Monday, September 1, 2014

A Whopper of A Lie


The purchase of Canadian doughnut chain Tim Hortons by Burger King for $11 billion has created quite a stir within both flanks of the political spectrum. On the Right, the usual "oppressive tax system" drivel has been front and center; on the Left, shouts of "tax dodging," loopholes" and "patriotism" have dominated the discussion. Well permit me, if you will, to set both sides straight with a few pesky facts.

First, a lot of attention has been paid to how high the corporate tax rate in America is. At present, it is the highest in the world at 39.1 percent. By comparison, Canada's corporate tax rate is 26.3 percent. If you knew nothing more than that one statistic, you would conclude, and rightly so, that Burger King's decision made perfect sense. But, as they say in just about every TV advertisement, wait, there's more.

That 39.1 percent corporate tax rate is a nominal, or unadjusted tax rate. As anyone who has ever sat down and done his or her own taxes will tell you, it isn't your nominal tax rate that determines what you owe, it's your effective tax rate. And, for corporate America, that effective tax rate averages out to roughly 12.6 percent. That difference is the primary reason why the United States ranked 11th from the bottom among the 27 wealthiest nations in effective tax rates. Hardly oppressive.

What accounts for this difference? In a nutshell the United States has the most complicated tax system in the world, filled with loopholes big enough to drive a semi-truck through. And those loopholes are kept in place by a litany of powerful tax accountants, many of whom wrote those very same tax laws. The last thing any of them want is for the American tax system to be simplified. The formula for these accountants is quite simple: the higher the nominal rate is, the more deductions they find; the more deductions they find, the higher the fee they charge. Think about that the next time you go to H&R Block.

Second, while it may seem as though Burger King's acquisition was a classic case of corporate tax inversion, that appears not to have been the case here. For starters, Burger King's effective tax rate last year was 27.5 percent. Tim Hortons' effective tax rate was just south of 27 percent. If you think a .5 percent difference is a windfall, you obviously need a refresher course in basic mathematics. Even for a billion dollar corporation, a .5 percent differential in a tax rate is not worth the headache of potentially losing millions of customers to McDonald's or Wendy's. And make no mistake about it, Burger King is no Pfizer. I'm pretty sure the average person who walks into a CVS to get a prescription filled has no idea who manufactured the drug they are taking. You can bet the ranch they know the difference between a Whopper and a Big Mac.

Maybe that's why Burger King CEO Alex Behring wasted no time letting everyone know that their corporate headquarters will remain in Miami, though the press release also mentioned that "the new global company will be based in Canada, the largest market of the combined company." How that will effect its future tax rate, no one knows.

So what was the primary reason behind the merger. In a word, market share.

Tim Hortons is the largest fast-food chain in Canada with over 4,500 locations throughout that country and the United States. And, unlike Burger King, whose sales have slumped recently, Tim Hortons has consistently increased its market share. According to Forbes, "the company’s reported a 9% increase in net revenues year-over-year (y-o-y) in Q2 2014, while the same store sales growth was 2.6% in Canada and 5.9% in the U.S."

The breakfast sector of the fast-food market is the only sector that has shown any growth of late as anyone who has visited a Dunkin' Donuts or Starbucks has known for quite some time. Burger King did what any company faced with declining sales would do: it pounced on an opportunity to diversify its lineup and expand its share in the market place. This is different than banks who merge. In those instances, it isn't about simply increasing market share but dominating the existing market altogether.

There's little doubt that the increasing trend of corporate inversions poses a serious threat to the United States tax system. If this trend is allowed to continue, the tax burden will only be shifted to smaller-sized companies and individuals who are already paying more than their fair share to the Treasury. It should be pointed out that neither of these two groups possess the resources needed to hire fleets of savvy tax accountants. That's what Turbo Tax was invented for.

Simply lowering corporate tax rates will not stem the tide of inversions. If anything, it will continue to reward bad behavior as corporate America will now have its cake and eat it too. The only answer lies in closing many, if not all, of the loopholes that currently exist in the tax code that permit these types of inversions in the first place. Only then can we have a true discussion on tax rates.

Protestations from the Right that this will only encourage corporations to look for other as of yet unknown loopholes are specious at best. Whether the loopholes are closed or not, corporations will always look for ways to avoid paying taxes. Show me a company that doesn't take advantage of every tax loophole available to it and I'll show you a company headed for bankruptcy. Or, as Senator Bernie Sanders adroitly put it last year on Bill Maher's Real Time, "If there's a corporation paying 35 percent, they should fire their accountants."

And as far as the Left is concerned, a little less hyperventilating and a little more fact checking is in order here. The truth is Burger King has done far more harm to America's digestive system than to its tax system. There are plenty of villains out there in corporate America who have done substantial damage to the U.S. economy; companies like GE, whose effective tax rate from 2008 - 2013 was -9 percent (they actually received a $2.9 billion tax refund).  It seems to me that they should be the targets of our scorn. Between companies that flee the country to avoid paying taxes - or simply avoid paying them altogether - and companies who, through mergers and acquisitions, destroy healthy competition within a given market and then end up owning that entire market, America is fast resembling an oligarchy.

To me that is the war the Left should be waging. And it's a war the Left can win if it wants to.

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