Skip to comments.Greedy Politicians Get their Comeuppance as Taxpayers Escape
Posted on 05/04/2014 10:47:10 AM PDT by Kaslin
If youre a regular reader, you already know Im a big supporter of tax competition and tax havens.
Heres the premise: Politicians almost always are focused on their next election and this encourages them to pursue policies that are designed to maximize votes and power within that short time horizon. Unfortunately, this often results in very short-sighted and misguided fiscal policies that burden the economy, such as class-warfare tax policy and counterproductive government spending.
So we need some sort of countervailing force that will make such policies less attractive to the political class. We dont have anything that inhibits wasteful spending,* but we do have something that discourages politicians from class-warfare tax policy. Tax competition and tax havens give taxpayers some ability to escape extortionate tax policies.
Now we have a couple of new and very high-profile examples of this process.
First, a big American drug company is seeking to redomicile in the United Kingdom.
The New York Times has a thorough (and fair) analysis of the issues.
Pfizer proposed a $99 billion acquisition of its British rival AstraZeneca that would allow it to reincorporate in Britain. Doing so would allow Pfizer to escape the United States corporate tax rate and tap into a mountain of cash trapped overseas, saving it billions of dollars each year and making the company more competitive with other global drug makers. the company wishes to effectively renounce its United States citizenship. a deal would allow it to follow dozens of other large American companies that have already reincorporated abroad through acquiring foreign businesses. They have been drawn to countries like Ireland and the Netherlands that have lower corporate rates, as well as by the ability to spend their overseas cash without being highly taxed. At least 50 American companies have completed mergers that allowed them to reincorporate in another country, and nearly half of those deals have taken place in the last two years. American businesses have long complained about the corporate tax rate, arguing that in todays global marketplace, they are left at a competitive disadvantage.
You can click here if you want some of those additional examples.
To get an idea of why companies want to redomicile, heres another excerpt from the story.
the British corporate tax rate is currently 21 percent and will soon fall to 20 percent. Analysts at Barclays estimated that for each percentage point less Pfizer paid in taxes, it would save about $200 million a year by reincorporating. People briefed on Pfizers discussions said that figure could be substantially higher. That means that Pfizer would be saving at least $1 billion a year in taxes alone. And moving to a lower-tax jurisdiction would allow Pfizer to tap cash that it holds overseas without paying a steep tax to bring it back to the United States. Of the companys $49 billion in cash, some 70 to 90 percent of that is estimated to be held overseas.
Im encouraged, by the way, that reporters for the New York Times are smart enough to figure out the destructive impact of worldwide taxation. Too bad the editors at the paper dont have the same aptitude.
By the way, its worth pointing out that Pfizers expatriation doesnt have any negative impact on America.
Pfizer points out that it would retain its corporate headquarters here and remain listed on the New York Stock Exchange. Pfizers chief executive, Ian C. Read, a Briton, said Pfizer found it was hard to compete with other acquirers while saddled with an uncompetitive tax rate. Still, he added that even as a reincorporated British company, we will continue to pay tax bills in the United States.
The only meaningful change is that the redomiciled company no longer would pay tax to the IRS on foreign-source income, but thats income that shouldnt be taxed anyhow!
The Wall Street Journal opined on this issue and made what should be very obvious points about why this is happening.
because the combined state-federal corporate income tax rate in the U.S. is nearly 40%, compared to the 21% rate in the U.K.
Amen. Americas punitive corporate tax rate is a self-inflicted wound.
But its not the just the statutory tax rate. The WSJ also points out that the United States also wants companies to pay tax to the IRS on foreign-source income even though that income already has been subject to tax by foreign governments!
The U.S., almost alone among the worlds governments, demands to be paid on a companys world-wide profits whenever those profits are brought back to the U.S.
Its for reasons like this that Americas corporate tax system came in 94th place (out of 100!) in a ranking of the degree to which national tax systems impacted competitiveness.
Now lets look at the second example of a high-profile tax-motivated corporate migration.
Toyota is moving the heart of its American operation from high-tax California to zero-income tax Texas.
And the Wall Street Journal correctly explains the lesson we should learn. Or, to be more accurate, the lesson that politicians should learn.
In addition to its sales headquarters, Toyota says it plans to move 3,000 professional jobs to the Dallas suburb Toyotas chief executive for North America Jim Lentz listed the friendly Texas business climate as well as such lifestyle benefits as affordable housing and zero income tax.
This isnt the first time this has happened.
In 2006, Nissan moved its headquarters from Gardenanorth of Torranceto Franklin, Tennessee. CEO Carlos Ghosn cited Tennessees lower business costs.
The bottom line is that greedy California politicians are trying to seize too much money and are driving away the geese that lay the golden eggs.
According to the Tax Foundation, the state-local tax burden is more than 50% higher in California than in Tennessee and Texas, which dont levy a personal income tax. Californias top 13.3% marginal rate is the highest in the country. Since 2011 more than two dozen California companies including Titan Laboratories, Xeris Pharmaceuticals, Superconductor Technologies, Pacific Union Financial and Med-Logics have relocated in Texas. Dozens of others such as Roku, Pandora and Oracle have expanded there.
No wonder, as I wrote a few years ago, Texas is thumping California.
The real puzzle is why most high-tax governments dont learn the right lessons. Are the politicians really so short-sighted that theyll drive away their most productive people?
But notice I wrote most, not all. Because we do have some very recent examples of very left-wing states doing the right thing because of tax competition.
Here are some excerpts from a column in Forbes.
Maryland is the latest state to make its estate tax less onerous, and its significant because its a staunchly Democratic state indicating that easing the pain of the death tax isnt just a Republican issue. Today the Maryland Senate passed the measure, already passed by the House, gradually raising the amount exempt from the states estate tax to match the generous federal estate tax exemption.
And other blue jurisdictions seem to be learning the same lesson.
In New York, Gov. Andrew Cuomos budget calls for increasing the states estate tax exemption from $1 million to match the federal exemption, and lowering the top rate from 16% down to 10% by fiscal 2017. A commission on tax reform in the District of Columbia recently recommended raising D.C.s estate tax exemption from $1 million to the federal level. In Minnesota, Democratic Governor Mark Dayton has proposed doubling the state estate tax exemption from $1 million to $2 million as part of a bigger tax package.
This is why tax competition is such a wonderful thing. Theres no question that politicians in states such as New York dont want to lower the burden of the death tax.
But theyre doing it anyhow because they know that successful taxpayers will move to states without this awful form of double taxation.
Just like European politicians reduced corporate tax rates even though they would have preferred to keep high tax rates.
Tax competition isnt a sufficient condition for good policy, but it sure is a necessary condition!
*There are spending caps that restrain wasteful government spending, such as the debt brake in Switzerland and TABOR in Colorado, but those are policies rather than processes.
P.S. Heres a joke about California, Texas, and a coyote.
P.P.S. And supporters of the Second Amendment will appreciate this Texas vs. California joke.
The problem is that the electorate just LOVES Progressives.
Why is it that the GOP can't get this message across to the general public. Most people in this country seem to have an envy-hate relationship with business, but get PO'ed when a company says, okay, have it your way...we'll leave. Why can't the GOP get the message out that the fastest growing economy in the world right now also has the lowest corporate and personal income taxes and seeks to decrease the gov'ts share of GDP to 5% over time...and it's not China. It's Chile.