Burger King is close to a deal that would acquire Tim Horton’s (Canada’s huge corporate version of Dunkin’ Donuts). It is more than a corporate expansion however. The move would allow Burger King to justify a “tax inversion” where an American company merges with a foreign company and then reincorporates abroad to fell under a more beneficial corporate tax rate. So long as shareholders of the Canadian companies end up owning at least 20% of the shares of the new parent company, you can escape the high corporate tax rate. I have previously criticized the corporate tax rate — and tax policies in general — as irrational in light of the lower rates in nearby countries. During the last campaign, even Obama admitted that our corporate tax rate is too high but there was never action to reduce it. The White House however recently asked for legislation to stop the inversion maneuver while Senator Sherrod Brown is calling for a boycott of Burger King.
We have previously discussed tax policies on this blog, though I am in the minority in criticizing the rising tax rates in states and cities. I have long been more conservative on tax and spending issues than many here, but I have enjoyed the different viewpoints. Companies and citizens are rational actors. When cities and countries have raised taxes to unacceptably high levels, they have seen an exodus of top taxpayers (which worsen the over tax base). Almost fifty companies have carried out inversion to avoid our high corporate rate and the pace is quickening.
Unfortunately, it remains popular to blame top earners and companies for not paying enough and to seek higher and higher taxes like they are a captive audience. The result of this approach has been disastrous in France. As they previously discussed how top earners are fleeing France in the wake of massive tax increased under Socialist French President Francois Hollande. Hollande’s popularity is now down to the teens (17 percent) and more importantly his economy is on life support. He just dissolved his government as businesses shutdown in the country and his economy contracts. The European Union is demanding reforms from the high spending and high tax approach.
In our country, we have continued to ignore the fact that other Western countries offer a far better deal for corporations. Canada’s corporate rate is 15%. Even when you add the 11.5% rate for Ontario, that is just 26.5% compared to our rate of 35%.
In a comparison of developed countries to what companies pay in the U.S., Canada requires only 53.6% of the U.S. tax burden while the U.K. is only 66.6% and the Netherlands require only 74.5%.
None of this tends to matter when politicians continue to campaign on the notion that corporations are not paying enough taxes and corporate welfare. I agree with some of these criticisms of tax loopholes and I have been a critic of government buyouts and subsidies. However, tax politics continues to rage in the absence of objective discourse. We cannot expect large corporations, particularly publicly held corporations, to remain headquartered in this country when our allies offer substantially lower tax burdens. That does not mean that we should engage in a race to the bottom with the Harper Administration in Canada. We still have many things to offer companies, but the rate of inversions is precisely what many people warned about when our corporate rate outpaced many of our Western partners.
The true impact of these tax policies will be brought home when they start serving mayonnaise with the fries at BK.