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‘Inversions’ Are Just the Beginning



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My former employer Burger King’s desire to become a Canadian firm, and thus relieve itself of the burden of worldwide taxation at confiscatory U.S. rates, has kicked off another round of discussion about the practice of “inversion” in Washington, where our so-called  leaders are, as always, missing the more important point.

The issue of whether a few pharmaceutical companies move to Ireland for tax purposes, or whether a few U.S. firms re-domicile themselves in Switzerland, is a minor one. Democrats want to change the rules to make it harder for companies to relocate abroad through acquisitions, but that is a live issue only for existing companies.

A forward-looking leader might wonder: Never mind what dusty corporate dinosaurs like Walgreens do — why would a new firm incorporate in the United States to begin with? What do we bring to the table?

There is little to no legal reason why a new company being formed by Americans with American capital has to be incorporated in the United States. There are other reasons to incorporate here: It is relatively inexpensive and easy to do so, and many investors prefer to be subject to U.S. law and U.S. institutions. In fact, relatively few U.S.  companies incorporate in overseas tax havens.

But that is a matter of tradeoffs. The political favoritism that riddles the U.S. corporate tax code means that well-connected firms do not pay that world-leading top rate, and the worldwide ambition of the IRS — the United States is one of a tiny handful of nations, including North Korea and Zimbabwe, that purport to tax firms’ earnings outside of their jurisdictions — is tempered by the generous treatment of deferred foreign income. Which is to say, given the tradeoffs in play, most U.S. firms choose to be legally incorporated in the United States, because the tax advantages of incorporating elsewhere do not — at this moment — outweigh such practical considerations as access to U.S. courts.

But of course the Left wants to change that equation. There are trillions of dollars in U.S. corporate earnings parked overseas, and progressives want the government to shove its greedy snout all up in that, denouncing “corporate cash hoarders” and blaming un-repatriated corporate earnings for everything from the weak job market to chronic halitosis.  Harebrained schemes for putting that corporate cash in government coffers abound. So the current balance  could quite easily be tipped. And after years of ad-hocracy under Barack Obama et al., U.S.-style “rule of law” may not be as attractive as it once was. A few more arbitrary NLRB decisions or political jihads from the IRS could change a few minds about the value of U.S. law and governance.

The question isn’t whether you can bully Walgreens out of its plan to move to Switzerland. The question is whether the next Apple or Pfizer ever puts down legal roots in the United States in the first place. Right now, the friction works in favor of the United States, but there is no reason to believe that that will always be the case. You think that Singapore wouldn’t like to be the world’s banking or pharmaceutical capital? That Seoul lacks ambition? That the Scots who brought us the Enlightenment can’t run a decent system of law and property rights? Burger King is not talking about moving to some steamy banana republic for tax purposes, but to stodgy, stable, predictable, boring old Canada. Boring and predictable looks pretty good if you’re Burger King, especially when the alternative is unpredictable and expensive. Unpredictable and expensive is what you date when you’re young and stupid — you don’t marry it.



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