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.
Durable Goods orders for July soared by 22.6%, Sadly, it was all due to aircraft orders. Ex-transportation, orders fell -0.8%. On a year-over-year basis, orders were up 33.8% overall, but only 6.6% excluding transportation orders.
The FHFA purchase only house price index rose a respectable 0.4% in June, but the year-on-year rate slowed by -0.4% to 5.1%.
The S&P/Case-Shiller home price index fell -0.2% in June, though it was up 8.1% on a year-over-year basis.
The Conference Board’s consumer confidence index for August once again rose above expectations, up 1.5 points to 92.4.
The Richmond Fed manufacturing index rose 5 points to 12 in August, as manufacturing strengthened in the mid-Atlantic district.
The State Street Investor Confidence Index rose a very sharp 7.0 points in August to a very strong 122.8.
ICSC-Goldman reports weekly retail sales rose 0.6%, and were up 4.2% on a year-over-year basis. Redbook reports a 4.0% rise in retail sales over last year.
The Chicago Fed National Activity Index, a gauge of overall economic activity and inflationary pressure, rose 0.27 points to 0.39 in August.
The PMI Services Flash for August fell -1.5 points to 58.5.
New home sales rose for July rose less than expected, coming in at an annualized rate of 412,000.
The Dallas Fed general business activity index fell from 12.7 in July to 7.1 in August.
I’m not sure how else you interpret this “inversion” nonsense.
Burger King Worldwide Inc. is in talks to buy Canadian coffee-and-doughnut chain Tim Hortons Inc., a deal that would be structured as a so-called tax inversion and move the hamburger seller’s base to Canada.
The two sides are working on a deal that would create a new company, they said in a statement, confirming a report on the talks by The Wall Street Journal. The takeover would create the third-largest quick-service restaurant provider in the world, they said.
The point of this sort of a merger, beside the business aspect, is to move the headquarters of Burger King to a lower tax nation:
Inversion deals have been on the rise lately, and are facing stiff opposition in Washington given that they threaten to deplete U.S. government coffers. A move by Burger King to seal one is sure to intensify criticism of them, since it is such a well-known and distinctly American brand.
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.
And surprise – Canada’s economy is picking up steam and corporations are eyeing it as a place to locate. Imagine that.
Canada’s corporate tax rate in Ontario of 26.5% (the federal rate of 15% plus Ontario’s provincial corporate tax rate of 11.5%) is considerably favorable to the American corporate tax rate of 35% thanks in large part to the conservative Canadian government led by Stephen Harper. The Harper government lowered the federal tax rate to 15% in 2012 down originally from 28% since it took office in 2006.
In fact, a recent KPMG Report, Focus on Tax, ranked Canada as the #1 country with the most business-friendly tax structure among developed countries when adding up a wide range of tax costs to businesses from statutory labor costs to harmonized sales tax. When comparing developed countries to what companies pay in the U.S.; Canada came in at 53.6%, the U.K. came in at 66.6%, and the Netherlands at 74.5% of the U.S. corporate tax burden.
Meanwhile, our politicians are trying to find a way to prevent that, because, well because they apparently think corporations work for them and exist to pay whatever tax rate they deem necessary. Of course, in a free country, this wouldn’t even be an issue. Corporations, like people, have the right to move wherever they wish. It is their call, not the government’s.
But, here that’s not the case:
Burger King’s possible merger to obtain the favorable Canadian corporate tax rate is a true reflection of the American corporate tax rate being the highest in the OECD. However, rather than taking the same stance on outright cutting the corporate tax rate as the Harper government did to keep the U.S. a competitive place to do business, President Obama calls tax inverting companies like Burger King “corporate deserters who renounce their citizenship to shield profits”. At the urging of President Obama, Congress is considering a bill to make it harder for companies to change addresses abroad. Treasury Secretary Jacob Lew called for a “new sense of economic patriotism,” asking Congress to pass curbs to inversions. The Treasury Department currently is also preparing options to deter or prevent corporate tax inversions potentially on its own.
“Corporate deserters”. “Economic patriotism”. It’s Orwellian Newspeak at its finest. Imagine anyone trying to “shield profits” from a grasping and out-of-control government. It is also another, in a long line of indicators, that this is no longer a free country in the sense we used to believe it was. It is now a country where every other entity is subservient to the needs or wants of intrusive, controlling government.
The PMI Manufacturing Index Flash for August rose 1.7 points to 58.0.
The Philadelphia Fed Survey for August rose a sharp 4.1 points to 28.0, a rise not supported by the report’s underlying indices. Both new orders and shipments slowed by half, while unfilled orders are shrinking and delivery times are improving. All of these are symptomatic of slowing activity. The headline number is not a a composite of components but is based on a single subjective question in the survey. This month, at least, the answer to that question seems at variance with the other indices in the report.
Existing home sales rose 2.4% to an annualized rate of 5.15 million units in July.
Initial jobless claims fell 14,000 last week, to 298,000. The 4-week moving average rose 5,000 to 300,750. Continuing claims fell 49,000 to 2.500 million.
The Bloomberg Consumer Comfort Index fell -0.2 points to 36.6 in the latest week.
The Fed’s balance sheet fell $-19.0 billion last week, with total assets of $4.412 trillion. Reserve Bank credit fell $-3.7 billion.
The Fed reports that M2 Money Supply fell by $-8.7 billion last week.
The Consumer Price Index rose 0.1% in July, at both the headline and core level. On a year-over-year basis, the CPI is up 2.0% at the headline level, and up 1.9% less food and energy.
July housing starts jumped 15.7%, to a 1.093 million annual rate.
ICSC-Goldman reports weekly retail sales fell -1.3%, but were up a strong 3.8%% on a year-over-year basis. Redbook, meanwhile, reports a slowing to 3.7% in retail sales over last year, compared to 4.8% last week.
The Producer Price Index for total final demand slowed to 0.1% in July. Prices excluding food & energy rose 0.2%. Prices excluding food, energy, and trade services increased 0.2%. Prices for goods were unchanged, while services rose 0.1%. On a seasonally adjusted year-ago basis, PPI final demand was up 1.7 %. Excluding food & energy, PPI final demand was up 1.6%.
The New York Fed’s Empire State Manufacturing Survey fell to 14.69 in August vs. 25.60 in July.
Net foreign demand for long-term U.S. securities fell to $-30.2 billion in June. Foreign accounts were heavy sellers of Treasuries and corporate bonds.
Industrial production in July rose 0.4%, while capacity utilization in the nation’s factories rose 0.1% to 79.2%.
The Reuters/University of Michigan’s consumer sentiment index in August fell -2.6 points to 79.2.
E-commerce sales rose a very sharp 4.9% in the second quarter of 2014, compared to 3.3% in the first quarter.