In the parlance of Washington these days, Burger Kingâ€™s decision to improve its margins by purchasing a Canadian corporation and moving its headquarters is an â€śinversionâ€ť â€” or, to the Obama administration, â€śunpatriotic.â€ť
In reality, the move is a logical consequence of bad tax policy.
â€śThe big news on Monday has been reports that Burger King is in talks to acquire Tim Hortons, Canadaâ€™s most popular coffee chain,â€ť Business Insider reported. â€śAccording to a recent KPMG study, Canada is one of the most business-friendly countries in the world. At least, when you look at the total tax cost for companies operating in some of the worldâ€™s biggest economies.â€ť
Burger King on Tuesday said its tax bill wonâ€™t be â€śmateriallyâ€ť decreased, but with todayâ€™s tight margins, that could be significant.
The real issue here is how weâ€™re supposed to view these kinds of moves.
â€śTo be clear, there is nothing wrong with cross-border merger activity; our economy is stronger for our investment overseas and for foreign investment in the United States,â€ť U.S. Treasury Secretary Jack Lew wrote last month in the Washington Post. â€śBut these activities should be based on economic efficiency, not tax savings. Many of these transactions have been motivated by â€” and even expressly justified by â€” the tax savings.â€ť
He also wrote to Congress, â€śWhat we need as a nation is a new sense of economic patriotism, where we all rise or fall together. We should not be providing support for corporations that seek to shift their profits overseas to avoid paying their fair share of taxes.
President Obama is even clearer in his terminology. These companies are â€ścorporate deserters,â€ť he says.
â€śLetâ€™s rally around an economic patriotism that says, instead of giving more tax breaks to millionaires, letâ€™s give tax breaks to working families to help pay for child care or college,â€ť he said.
But this isnâ€™t a lack of patriotism, Harvard economist Greg Mankiw wrote in the New York Times last week.
â€śDemonizing the companies and their executives is the wrong response,â€ť Mankiw wrote. â€śA corporate chief who arranges a merger that increases the companyâ€™s after-tax profit is doing his or her job. To forgo that opportunity would be failing to act as a responsible fiduciary for shareholders.â€ť
He pointed to a quote from the renowned jurist Learned Hand.
â€śAnyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury,â€ť Hand said. â€śThere is not even a patriotic duty to increase oneâ€™s taxes.â€ť
Mankiw contends that corporate inversions are a common sense response to our convoluted tax system.
â€śThe most obvious problem is that the corporate tax rate in the United States is about twice the average rate in Europe,â€ť he wrote. â€śNational tax systems differ along many dimensions, making international comparisons difficult and controversial. Yet simply cutting the rate to be more in line with norms abroad would do a lot to stop inversions.â€ť
The simple solution is corporate tax reform.