For this past week, business and political circles have been abuzz with the news of another tax inversion deal, this one struck between Burger King and Canadian coffee giant Tim Hortons. In the simplest terms, tax inversion is when a business entity chooses to relocate its headquarters to a nation with lower tax rates relative to its current location in order to avoid costs. Members of the Democratic Party have lambasted companies that make such moves as “corporate deserters” (President Barack Obama) and lacking in “economic patriotism” (Treasury Secretary Jack Lew). Seemingly, these critics would rather turn the situation into a talking point on the malevolence of corporations than attempt to address the problem it brings to the forefront: The United States is becoming less and less a business-friendly, pro-growth nation.
I am going to venture into a few concepts some politicians apparently find hard to understand. First, the primary objectives of a firm are to satisfy shareholders, increase profit and expand influence and market share. Second, taxes paid by a firm to the government decrease profit and hinder the objectives of that firm.
Bearing these evidently incomprehensible, perhaps reprehensible to some, business principles in mind, it makes sense for corporations to move to areas of lesser taxation. Corporations do not choose to move in an attempt to harm the nations they occupy; they move to satisfy their objectives. Satisfying these objectives leads to profitability, which permits corporations to expand and create more jobs and also pleases shareholders and encourages them to continue investing. Nations that act as host to corporations stand to benefit from the increase in employment and investment dollars.
An analogy can be found in the controversy that surrounded professional golfer Phil Mickelson nearly two years ago when he spoke openly about the possibility of moving out of California for tax reasons. He had recently won the British Open and was said to have been taxed over $100,000 on his winnings in a state whose tax rates are among the highest in the nation. Mickelson later recanted his remarks, but they highlighted the fact that even individuals consider changing their lifestyles to avoid monetary dispossession.
I am not defending Mickelson’s comments per se, simply emphasizing the point that if taxes grow too high, governments risk losing revenue. For those who do not prefer Phil’s golfing style or persona, Tiger Woods stated during the Mickelson controversy that he actually left California in 1996 to avoid the high taxes there.
The issue comes full circle to our critics, President Obama and Secretary Lew, who promote higher taxation of job creators and investors.
Responsibility should not be placed on corporations to hold unquestioning loyalty to their host nations when business environments become antithetical to the objectives of the firm; the responsibility lies with governments of nations to keep their business taxation policies competitive. I by no means advocate for governments to be beholden to corporate desires or for the abolition of taxation – far from it. Instead, I simply believe our nation (and individual states, for that matter) should be cognizant of the international business environment and strike the correct balance between benefitting both corporations and the nation’s citizens or government. Is it so difficult to consider that business actually may not be the enemy of nations?
This segues into another perpetual issue, that perhaps instead of the government worrying about how it will supply its ever-growing bureaucracy with funds, it should concern itself with making the government apparatus smaller, more manageable and fiscally feasible. Efficiency is not something to be feared; it is something to be strived for.
The federal government holds nearly $18 trillion of debt, almost $1 trillion more than the entire United States GDP. As of 2012, 22 million people were employed by the local, state and federal governments, a staggering 16% of the American workforce, according to the U.S. Department of Labor's Bureau of Labor Statistics. Why not attempt to decrease our risks instead of trying to fund and proliferate them? Why continue to prolong programs that are outdated and impractical? Why continue the trend of normative government expansion that leads only to continually unfathomable debt?
It is time for our government to change the way it does business. If it doesn’t, Phil Mickelson and Burger King won’t be able to make up the difference.
