NEWS BLOG (WSAU) For the record, Tim Hortons doughnut shops are everywhere in Canada. I don't like their coffee. They serve a European-style blend that is too strong for my taste. And, I eat more often at Burger King than I should. Where Burger King's corporate headquarters are located won't cure my Whopper habit.
This week Burger King announced that it will buy Tim Hortons and, because of the sale, will relocate their headquarters to Canada. Because of this foreign inversion, Burger King's corporate tax rate will drop from 35-percent to about 22-percent. In a multi-billion dollar deal, the savings are huge.
Instead of crying that Burger King is being unpatriotic, we should ask a different question. Why are other countries corporate taxes so much lower than ours?
Much of the outcry is because of an unpleasant truth: Americas 35% corporate tax rate is among the highest in the world. And a corporations obligation to its shareholders far outweigh any obligation to the taxman.
This is happening on a smaller scale within the U.S. when companies move their headquarters from one state to another and when it happens domestically, the politically-charged allegation of being unpatriotic is removed from the conversation. Many large companies are headquartered in Delaware because of that state's favorable bankruptcy laws. If a firm goes bust, it's far easier to reorganize there than in other states. South Dakota has favorable accounting rules for banks that issue their own credit cards, so banks that operate nationwide locate their credit card division there. Texas, which has very low state corporate taxes, has lured away countless corporations from California, a high-tax state.
One thing that might change this equation is other countries raising their corporate taxes. Canadians wont be happy that a household-name company be being bought out by the Yanks. And Americans have an unfair advantage when buying up foreign companies. Since the tax-savings are so substantial, a U.S. company can overpay and outbid other Canadian investors for the likes of Tim Hortons. The Americans may lose money on the deal in the first year, and reap the benefits in the second.
Money is like water; it seeks equilibrium. As long as there are tax havens, capital will find its way to those places.
IMAGE: Burger King in Myrtle Beach, SC by Mike Kalasnik via WikiCommons.com