October 13, 2014

In August, Burger King relented from its plan to move its headquarters to Canada and to become a Canadian company, doing so after political pressure was brought to bear. But the situation in which the King of the Whoppers found itself is not limited to just Burger King.  Increased interest in moving off shore (called inversion) is the result of the worldview of those currently in power in Washington.   Their view is to take as much as they can from individuals and companies, especially those who are doing well.  They call it taxing the rich.  The problem is; this is a failed economic policy.

Burger King is in the process of merging with a Canadian company – Tim Horton’s – a large firm that’s the equivalent of Dunkin Donuts in the U.S.  In the process its plan was to move its headquarters to Canada while still doing business here.  When one looks at the federal corporate tax rates of the two countries, the reason why quickly becomes apparent.  Companies in Canada pay about 53.6% of what U.S. firms pay in corporate taxes.   That is a big incentive: for Canadian companies to stay put and for U.S. firms to come and join them. 

This all started in 2006 when the Conservative Canadian government led by Stephen Harper started reducing Canada’s Federal corporate tax rate.  The naysayers predicted doing so would cut government revenues.  Instead the Canadian government has seen a major increase in its revenues even though the tax rate has fallen from 28% to 15%.  The reason for the revenue increase is simple, Canada is pro-business and companies are drawn to that kind of environment.

Meanwhile back in the U.S. the President is calling companies like Burger King “corporate deserters” and accuses them of being unpatriotic.  Treasury Secretary Lew is preparing options to deter or prevent U.S. corporations from moving across the border.  The sad story is the President’s worldview is pro-big government and anti-free market – and freedom in general. 

Companies are in business to make a profit. They produce goods and services demanded by the public while seeking to make a reasonable return on their investment.  As mentioned last week, investors are not all “fat cats” who are rolling in money. Most are people who have managed to save a small amount and have invested it.  IRAs are just one vehicle they use.  So when the government maintains, or increases, high tax rates it hurts companies which, in turn, hurts the small investors.  When taxes are high it also forces companies to charge more for their goods and services which mean all of us who buy from them are picking up the tab for high tax rates while economic growth and expansion are stymied.

So, what’s the answer?  If we look at the Canadian example there’s a lesson to learn.  Their tax rates are low while governmental revenues are increasing. We are seeing similar trends here in Texas.  Where tax burdens are lower, companies are attracted and existing firms stay put.  Instead of trying to penalize firms for making wise economic decisions the President should be removing impediments to their survival – high corporate tax rates being just one of them.  To stop the exodus of U.S. firms, the administration needs to change its worldview from forcing companies to conform to allowing the free markets to work– emphasis on FREE.  Start by following Canada’s example.  Reduce the corporate tax rate!

Bill, Mark and John