Burger King announced this week that it will merge with the Canadian-based Tim Horton breakfast chain in an $11 billion deal to create the world’s third-largest fast food company. Even though Burger King was the bigger company going into the deal, the new company will be based in Canada. This is called a “corporate inversion” – for tax purposes, the U.S. company becomes foreign-owned and benefits from lower taxes in the foreign country.
Not surprisingly, the Burger King deal has caused an uproar – but its focus is misplaced. Democrats in Washington are blasting Burger King. Sen. Bernie Sanders (Socialist-Vermont) said the move shows “contempt” for average Americans and the United States. Sen. Sherrod Brown (D-Ohio) called for a boycott and for consumers to eat at Wendy’s and White Castle, both restaurants located in his state.
There’s cause for outrage. You and I can’t reduce our own tax rate by merging with someone from a foreign country while continuing to live and work here. So, why should corporations be allowed to do it?
But blaming Burger King (which, incidentally, is majority-owned by a Brazilian, not American, private equity firm) for maximizing shareholder value is kind of like blaming a squirrel for gathering nuts: it’s what they do. And if you’re going to follow Sen. Brown’s advice and start boycotting companies involved in controversial tax practices, prepare to abandon Google, delete your Facebook account, pitch your iPhone, stop sipping Starbucks, avoid flying on Southwest, return your GE appliance, and quit taking your prescription medication.
The bigger question is why companies are working so hard to avoid corporate taxes in the United States.
The real outrage here should be directed to Washington’s inability to reform an uncompetitive corporate tax code. “Corporate inversions” are sometimes more than just paper shuffles. They can also involve the shifting of real jobs and real responsibilities away from the United States and toward foreign countries.
The reason American companies are seeking to invest abroad rather than here is simple. At 35 percent, we have the highest corporate tax rate in the developed world. That’s nearly double the rate paid in the United Kingdom and triple the rate paid in Ireland. It’s even higher than the rate paid in quasi-Communist China.
The Democrat solution to corporate inversions is sticks and chains. If we just change the law to enact strict punishments for sending profits or jobs overseas, the thinking goes, we can stop this practice. But capital is like water – it finds the path of least resistance. As long as our corporate tax rate is multiples higher than competing countries’ rates, corporations will find accountants and lawyers smart enough to find and exploit new loopholes. Or, in some cases, they may do even worse. Instead of doing a questionable paper shuffle, they may outright pick-up operations and move someplace else.
Setting aside the fact that corporate taxes are double-taxation anyway, the sticks-and-chains approach won’t work. To stop deals like this from happening, we must reduce the corporate income tax rate so that corporate inversions are no longer wildly profitable. Along with reducing the rate, Congress should work to eliminate special exemptions (a task far easier said than done). And yes, there is certainly a place in corporate tax reform for strict enforcement of new laws designed to prevent companies from shirking on tax responsibilities through mere paper shuffling and creative accounting.
The problem is that this kind of deal seems impossible in today’s Washington, where both parties are entrenched on seemingly every issue and any move toward agreement that involves compromise is rejected. On some issues, Republicans should take the majority of the blame. On this issue, however, it’s Democrats who refuse to budge.
 The corporation is taxed on the profit. Then, when the profit is distributed to shareholders through dividends or indirectly realized by shareholders through capital gains, it’s taxed again.