Free Markets, Free People

In support of Burger King

I’ve never really been much of a Burger King fan, but guess what I’m having for lunch today?

Why?  Because Burger King has given us an opportunity to point out one reason why our economy is lagging. And, as usual, it has to do with government policy.  Politicians would like to play the blame game and point at corporations like Burger King moving to Canada (after a merger with Canadian based Tim Hortons) as the reason.  Instead, it is the federal government’s oppressive and unprecedented corporate tax rate that is helping to keep our economy floundering by providing incentive for corporations to leave.

Megan McArdle writes a great column today.  To begin with she cites a paragraph from Matt Levine that makes the point that most in the media and almost all politicians opposing the merger fail to make:

The purpose of an inversion has never been, and never could be, and never will be, “ooh, Canada has a 15 percent tax rate, and the U.S. has a 35 percent tax rate, so we can save 20 points of taxes on all our income by moving.” Instead the main purpose is always: “If we’re incorporated in the U.S., we’ll pay 35 percent taxes on our income in the U.S. and Canada and Mexico and Ireland and Bermuda and the Cayman Islands, but if we’re incorporated in Canada, we’ll pay 35 percent on our income in the U.S. but 15 percent in Canada and 30 percent in Mexico and 12.5 percent in Ireland and zero percent in Bermuda and zero percent in the Cayman Islands.”

Got it?  The US government does something no other first world government does.  McArdle explains:

The U.S., unlike most developed-world governments, insists on taxing the global income of its citizens and corporations that have U.S. headquarters. And because the U.S. has some of the highest tax rates in the world, especially on corporate income, this amounts to demanding that everyone who got their start here owes us taxes, forever, on anything they earn abroad.

This is a great deal for the U.S. government, which gets to collect income tax even though it’s not providing the companies sewers or roads or courts or no-knock raids on their abodes. On the other hand, it’s not a very good deal for said citizens and corporations, especially because our government has made increasingly obnoxious demands on foreign institutions to help them collect that tax. Both private citizens and corporations who have a lot of income abroad are deciding that they’d rather renounce their ties to the U.S. than deal with the expense and hassle of letting it tap into income that they have earned using some other country’s roads and sewers and police protection.

Practically speaking, global taxation is hard to enforce and loaded with bad incentives, which is why our fellow members of the Organization for Economic Cooperation and Development have moved away from global taxation of corporate income, and abandoned global taxation of personal income. If anything, the U.S. has gone in the other direction — by insisting, for instance, that foreign companies report various financial transactions with U.S. citizens to the Internal Revenue Service, and taxing foreign cost of living allowances, which makes it more expensive for companies to employ expats. On the corporate side, the Barack Obama administration has repeatedly suggested tightening up on tax deferral of foreign income and other credits, which would make it even more expensive to be a corporation based in the U.S.

So why base in the US with this being the case?  Why wouldn’t any sane US based corporation be trying to find a remedy to this pernicious and oppressive tax code?  In reality, this describes it rather well:

[I]t boils down to “the police kept people from sacking your first headquarters, so therefore you owe us 35 percent of everything you make, forever.” Loan sharks and protection rackets offer more reasonable terms than this.

Yes, they likely do.   You know you have a problem when more and more of government begins to resemble criminal gangs.  And that’s where we are headed.  Instead of looking at a solution that will benefit a corporation and give them an incentive to remain and pay taxes, our government and the politicians seem bound and determined to make the corporation the bad guy with absurdly Orwellian insults like “economic patriotism” and “corporate deserters”.  This, instead, should be the bottom line:

If we’re worried about inversion, then the U.S. government should follow the lead of other developed countries, and move to territorial taxation. Otherwise, we should stop complaining when people and corporations decide that they’d rather be a citizen of some more sane system somewhere else.

Indeed.

~McQ

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