11 min reading time

Our most vocal medical device tax detractor, group member John Eckberg, Director of Media Relations for Cook Group (which stands to pay $100MM+ in extra taxes), wrote the following this morning. Does his logic hold?

[Subject] How many jobs will not be created in the U.S. because of the 2.3 percent top line medical device tax?

[Detail] Medtronic’s most recent 10-Q offers some insight on the impact of the 2.3 percent top line tax on U.S. medical device sales.: “We currently estimate that our annual excise tax fee would be within the range of $125 million to $175 million after tax.” So, how many jobs are not going to be created in the U.S. because of that tax? At $50,000 per, the low-end estimate equals 3,000 jobs.

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John Eckberg
Media Relations
FROM TODAY PwC NEWS – Medical Device investing declined for the third consecutive quarter, falling 37 percent in dollars and 27 percent in deal volume with $434 million going into 65 companies, experiencing the lowest dollar level of investment since 2004. Overall, Life Sciences investment for the first three quarters of 2012 is down 19 percent in dollars and 12 percent in deals from the same time period in 2011.

Jerry Robinson
Consulting Designer: mHealth, IoT, Embedded Products, Wireless Commun, Consumer, and Disruptive Innovation Tech.
Just to add something….

a job was equated to $50K in the topic…

Ishrak (CEO) makes about $30 million annually, per this report
[http://www.bizjournals.com/twincities/news/2012/06/28/ceo-pay-medtronic-ishrak-hawkins.html|leo://plh/http%3A*3*3www%2Ebizjournals%2Ecom*3twincities*3news*32012*306*328*3ceo-pay-medtronic-ishrak-hawkins%2Ehtml/EYnx?_t=tracking_disc]

That equates to about 600 jobs according to the 50K/job number..

If I hired a CEO from China, I could save a lot of money and hire additional workers. Much more productive for the company.

600 jobs may not sound like a lot – but it’s a good portion of the 3000 number stated in the article…

–jr

Jerry Robinson
Consulting Designer: mHealth, IoT, Embedded Products, Wireless Commun, Consumer, and Disruptive Innovation Tech.
John’s logic is not completely valid… Here is why I say….

a – He estimates that a job would equate to about $50K in tax. From that he assumes 3000 jobs. I think the job amount is at least going to be $150K – and closer to $250K per job (ideally….).. so the 3000 number is high… But it is a debatable number…

b – There is an assumption that this amount “does not get passed on”… that is simply incorrect. For some companies, they have argued that passing on the 2.3% can not happen… but what that really means is that the amount is passed on “later… not sooner…”. Additional costs get passed on.. that’s business…

c – an argument was made that the “2.3%” will have to come out of reducing expenses and cutting costs.. sounds reasonable -but then you might ask “why aren’t you doing that already?”

d – this is a good point – but not stated.. Increasing cost – by 2.3% at the device level – will drive up health care cost. one way or another…. so how does that help reduce OVERALL Healthcare cost… answer is …. it doesn’t…

e – who ultimately pays? Government pays a LOT.. so the real effect on that Government paid portion is just to churn money and waste it all along the chain…

Let’s say that 1/2 (just a WAG) of the 2.3% money cost is ultimately paid by the gov’t in some fashion… then the actual real NET improvement is just 1.15%. A lot more waste all along the chain.. that is just not the direction that will help reduce health care costs.. and INSTITUTIONALIZES another waste in the healthcare business…

I don’t think the 2.3% should – or even is – a “company and jobs killer” – as some say. But it FOR SURE does not work to reduce the cost of healthcare – or make it more affordable for people.

John Eckberg
Media Relations
Hello Mr. Morland,
Get back to me when you understand EBITDA.
Thanks

John Marland
Senior Developer at Automated Telemetry,LLC
Well – first it’s Marland
2. I thought I made clear that I was trying to get out of this “ever tax destroys jobs and every tax break creates jobs”
It was “magic” as in fantasy as in get a grip.

3. “ONLY nationalizing 2.3 percent of the sales, which translates into claiming 5% to 30% of some companies’ earnings”
Hmm…. sorry – not buying that one – the only devices that sell for a 7% total profit are the ones that have some little plastic gizmo that has to be ordered by the millions. I’ve worked on more than one medical device that went out the door at cost because of the millions made on the disposables – that’s not the same.
But I guess we have to keep those commies in Washington from nationalizing everything.

so – the off shore companies are making much (2.3% more) on each device and that makes a huge difference ?

Please
….JW

John Eckberg
Media Relations
Tell you what Mr. Morland, I’m assuming we agree on this – a new, untested tax that takes all the earnings of a U.S. company is a terrible idea. I’d think everybody can agree with that. But what about a tax that takes all the earnings from one division – or two divisions – a tax that claims all the earnings that are only there because some company executive or board of directors decided 20 years ago to invest millions in those divisions and paid countless number of employees year after year, paid dozens of sales and marketing employees year after year, paid them so that one day they could have earnings? What about a tax that takes all the earnings from those business units? How can that be a good idea.

It’s more akin to what happened in Jamaica when leaders of that sovereign nation decided to nationalize so many industries. But rather than nationalizing the entire industry, in this case, the great ship of state is essentially ONLY nationalizing 2.3 percent of the sales, which translates into claiming 5% to 30% of some companies’ earnings. Rather than claiming the entire company, our government, essentially, is just claiming by way of taxes ALL of the earnings from just a few divisions. I’ve said it once and I’ll say it until the day I can’t say anything: this is more akin to piracy than public policy.

It’s true that this may only be a haircut for some major companies, which will not be named, because they have billions in earnings. So what’s another $100 million lost to taxes, one of the people on this board pondered, after all when a company has $10 billion in sales. What’s wrong with a new tax that does that? For one thing, this tax means an incredible advantage to companies not based in the U.S. because they are starting off with a much much lower corporate tax rate. We compete in a global marketplace and companies with plants in, say,Spencer, Indiana, compete with products manufactured by companies with a headquarters in Switzerland (what, 3 percent tax rate?) that manufacture in India or Malaysia and dump those products on GPOs in Colorado or Florida or North Carolina – GPOs that are understandably happy to pay the lower price.

If you want to create a scenario that drives publicly traded companies to relocate factories off-shore, this tax is the way to do it.

Pass on the price hike to hospitals? Hah, that’s laughable. About 40 percent of hospitals operated in the red last year. You can pass along price increases in any way shape or form in this space. Some big companies are likely giddy over this tax because it’s going to lower their M&A costs in a year or two.

Bob Light
Director, Financial Systems at VBrick Systems, Inc.
It seems this thread has moved away from the topic, which was whether the tax represents a potential loss of 3000 new jobs at Medtronic. The answer of course is yes, no, maybe… A real analysis would involve researching Medtronic’s history of hiring/wages as related to net profit. One could probably assume that at least some portion of the kept tax dollars would result in new jobs, but certainly not 100%. However, additional increases in wages paid to current employees also have the potential to create new jobs, as those employees spend the incremental wages. Money spent on new equipment or upgrading facilities/plants would also have this effect.

Paying taxes is a necessary evil, to which most agree, as long as they don’t have to pay it…

Guy Hibbins
Medical Officer
The mantra that lower taxes are better only holds water if they do not blow out the deficit. Currently the US dollar is falling against currencies which have a much lower government debt to GDP ratio like the Norwegian Kronor or the Australian dollar.
In 2005 one Australian dollar was worth 50 US cents. Today the two currencies are on parity.
This is information is not lost on the so-called BRIC emerging economies (Brazil, Russia, India and China) which are moving away from trade in the US dollar for their own economic protection.
Since 2008, for example, China has made over US$300 billion in currency swaps of its own yuan currency in exchange for the currencies of its neighbors as hedge against what it sees as the inevitable day when inflation against other currencies causes the US dollar to cease to be the world reserve currency and China can no longer buy commodities cheaply using US dollars. When this happens the shock to the US economy will be considerable.

Harry Kitt
Systems Test Technician at Boeing
It’s easy to see that tax savings have the potential to keep or create jobs. Just like overeating stretches the stomach to allow bigger meals in the later evening. What guarantee is there that either of these things will occur?

Todd Staples, MBA
Account Representative, GYN at Medtronic
I think we can all agree that there is a fine balance between taxation and reinvestment of corporate profits to grow new and existing product developments. It is unfair to make a blanket statement that leads readers to believe med device company owners are running to the bank with their millions in profits, just like it is equally unfair to say that government never makes a just use of tax dollars. There are certainly examples of both and I do believe there is a balance to be sought out since some ideological utopia where we all agree is never going to happen.

Taxes are of course necessary, but it is absolutely beyond question in my opinion that keeping taxes low encourages investment by the private sector and promotes business. Some will always advocate for higher taxes because they loathe what they see as corporate injustice and favor their warm protective government, but there are an equal number of those who see things reversed.

What we need is balance. Reasonable taxes, reasonable regulation, reasonable corporate stewardship. Anytime things begin to push too far in one direction you see heated debate and animosity – and things get nasty. I believe that what we are seeing with this new tax is simply that taxation in THIS industry is pushing toward the boundaries that exceed the tolerance of many and cause those affected to push back. It is every bit the right and responsibility of those in our industry to push back when the government oversteps, just like it is the FDA’s role and responsibility to keep our industry in check with their own regulations.

Stuart R. Taylor
Quality Systems Professional with QE, QA, and QC experience seeking opportunity in Medical Devices and Pharmaceuticals
@ Harry – No, what we have here is the lazy, “let’s create a new tax to solve a problem” argument. And oh, let’s use a bunch of hyperbolic and clever but irrelevant statements to support the case.

I’m sorry, but turning a paramecium on its head is a clever saying, but unfortunately, it makes no sense here and is completely irrelevant and pointless in addressing the issue.

You come up with some clever sayings and verbiage, but you make no sense to me : )

If you are fair and accurate, I presume the “flag toss” goes to John Marland. All I did was turn his own intolerant and illogical comment back on HIM to the hypocrisy, as if anyone has a monopoly or jurisprudence on correct thinking of highly educated people. You insinuated that my “scolding” was directed to all (and not just him), in which case it shows you didn’t read or understand what I wrote.

John Marland
Senior Developer at Automated Telemetry,LLC
Goodness – did I gore someone’s ox?
Anyway – if you read more closely you’ll see that I declared both plans to
be “magic” and well all know , there’s no such thing.
….JW

Harry Kitt
Systems Test Technician at Boeing
What we have here is the lazy, “Any tax is bad” argument that you find everywhere. Easy to get agreement since paying the least possible is a simple goal for simple consumers. If we turn this paramecium on its head, it will starve itself to death.

If an economy has only so much capacity, do we give the edge to those who always need extra boosts and tax breaks? Do they really expect that their weakness is the strength of their argument?

What we are hearing is that its better to burn the house down than to be told by the government that we should clean it. I thought the critical thinking cheap shot would garner a flag toss, so you all think we deserved the scolding.

Patrick Mize, PhD
Passed away on May 10 2018
Independent of the trueness of John’s question and the perceived answer there seems to be a lot of bashing of the FDA. Can we have an industry without an FDA? I really shudder to think of a country like China and their FDA and that medical products shipped to the US from China and others really cannot be trusted.

If the FDA is crap it is because our industry’s lobbying of congress formed the laws that dictate the agency’s activities. Legislation for the most part starts because industry members perceive some slight and want some protective legislation or, more usually, starts because patients have been injured or killed. Has industry formed an independent non-governmental watchdog capable of policing its members? Does industry clean up its act and really follow some sort of GMPs? We should stop whining…
Disclaimer: I too have been in failing startups because of regulatory burdens and organizations that moved manufacturing because of seemingly favorable economics elsewhere. I also have had many difficult conversations with the FDA where their employees could not be educated.

Stuart R. Taylor
Quality Systems Professional with QE, QA, and QC experience seeking opportunity in Medical Devices and Pharmaceuticals
@ John Marland – “taxing the living daylights out of products” isn’t a statement I would have expected from someone who complains about the logic of “highly educated people”. Your “magic formula” is not sound at all and is more like some gimmicky smoke and mirrors. It’s stunning to me how many people resort to taxing things to solve problems.

It’s funny, but I thought the exact same thing about your comment when I read your comment: “For a forum that is supposed to be populated by highly educated people capable of critical thinking I have to say that’s a surprising thing to encounter here.”

Stuart R. Taylor
Quality Systems Professional with QE, QA, and QC experience seeking opportunity in Medical Devices and Pharmaceuticals
@ Harry Kitt, I disagree with you and I believe your apparent trust of government stewardship is grossly misplaced, based on your statement: “When government taxes a portion of it, they tell you where it goes. Usually for social benefit, such as education.”

“They tell you where it goes?” and “USUALLY”? Don’t think so : )

John Marland
Senior Developer at Automated Telemetry,LLC
I’ll just add and then shut up – that there is a pervasive belief that if you mix giant tax breaks with billionaires or billion dollar corporations you get jobs, like some magic formula.
For a forum that is supposed to be populated by highly educated people capable of critical thinking I have to say that’s a surprising thing to encounter here. The magic has never worked, isn’t currently working and won’t work in the future.

Ok, I’ll forward the theory that if you tax the living daylights out of products already on the market, it will stimulate companies to develop more products because it’s the only way to make money, thereby creating many high paying research jobs.
Say a graduated tax that starts at 0% for the first two years a new drug/device is on the market and goes up by some amount , say 8% every year until the patent runs out. Then when anyone can make it and the price goes down, no tax at all.
My magic formula is just as sound as the other and will create just as many jobs.
….JW

Harry Kitt
Systems Test Technician at Boeing
Following the money is what we are asked here. One says it goes to a job. Another says it goes to a pocket. The latter is always true. The former is an unproven option. When government taxes a portion of it, they tell you where it goes. Usually for social benefit, such as education.

Guy Hibbins
Medical Officer
Every industry would like to be taxed less rather than more and would do better if it alone paid less rather than more tax. For example, the mining industry in Australia opposed paying more tax recently, despite record levels of profitability.
However, governments need to look at the big picture and the overall profitability of the industry.
The effects of taxation on the economy are subject to economic modelling and it is not a valid argument to say that any tax increase is bad because it would hinder job creation. If we do not pay for our expenditure we will all end up like Greece. Bankrupt.
The appropriate level of taxation will depend upon many factors, but simply reducing taxation without reducing expenditure is a recipe for disaster.
It will not only not create jobs it will create job losses due to a prolonged economic downturn. This is dealt with very well by HS Dent in his book, the Great Crash Ahead.
He points out that the US has some $66 trillion in unfunded liabilities in Medicare and Social Security over the coming decades.
This is nothing new to Treasury economists. There has simply been a lack of political will to address the problem.
Australia saw this coming 50 years ago as a result of long term economic modelling, and introduced means testing of social security pensions in order to encourage baby boomers to save for their retirement, thus avoiding the need for unsustainable levels of taxation.

Harry Kitt
Systems Test Technician at Boeing
Being anti-tax is one dimensional and not praiseworthy. Compare it to blaming your parents when you have to be told to clean up your room. The “small tax – job” loss ploy is a red herring. With every choice ambivalence exists. Slanting it to one side asks that the negative portion be shifted elsewhere that may not touch the arguer.