Burger King’s retreat to the Great White North reveals the consequences of setting the tax rate too high. The iconic Florida-based fast-food chain intends to merge with Tim Horton’s, the equally iconic coffee-and-doughnuts chain in Canada. The resulting burger and doughnuts conglomerate would be based in Ontario, where taxes are reasonable.
Democrats look at this high-profile escape and see their grasp on other people’s money slipping through their fingers. Sen. Sherrod Brown, Ohio Democrat, calls for a Whopper boycott. Others want President Obama to help them get it their way with his phone and pen.
If Democrats really want to prevent companies like Burger King from fleeing the United States, they could learn something from the burgermeisters. Burger King realized with its “Value Menu” and McDonald’s with its “Dollar Menu” that the key to profitability isn’t jacking up the price on every item. Customers, especially hard-hit by the jobless economy, have flocked to the lower-cost meals.
America has become the most expensive restaurant in town, but the food isn’t as good as it used to be. The corporate tax rate is 39 percent, higher than in every other developed country and 14 points higher than the global average. CEOs who can move, but don’t, are cheating their shareholders just as a dad who takes the kids to an overpriced, mediocre buffet is cheating his family.
Various deductions bring Burger King’s effective tax rate to around 28 percent, which is part of the problem. The U.S. tax code is so complex and riddled with so many preferences and loopholes it’s impossible to know from one tax season to the next how much will go to the tax man, especially with Congress waiting until the last minute to pass “tax extenders.” Complying with 74,000 pages of Internal Revenue Service regulations requires an army of accountants. Once they put away their eyeshades, the federal government gets perhaps 10 percent of all the revenue from the corporate tax. It’s a lot of pain and not much gain.
All of the credits, deductions and incentives dumped into the tax code distort the allocation of investment. Decisions such as, “Should I install a solar panel?” are based not on whether the power savings would be worthwhile, but whether the tax break would be worthwhile. The result is that many corporations must serve Washington, not their customers.
Most every nation will tax corporations headquartered in their territories on income earned within their boundaries. Companies can securely conduct business overseas, knowing that global income will be taxed at a consistent rate. Not so for American companies, which have to go through complex calculations to satisfy Washington’s worldwide reach.
The smart and rational company response to the broken tax system is to run away. Corporations have been parking billions of dollars in cash overseas, or buying smaller corporations overseas (the classic “inversion” deal), and seeking other ways to avoid not merely the tax, but the complexity and cost of compliance as well.
Instead of giving companies a reason to flee, and trying to punish them when they do, the smarter deal is to give them a reason to stay. Slash the corporate rate and do away with the deductions and loopholes. Simplify the system so that companies spend more time frying burgers and less time hunting for tax dodges.