Let me explain. Or actually, in the case of Burger King’s planned acquisition of Tim Hortons, let my colleague Matt Levine explain, because he is smarter and funnier and a better writer than I am, and has already nicely summed things up:
The purpose of an inversion has never been, and never could be, and never will be, “ooh, Canada has a 15 percent tax rate, and the U.S. has a 35 percent tax rate, so we can save 20 points of taxes on all our income by moving.” Instead the main purpose is always: “If we’re incorporated in the U.S., we’ll pay 35 percent taxes on our income in the U.S. and Canada and Mexico and Ireland and Bermuda and the Cayman Islands, but if we’re incorporated in Canada, we’ll pay 35 percent on our income in the U.S. but 15 percent in Canada and 30 percent in Mexico and 12.5 percent in Ireland and zero percent in Bermuda and zero percent in the Cayman Islands.”
What is he talking about? The U.S., unlike most developed-world governments, insists on taxing the global income of its citizens and corporations that have U.S. headquarters. And because the U.S. has some of the highest tax rates in the world, especially on corporate income, this amounts to demanding that everyone who got their start here owes us taxes, forever, on anything they earn abroad.
This is a great deal for the U.S. government, which gets to collect income tax even though it’s not providing the companies sewers or roads or courts or no-knock raids on their abodes. On the other hand, it’s not a very good deal for said citizens and corporations, especially because our government has made increasingly obnoxious demands on foreign institutions to help them collect that tax. Both private citizens and corporations who have a lot of income abroad are deciding that they’d rather renounce their ties to the U.S. than deal with the expense and hassle of letting it tap into income that they have earned using some other country’s roads and sewers and police protection.
If there are two car dealerships next door to each other and one offers a car for 20% less than the other (all-in), which one are you going to patronize? Sure, the coffee, environment, and paint job might be better at the more expensive dealership, and that might be worth paying more for, but at some point– 10%, 35%, 50% (and there is a point)– the benefits of going to the higher-cost dealer are outweighed by the economic comparison.
People who are arguing against Burger King leaving the U.S. and reincorporating in Canada are essentially saying that they must continue patronizing the more expensive store, and they are using guilt-trip tactics to argue their point. It’s what we have come to expect from a less economically literate worldview. I’m glad that we’re finally seeing such effective pushback. I hope it’s not too late.
Do I want Burger King to leave the U.S., taking a lot of tax revenue from us? No way. But I sympathize with their plight (being a small business owner, boy do I sympathize). It’s absolutely worth it to be a part of the U.S. economic system and, yes, I think they do “owe” something on some level to that system. But when that system constantly demands more and more while other countries are offering them better rates? It’s a no-brained decision to eventually leave for other shores.
Dear taxing authorities: if you get greedy, eventually you’ll get nothing. There’s a lesson here– there’s a trend going on here. You need to learn it before you have no business tax revenue left.
Tax sanely. Spend wisely and responsibly. Be good stewards of the economic trees. And the Burger Kings, and all of his friends, may come back.