 200 layoffs and a decision to move some production to Costa Rica and Mexico.
Where to begin with this op-ed? First of all - Covidien denied that is decision to source some of its products from overseas were due to this tax. Of course, this did not stop the rightwing spin machine from repeating Will’s claim. Maybe other medical device manufacturers made this claim but Paul N. Van de Water has often noted:
the excise tax creates no incentive whatever for medical device manufacturers to move production overseas. The tax applies to imported as well as domestically produced devices. Thus, sales of medical devices in the United States will be equally subject to the tax whether they are produced here or abroad, and the tax will not make imported devices any more attractive to domestic purchasers. In addition, devices produced in the United States for export are exempt from the tax, so it will not reduce the competitiveness of U.S.-made devices in international markets.
Yes – I am repeating myself but as I also noted on Sunday, the tax is on the wholesale price and not gross revenues as Will claimed. Here are a few other things Will seems to not understand. Covidien’s effective tax rate is 15% - not the 35% Federal plus state & local taxes Mr. Will talks about. Maybe he is thinking more along the lines of Medtronic. So I checked its 10-K filing for fiscal year ended April 26, 2013. Its pretax income was 25.6% of its sales, which means this tax would be far less than the alleged “15 percent tax” Mr. Will suggests. And its effective tax rate was only 18.4%, which is about half of what Mr. Will claims.

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