[pullquote]Businesses are trying to make money, and our politicians are trying to punish them for it.[/pullquote]
This week, Burger King has started making moves to buy Canadian doughnut shop Tim Horton’s. Part of the deal includes the American burger joint moving its headquarters to Canada. The reason? Taxes (emphasis mine):
By moving to a lower-tax jurisdiction, inversion deals enable companies to save money on foreign earnings and cash stowed abroad, and in some cases lower their overall corporate rate. Even though many of the headline-grabbing inversion deals of late have involved European companies, Canada has also been the focal point for a number of them, given its proximity and similarity to the U.S. Canada’s federal corporate tax rate was lowered to 15% in 2012.
That 15% is significantly lower than the 35% federal rate here in the US. When you factor in state and local taxes, BK’s effective US tax burden is a whopping (see what I did there?) 39%. Canada’s effective tax rate is 26.3%. The label applied to this practice is called “tax inversion.” Here’s how Wikipedia describes it (emphasis mine again):
Tax inversions are a form of tax avoidance. They are driven by a combination of factors, but the most prevalent factor is that the U.S. tax code (unusually amongst developed nations) seeks to impose income tax on profits earned abroad by American corporations. This creates a strong incentive for American companies with large overseas markets to seek to recharacterise themselves as a foreign corporation if they want to return foreign earnings to stockholders without double taxation.
Tax inversions as a tax-reduction maneuver have become a public policy issue, as substantial tax revenues are lost.Politicians and government officials including Barack Obama and Jack Lew have issued statements calling tax inversions “unpatriotic”, and various proposals have been discussed to prevent tax inversions where the relevant corporation is less than 50% foreign owned. The Economist has called recent calls in America to restrict companies from relocating abroad by way of merger “misguided”, and called for wider tax reform to address what it describes as more fundamental flaws in the American corporate tax system instead.
See that? Here we hit the nitty gritty of it: Businesses are trying to make money, and our politicians are trying to punish them for it. The purpose of a business is to make money by providing goods and services to customers. Sadly, our economic policies in general and our tax policies in particular are making it increasingly and intentionally difficult for businesses to turn a profit.
Obama sees these companies leaving and calls them “unpatriotic.” Socialist Senator Bernie Sanders says the move shows BK’s “contempt” for America. Commenters on Burger King’s Facebook page are wailing and gnashing teeth, vowing never to eat there again if the deal goes through.
(It should not be difficult to understand the logic behind Burger King’s move. But, we are dealing with an electorate that elected Obama twice, so some cognitive disconnect is to be expected.)
So what’s the solution?
The fact is, the US is hemorrhaging jobs and businesses. We have a record number of underemployed workers, particularly among minorities, and a record number of people on some type of government assistance. Proposed minimum wage increases will only exacerbate the problem. Burger King isn’t the first to bail, and they won’t be the last.
I have long been in favor of the Fair Tax, a sales tax that “replaces federal income taxes including personal, estate, gift, capital gains, alternative minimum, Social Security, Medicare, self-employment, and corporate taxes.” I’d even settle for a flat tax. Either would be a big but welcome change.
There are lesser measures that can be taken, such as tinkering with the current monster of a tax code. But, when you even have a Harvard economics professor writing in the New York Times in favor of eliminating corporate taxes, you know we’re in trouble. I disagree with Mankiw’s call for a value added tax (the Fair Tax is NOT a VAT), but he’s at least pointing in the right direction.
While a Fair or flat tax would go a long way towards improving our economy, neither will happen with Democrats in charge of the Senate and Obama in control of the White House. We’re going to need strong, conservative, economically smart leadership. We get a shot at the Senate this November, and another shot at the White House in 2016.
We have to get it right this time.