In the business headlines today it was announced that Burger King is in talks to buy Tim Horton's, a well-known chain in Canada, and that BK will move its headquarters to our northern neighbor and become a Canadian corporation for tax reasons. This is a move that is called a "tax inversion", which means that the acquiring company obtains a tax benefit by leaving the United States for a country where the corporate income tax rate is lower. This is due to somewhat recent changes in the tax code. Corporate income taxes are hiked since those hiking them think that the corporations aren't doing their "fair share", and by hiking their taxes the government gets more money in the process.
This seems like a good idea to Joe and Jane Citizen and it seems like an even better idea to the government taxmasters. Make the corporations pay more; they've got the money, right? But as is often the case where what seems like a new law is a good idea, that new law fails to take into account what I call the Law of Unintended Consequences.
The Law of Unintended Consequences, in the instance of increasing corporate tax rates, can have two obvious results.
The first result is higher prices passed on to the consumer. Think about this for a minute. A corporation isn't in business to provide you with some sort of service. A corporation is in business to make money. Oh, there are some enterprises out there who are very customer-service oriented and they see their revenue as an indication as to how they are succeeding in providing customer service, but even those corporations are not going to remain in business if expenditures outpace revenues. Corporate beancounters are all well too familiar with the "cost of doing business", and although they accept that as a reality, another reality is that they are going to keep that under control. Increased costs will be passed along to the consumer of the product if those increased costs are seen as remaining for any foreseeable future. Higher prices for the product is the most likely consequence of increased corporate tax rates.
The next obvious consequence is what you're seeing happen with Burger King. It's nothing new as that it's had precedent for several decades in one sense. Increasing the corporate tax rate to something that the corporation is not willing to live with can and will result in that corporation relocating its headquarters in some cases and relocating its state of incorporation in many other cases.
How many of you have heard the term "Delaware corporation"? I use to work for one. The corporate headquarters were in southern California, and later on in Maryland, but for legal (tax) reasons the corporation was incorporated within the State of Delaware. A corporation doesn't incorporate in Delaware because the CEOs want to live there. The corporation incorporates there because Delaware doesn't charge them as much to incorporate there as California does. (When I was living in San Jose, I heard frequent ads on the radio encouraging business execs to incorporate in Nevada for similar reasons).
But this second consequence isn't limited to where a corporation files their articles of incorporation. Corporations will also migrate to states that are more business friendly. Governor Rick Perry of Texas has mounted efforts to bring corporations to Texas, where residents do not pay state income tax and where the regulations not as burdensome. Huntsville, Alabama has seen major defense companies expand there while contracting facilities that are elsewhere (as in California). A good friend of mine back in San Jose works for a company based in Tennessee, and the parent in Tennessee seems to be making preparations for work to be done there and not in California.
So if regulation and tax rates are having the unintended consequence of corporate assets from one state to another, is it really a surprise that the bigger corporations who have overseas assets would want to base in other countries if the tax rates upon them here are hiked? Corporate lobbyists warned our lawmakers what would happen if their tax burdens were increased. They said they would up and leave if the new tax rates are too high. That might have been seen as threats and bluffing, but corporate CEOs are beholden to the bottom line so that institutional investors such as mutual funds will invest in their companies. Reduced profits leads to reduced investment. They can only pass along so much of their cost of doing business to the consumer. Eventually, a point is reached to where their corporate lawyers discover ways to legally pay lower tax rates, which is why tax inversions are now becoming popular.
Now let's get back to Burger King.
Senator Sherrod Brown of Ohio is now calling for a boycott of Burger King. He wants consumers to go to Wendy's or White Castle. He's calling for people to patronize companies based in his state, and he very likely wants you to think that he's eating there too.
First of all, United States Senators aren't known for going for fast food meals unless they're on the campaign trail and they want to be photographed at one. They eat in their own private cafeteria or have their staffers bring food to their offices. Oh, I'm sure there are a few who like the occasional Big Mac or the Chinese takeout, but when they go on their lunch break they're not going to walk around in public until they find themselves at a Wendy's. It's simply beneath them to do that.
Second, as far as boycotting goes, I'll eat where I damn well please. I may or may not go to Burger King. I normally don't here in Tucson since Burger Kings in this town tend to have bad service (if you can call it service in the first place), and plus, since we have Culver's, Freddy's Steakburgers and In-N-Out the odds of my going to BK aren't that great in the first place. However, I've been known to stop off at them while on the road, as that the BK restaurants outside of Tucson seem to have decent service and I happen to like flame-broiled Whoppers.
Third, why is the Senator surprised at what Burger King is doing? If a corporation can reduce their expenses by basing themselves in Canada, why wouldn't they go there? Canada will not be raising their tax rates, especially if they're collecting unintended revenue from American corporations relocating there. They might be tempted to lower corporate tax rates in order to attract more outside investment.
I don't particularly like to see the corporations here move overseas. I want to make that clear.
However, if you have a bunch of Tax Nazis in the government who want to confiscate more money from them since they can't get the budget under control, can you blame them?
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