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 Richmans' Trade and Taxes Blog

Inversion Deals -- Corporate Income Tax Flight Continues
Jesse Richman, 8/26/2014

The United States has noncompetitive corporate income tax rates which create powerful incentives for US companies, aided by hedge funds and Wall Street banks, to flee the country.  A recent story in Forbes highlights the developing trend, and some of the key players in the effort to get Burger King a Canadian passport. 

The U.S. corporate income tax rate is politically hard to touch because people like the idea of taxing big money corporations at high rates.  But it is economically unsustainable, and needs to be significantly replaced by a VAT or some other tax that is less readily avoided. The move of even Burger King to abandon its U.S. corporate citizenship suggests just how important it is to break this political stalemate and reform the tax code. 

U.S. corporate tax rates are quite high compared with the rest of the world.  Canada's tax rate is 15 percent versus the U.S. rate of 35 percent, hence the attraction of a move north for Burger King.  

High corporate tax rates exacerbate the U.S. trade deficit in multiple ways.  For instance: 

1. They make it hard for truly U.S. corporations to compete internationally.  U.S. producers are at a disadvantage relative to foreign concerns paying less tax, and their products are correspondingly either less profitable or less price-competitive.  

2. International competitors pay less tax on their profits than U.S. firms, leaving less to reinvest in new plant, equipment, technology, research, and training to retain competitiveness. 

3. They encourage corporations to move at least some operations overseas so that tax-shifting strategies can be used to reduce the U.S. tax burden.  

By exacerbating the trade deficit, high corporate tax rates contribute to a range of economic problems including increased income inequality, diminished standards of living, increasing international indebtedness, reduces industrial competitiveness, and more. 

The flight of even retail establishments to foreign destinations may have perverse effects on the way the burden of corporate income taxes are borne, encouraging more firms to flee.  If all firms in an economy are taxed equally, then a large portion of the tax burden (just how much is a matter of controversy) tends to be shifted forward to consumers.  You pay higher prices for burgers today because McDonald's, Wendy's and Burger King are all paying corporate taxes on the profits of that sale, and they incorporate the fact that they will be paying taxes into their prices in order to still earn a competitive return for their investors.  But if Burger King doesn't have to price in as much of the cost of U.S. corporate taxes, then McDonald's and Wendy's may have to price accordingly.  This could be good for consumers, but it will hurt U.S. tax collections as firms with lower tax burdens are advantaged over time. 

The solution to high corporate tax rates is quite simple.  Cut the tax rates and replace them with something that creates less economic distortion.  A good candidate to replace lost corporate income tax collections is the Value Added Tax.  This tax is collected for companies as they 'add value' to products.  But unlike the corporate income tax it is border adjustable meaning that it will fall equally on importers, exporters, and import-competing firms. 

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  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

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  • [Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

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  • In Trading Away Our Future   Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]