The real story here is in the nature of the acquisition, a so-called "inversion" that will create a combined Canadian, rather than American, company, which is likely to substantially reduce Burger King's corporate tax liability.
This is not entirely correct. The reduction in tax liabilities will be much smaller than you might expect and this is not a merger motivated purely by that. For an in depth discussion see [1].
Very interesting read, and thanks for the link. Had no idea that the King had fallen on such hard times (or maybe that Tim was comparatively doing so well) Almost double the owned assets ($1.5 B vs $0.8 B) and nearly triple the total revenue ($3.0 B vs $1.1 B). The King may be valued higher for its IP, but it appears like Tim is running a significantly better core business. Admittedly, Tim is basically a monopoly in its home market. At best, this looks like a merger of equals, rather than an inversion; if not a big, but unknown, player buying a weak, but well known, competitor in a new market. Very similar tact as many foreign companies (UK, Japan, German, Chinese) have done in other sectors like tech (doubled from 1996-2005). [1]
Right, I don't think that's the only motivation, but it seems like it's at least part of it. If I read that article correctly, almost half of Burger King's locations are outside the US and Canada, and the revenue all of those locations, as well as the Canadian ones (however many of those there are) should see a reduction in tax liability; further, that slice of the pie is growing, as Burger King's US presence is shrinking while its foreign presence is growing.
So? -- Seems like a smart business move, if that is really the case.
I'm getting tired of people trying to name-n-shame companies that are leaving the US in favor of substantially better tax laws.
Instead of groaning and trying to patronize these companies with some sort of nationalist pride, how about we do something about the damn tax laws that are making companies want to leave in the first place.
Sure, because a race to the bottom (the best tax rate from a companys perspective? 0%) is exactly what the world needs. I've never understood why companies should only be liable to taxes in the country they are incorporated in. You do business here? Then you pay tax here.
There are a lot of things that can be done without a so-called "race to the bottom".
- Why does it require a team of lawyers and tax experts just to haphazardly understand the tax law well enough to submit a corporate filing?
- Why does America have the highest corporate tax rate in the world? (besting the next highest country by 4%)[1]
- Why do we double tax corporations that earn revenue off-shore? (they pay taxes in the country they earned the revenue in -- then we tax them again if they bring that money back into the country -- effectively encouraging corporate like Apple to keep billions of USD offshore)
Well, I'd rather have a race to the bottom on tax rates, rather than the race to the top that governments seem keen on.
In reality, it the tax rate wouldn't need to go to zero - just low enough that the cost of paying it outweighs all the costs (PR, resource issues, relocation costs etc etc) of moving to a lower tax regime.
While I agree with you, on the flip side the alternative is that they don't sell their goods here, and people wouldn't be very happy about that. You have to draw a line somewhere to decide what's a reasonable price/tax/etc. for everybody, but it's not really an easy thing to do.
> "the flip side the alternative is that they don't sell their goods here"
That's a silly concern. Businesses do not forgo profit simply because they'd prefer if there were more. They always prefer if there were more. And yet they still seek the profit that's available. So long as cost/benefit suggests the US is a profitable market, they will continue to sell their goods here.
The only "risk" of corporations "taking their ball and going home", is if the United States pursued a transparently self-destructive tax rate on foreign-based corporations. Which there is absolutely no reason to expect would even enter rational conversation.
Imagine a husband and wife are talking about what car they should buy next and they disagree on the budget. The analogous case to a tax rate so high corporations leave the US market, is the husband deciding to burn the house down so that there's no garage and no money at all.
While that's certainly a possible alternative to negotiating their differences, discussing that alternative is, at best, silly. And attempting to ascribe serious weight to the possibility is downright intellectually dishonest.
I have to disagree. They will go other places if those places aren't going to tax them as much and they expect a similar return. Obviously with Burger King, they're basically everywhere already so it doesn't matter as much, but if the profit margin in the US is smaller then other countries because of tax they'll consider putting stores somewhere else if it's more profitable.
That said, IMO the concern with them selling their goods somewhere else isn't that we won't be able to eat their burgers, but that they employ tons of people at their stores. People are going to be pissed if Burger King decides they're going to close down their slower stores in the US and open some new stores elsewhere that doesn't have tax because they'll end-up making more.
I agree in that we could put a tax in place without anything imploding, they aren't just going to run away obviously. The question is more can we implement a tax which would be worth the money we'd make off of it without it resulting in Burger King closing places around the country because they're not profitable anymore.
Both the possibility that corporations may not come to the US market, or may only come to the US market after having expanded into other, more-profitable markets require an assumption that the US would (substantially) raise taxes above the current level.
We're hypothetically setting out to close a loophole that results in two distinct effective rates, a lower rate A for foreign corporations and a higher rate B for US-based corporations.
So, again, why should we spend any time worrying about what might happen if we were to introduce an even higher rate C? No-one's talking about that. It's not on the table. It's not remotely politically plausible. It's not even a thing anyone's seriously proposed.
Talking about it is either entirely besides the point, or a motivated attempt to conflate closing the loophole with raising rates to C, to scare people away from trying to close the loophole.
> The only "risk" of corporations "taking their ball and going home", is if the United States pursued a transparently self-destructive tax rate on foreign-based corporations. Which there is absolutely no reason to expect would even enter rational conversation.
What's more likely is that corporations would split into the global corp, and the US corp. The US corp pays the high taxes and does work in the US. The global corp owns all the IP, and leases it to the US corp for some amount of money.
I agree it's unlikely, at least a full pull-out of the market is basically never going to happen. But if they were to get a somewhat high tax I'd expect their lower-profiting stores may end up getting closed down because they're not worth keeping open (IE. They're basically making nothing off of them after tax, but they could sell them off and then open a store somewhere else that may now be profitable since the US costs more to have stores).
Assume the USA lowers taxes until again it is attractive to relocate businesses there. The obvious happens, and businesses move to the USA. Yay!
But other countries don't appreciate this loss of business and retaliate by lowering their taxes. Businesses again leave. So the USA lowers theirs again, and so on and so forth.
Eventually you hit a point where one country breaks and can lower their taxes no further, but everyone suffers, because taxes are now so low that revenue gained from the aforementioned business taxes is basically nothing.
That is a very simplified view of how taxation works. There is quite a bit more to corporate taxes in American than just the percentage.
The bothersome part is, people seem to think our country is just so great that businesses should want to pay ludicrous taxes here, almost like it's patriotic to pay higher tax rates among other things. Well, it's not.
If that was how taxes worked, everyone would move to Texas, Florida, Washington for the lack of state income taxes. And or every state in the US would have zero income tax.
And every company on earth would be in Ireland. Or every country would already have 0% corporate income taxes by now.
And the US would have lowered its corporate tax rates a very long time ago because they would have to in order to compete.
And countries with high personal income taxes (eg France) would be 'forced' to lower their income tax rates to compete with low income tax rate countries.
While you see relatively small scale effects like this, it is not as dramatic as you make it out to be. There would be no race to zero.
In fact, there is zero evidence of your scenario having ever played out on a global scale in the past century of well monitored public economic data. If a race to zero were even possible, it would have already been forced into existence, as any variance would be enough to trigger the beginning.
That is a wise plan and it is exactly how it works. Every country charges exactly the highest tax they can charge without driving business away. But the tax rate is not the only thing the business has to consider. They have to consider stuff like labor costs, established case law, cost of regulatory compliance, likelihood of civil unrest, corruption, etc. If a country creates conditions are good for business then a country may be able to charge a higher tax without driving business away.
Let’s accept your premise. Every country competes to provide the best business environment except one. One country doesn’t compete, on principal, because the result will be that “everyone suffers”. Now who suffers?
I don't think I made a value judgment there. I have no objection to Burger King pursuing this strategy. I just think that motivation is part of the story -- it's not just about selling donuts in Canada, and the business aspects are worth reporting on, if for no other reason than to increase awareness about exactly the US tax law deficiencies you describe.
The Laffer curve for people certainly exists at a point (say, a 70% tax rate), but it is silly to state it is applicable now - for real-world evidence, look at the tax receipts under the Bush presidency, or Sam Brownback in Kansas. Laffer is a smart dude, but the Laffer curve is not an authoritative law as much as a rule of thumb that applies in a few, limited situations.
I wouldn't say it's a law - just a formalisation of common sense: You can't raises taxes indefinitely, and the higher the tax rate the greater the lengths people will go to to avoid it.
Well since we throw people in prison for avoiding taxes, is it really that unreasonable to 'name and shame' corporations that are basically doing the same thing through clever legal wrangling?
People are imprisoned for evading taxes, not for avoiding them. If the law says you don't owe a particular tax because you moved to Canada, why would you pay it?
