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.
Source: Forbes
Justice Holmes
Boycott Burger King!
Companies that enter into inversions should be excluded from any federal contracts or benefits.
——————————
They used to be. There was a Federal Acquisition Reg clause that prevented contracts and grants to inverted domestic corporations. But that clause expired after fiscal year 2012.
Talk to the FAR council or DoD if you want it reinstated. I sent them my comments a year ago and got no response.
Interesting paper, Groty. Thanks for sharing it. I’m still reading it, but I liked this from the Intro:
“In 1987, Ireland began cutting its 50 percent corporate tax rate to 12.5 percent – the rate reached in 2003. As a consequence, the country experienced a massive inflow of capital, with over 1,000 multinationals setting up shop. The list includes Motorola, Delly, Wyeth, Intel, Microsoft, IBM, Citigroup, and Bristol-Myers Squibb. The extra investment drove growth. Indeed, between 1987 and 2007, Ireland’s GDP growth rate averaged 6.4 percent per year compared with 3.7 percent per year between 1971 and 1987.”
Jim, Along w/ cop haters, we have a strong contingent or rich haters.
Paul C., That’s Hollywood, they get a pass on all things hypocritical.
Paul, Great point. And that going to Canada to make films has been ongoing for decades now. When liberals go to Canada for tax breaks that’s fine. But, when a greasy burger chain does it then it’s treason. Those tax and spenders are hypocrites.
Nick – film stars and executives are heavy donors to the Democratic Party and their candidates. You don’t want to upset them.
bettykath – “Unless you have a mortgage or high medical bills, the standard deduction is used by most people. The very rich have lots of deductions as do corporations. They don’t pay the full rate, so don’t try to cry on my shoulder.”
Or you are married or have kids or kids in college or you are going to college or own a rental property or have a vehicle for a business or …….. These are all personal choices that give you tax breaks. Stop envying the rich instead aspire to be one. If you can’t do that, then stop complaining.
Great piece! And Michael Haz, you are a superb addition here. The point that is so obvious is that is the fiduciary responsibility for a corporation to maximize its profits. BK would be wrong NOT to do this. The solution is simple ands logical. Lower US tax rates. Otherwise, Canada will be giving enticements to other companies. The hand wringers here don’t whine when one state lures a company from another state w/ lower taxes. That’s basic competition. So, why is it “unpatriotic” for BK to move to our good friend, Canada? You say “lower taxes” to the Dem cultists and they have seizures.
Nick – I do not see people asking for a boycott of film studios because they are filming in Canada, which is a lot less expensive. Where is the fairness here?
Unless you get a girlcott as well as a boycott there will be little effect on Burger King. Sherodd Brown should know this. Odd Duck Brown they call him.
Actually, Boston University economics professor Laurence Kotlikoff has a study showing a race to the bottom – where the bottom is defined as a corporate income tax rate of 0% – is exactly what we need. Unsurprisingly, his models show that it will lead to greater investment, capital formation, economic growth, employment and incomes (duh). But what may be surprising to some is that the poor will benefit considerably. As I remember it, the people in the bottom 20% income bracket will see a permanent increase in real income of 12%.
http://www.kotlikoff.net/sites/default/files/CorporateTaxPaper_Current.pdf
Unless you have a mortgage or high medical bills, the standard deduction is used by most people. The very rich have lots of deductions as do corporations. They don’t pay the full rate, so don’t try to cry on my shoulder.
bettykath wrote: “The very rich have lots of deductions as do corporations. They don’t pay the full rate, so don’t try to cry on my shoulder.”
What are you trying to say? If I pay an employee a wage, that I should pay taxes on that pay before I pay him? If I buy my employee a chair to sit in, and a desk to work on, and a computer, that I should pay taxes on the money I use to do that? Is that what you are saying?
If that is what you are saying, perhaps some corporations would respond by making employees buy their own furniture and pay rent to the corporation for their office space. I think a smarter plan is to not tax corporations at all.
It might not be a bad idea to get rid of the direct individual tax also, and go back to the taxing that existed 101 years ago in this country, before the 16th Amendment was passed. If only there were no Democrats, such a thing might actually be possible.
I rarely go to Burger King anyway, so whether they invert or not is up to them. My going or not going is not dependent on how they pay their taxes. If it is legal, then they are working for their shareholders to make more profit using the same income.
The French raised their top income tax rate. Rich people moved out of the country for tax purposes. Not sure if it is true now, but the Irish used to not tax artists which is why John Ford was domiciled there. People who move to Arizona from Eastern states are constantly surprised at how low our property tax rates are.
If the richest corporations are being ripped off by high taxes, why do so many of the pay zero and even get money back? GE, Verizon, Boeing, various energy companies, to name a few. I’d boycott BK but I never eat there anyway.
Boycott Burger King!
Companies that enter into inversions should be excluded from any federal contracts or benefits.
It looks like Warren Buffet is providing $3 billion of “preferred equity financing” that will make the deal possible, according to this CNBC article. http://www.cnbc.com/id/101946713
Boycotting BK is a good idea, but not because it tries to maximize profits – it’s mission as a corporation. It’s a good idea because the human body stores fat for potential future use. Burgers, fries, shakes, are filled with fat. The human body turns sugar, starch, and carbs into fat. Buns, fries, and everything else on the menu are filled with fat, sugar, starch, and carbs. It tastes good. People destroy their health and their environment by consuming that type of food. Switch to veggies, nuts, legumes and quinoa and you will look better, feel better, have more energy, save the environment, save money, and punish BK.
Excellent analysis, professor. I loved the way you ended it about serving mayonnaise with the french fries.
Michael,
There’s two sides to this: legal and political.
Legally BK most likely can invert their corporation.
Politically people want to string them up by their toenails because reasons.
Right, got that. Adding a bit of morning levity tot he conversation.
Obama doesn’t follow the law and he is cheered by members of his party. Burger King follows the law and is boo’d by Democrats. Go figure.
If BK is adhering to IRS law and regulations, they should be able to do the inversion. It’s legal. Where this gets murky is if BK decides to change the Tim Horton’s menu or product or image from what it now is into something the BK marketing geniuses think it should be. That, my friends, will start a land war between Canada and the US, with breakaway states in the northern US tier joining the Canadian side.
Jim,
But, but, but… OK.
I’m sure most of you have seen this before. But the “inversion” talk makes me think of it.
Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:
The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.
So, that’s what they decided to do. The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. ‘Since you are all such good customers, he said, ‘I’m going to reduce the cost of your daily beer by $20. Drinks for the ten now cost just $80.
The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. What happens to the other six men – the paying customers? How could they divide the $20 windfall so that everyone would get his ‘fair share?’ They realized that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man’s bill by roughly the same amount, and he proceeded to work out the amounts each should pay.
And so:
The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33% savings).
The seventh now pay $5 instead of $7 (28% savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).
Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings.
‘I only got a dollar out of the $20,’ declared the sixth man. He pointed to the tenth man, ‘But he got $10!’
‘Yeah, that’s right,’ exclaimed the fifth man. ‘I only saved a dollar, too. It’s unfair that he got ten times more than I!’
‘That’s true!!’ shouted the seventh man. ‘Why should he get $10 back when I got only two? The wealthy get all the breaks!’
‘Wait a minute,’ yelled the first four men in unison. ‘We didn’t get anything at all. The system exploits the poor!’
The nine men surrounded the tenth and beat him up.
The next night the tenth man didn’t show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important.
They didn’t have enough money between all of them for even half of the bill!
And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.