Raymond Richman - Jesse Richman - Howard Richman
Richmans' Trade and Taxes Blog
Inversions Are Not a Problem; the Real Problem Is Outsourcing
Burger King’s purchase of Canada’s Tim Hortons chain of coffee houses is called an inversion, a term used to describe a company’s moving its headquarters abroad to avoid paying U.S. taxes on the income of a foreign company it purchased. Tim Hortons has a number of locations in the U.S. as well (600) and it pays U.S. and state corporate income taxes on its U.S. operations. Burger King’s inversion does not reduce U.S. revenues from Burger King’s and Tim Hortons' operations in the U.S. at all. All the Burger Kings and Tim Hortons in the U.S. will continue to pay U.S. and state corporate income taxes. The fuss about inversions is a smokescreen that conceal the problem, U.S. manufacturing companies moving abroad and outsourcing their production. Now that is a real problem for the U.S. economy.
An inversion is not to be confused with outsourcing which does affect revenue, causes massive unemployment here at home, and worsens our balance of trade. Inversions do no. Nearly all the leading American corporations engage in outsourcing, including Apple, Nike, Honeywell, Caterpillar, Hewlett-Packard, Motorola, IBM, NCR, Lev-Strauss, and many, many others. They add insult to injury by importing the products they produce overseas to compete with product made here. By contrast, inversions like Burger King-Tim Hortons do not change the place of production or cause unemployment at all or worsen the trade imbalance.
The U.S. Congress and the Obama Administration in their arrogance want to tax Tim Hortons (now Burger King’s) Canadian operations at 35 percent, the U.S. corporate income tax rate. (In addition, the states have rates ranging from zero to Pennsylvania’s 9.99 percent.) The Canadian general corporate income tax rate is 28 percent and on manufacturing and processing corporations, it is 15 percent currently. Canada’s principal provinces levy corporate income taxes of 10 to 12 percent. Canada reduced its corporate income tax rates from 38 percent to enable Canadian companies to compete with such countries as Ireland which has a 15 percent corporate income tax rate.
All that Burger King wants is to avoid paying more in taxes on the combined company than the two pay at present. The administration wants to increase those taxes as a result of the merger. Most countries have a territorial basis for income taxation and do not tax the foreign income of its companies; we do. All countries are entitled to tax the income earned within its boundaries. But the exercise of an extra-territorial right to tax does appear on the face of it arbitrary and unjustified.
A solution to the inversion problem would appear to be for the U.S. to adopt a territorial basis for income taxation. That would eliminate the incentive to move one’s headquarters to a country that employs a territorial system. Reducing the corporate rate to, say, 15 percent to solve the outsourcing problem, would reduce the revenues from the corporate income tax by more than half. And that is what the administration wants to avoid. So what is needed is a solution that maintains the total level of revenues.
A solution is at hand, namely, to eliminate the corporate income tax, which many economists believe to be an abomination anyway and to tax corporate earnings under the personal income tax, just as we do partnership earnings. A zero corporate income tax rate would be a tremendous stimulus to exports, improve the trade balance, and create millions of jobs. The net effect on total tax accounts revenue would be less than one would be led to believe.
The revenues from the federal corporate income tax in 2013 was $384.9 billion and total corporate profits in 2013, according to the GDP accounts, was $1,703.8 billion. The maximum corporate income tax rate was 35%, but the maximum personal income tax rate was 39.6%, effective at a taxable income of $406,00.
The rich, who own much if not most of corporate wealth would pay much more in taxes if corporate earnings were to be taxed under the personal income tax, whose rate on incomes above $406,000 is 39.6 percent, The top one percent of taxpayers own 35 percent of all corporate stock and 35 percent of $1700 billion is $595 billion, much more than the $385 billion in corporate income tax receipts. While the final number may be in doubt, there is little doubt that there would be no net revenue loss.
There is a good case for taxing corporate income as personal income. There is ample precedent for taxing corporate earnings as the personal income of shareholders. As note, the earnings of partnerships are taxed as the personal income of the partners. And corporate income was taxed in this fashion under the United Kingdom’s income tax for centuries until they copied the foolish U.S. corporate and personal income tax after WWII.
The excuse often cited for the corporate income tax is that shareholders enjoy limited liability but limited liability partnerships and proprietorships now exist in most if not all the states. Why not tax shareholders as we do partners, which in fact they are, co-owners of the business? It works for partnerships. It would work equally well for corporations.
Real Estate Taxation
Journal of Economic Literature:
Atlantic Economic Journal: