Burger King: Having it their way on tax rates. (Joe Raedle/Getty Images)

If you’re looking to move from Miami to Canada, as Burger King Worldwide is, chances are excellent that your motive is something other than the weather.

The word “inversion” has entered the popular vocabulary, describing a tax-driven corporate merger in which a U.S. firm acquires an overseas company and then relocates its legal domicile to that firm’s home tax jurisdiction. The purpose of this is in no small part to escape the onerous U.S. corporate income tax. That’s what Burger King is looking to do by acquiring beloved Canadian doughnut chain Tim Hortons, which is based in Ontario. A number of U.S. pharmaceutical companies have relocated to Ireland and the Netherlands — one tried, unsuccessfully, to move to Sweden — while Illinois-based Walgreens was barely dissuaded by political pressure from relocating to Switzerland.


Canada, the Netherlands, Sweden: Not exactly your typical tax havens.

The U.S. corporate income tax has two counterproductive features. The first is that it imposes the highest nominal tax rate in the developed world. That is, counterintuitively, less important than it sounds: Our corporate tax code is riddled with political favoritism in the form of special carve-outs, exclusions, and deductions, so that many firms pay only a fraction of the top rate — especially if they are politically well connected. The high nominal rate and the plethora of sweeteners is in effect a carrot-and-stick arrangement, and effective business tax rates, while relatively high overall, vary significantly from corporation to corporation and from industry to industry.

The second and more cumbrous feature, nearly unique to the United States, is that our federal government claims worldwide tax jurisdiction, whereas most other countries tax only business activities within their own borders. For example, a Switzerland-based firm doing business in its home country, France, and Italy would pay Swiss taxes on its Swiss business, French taxes on its French business, and Italian taxes on its Italian business. A U.S.-based firm would do all that, too — but it would also be subject to U.S. taxes on top of whatever it paid overseas, minus a credit for its foreign taxes. That means that U.S.-based firms always pay the higher rate between two countries, and they must do double the tax paperwork. Not a big deal if you’re an engineering firm with an office in Houston and one in Dubai, but a very big deal if you’re a complex multinational operating in 20 or 30 countries.



President Barack Obama, calling for an exhibition of “economic patriotism,” has indulged a distasteful sort of totalitarian rhetoric and denounced these expatriating businesses as “corporate deserters,” as though the perverse incentives to which they are responding were their own creation and not Washington’s. It takes a great deal to make Sweden look like a bargain by comparison, or to convince a purveyor of cheeseburgers and chocolate shakes that being headquartered in the world’s second-fattest country (after Mexico) is no longer in its best interest.


Almost as delicious as a Whopper is the involvement in the Burger King deal of Warren Buffett, President Obama’s favorite financier and the man with whose economic views he claims to associate himself. Buffett is a very high-profile supporter of a sanctimonious and dreary campaign to raise taxes on high-income Americans. Specifically, he is a proponent of raising the minimum effective tax rate on wealthy Americans to 30 percent, which would, among other things, increase the double taxation of income that Burger King would like to avoid. The majority of Burger King is owned by a Brazilian hedge fund, 3G Capital, founded by the Swiss-Brazilian banker Jorge Paulo Lemann, the 37th wealthiest man on Earth. Perhaps the rhetoric of American patriotism is less persuasive to Swiss-Brazilian-owned multinational conglomerates.

President Obama, as is generally the case, has this backward: Doing what is best for the United States would mean reforming the boneheaded and destructive tax code created by the energies of the best minds in Washington — not knuckling under to such stupidity.


There is a very good model for reforming the corporate tax code, one described by Harvard economics professor Greg Mankiw in the New York Times: Scrap it.


The corporate income tax is a relatively small source of federal revenue, accounting for about 9 percent of receipts. More to the point, corporate income eventually becomes personal income in the form of capital gains, profit-sharing, bonuses, and the like — and it makes sense to tax it once, when it hits somebody’s bank account, rather than twice, as is often the case under current practice: Profits are taxed once as corporate income, and then again when they are paid out as dividends. Professor Mankiw’s preferred alternative, a value-added tax, would be unnecessary under a sensibly reformed income-tax system.

In an increasingly integrated global economy, there is no particular reason that Burger King, or Apple, or General Motors, needs to be legally headquartered in the United States. The United States has much to recommend it: a stable government, effective courts and law, an enormous consumer market, and the world’s greatest work force. That’s on the “pro” side of the ledger. Washington’s first job should be, at a minimum, to cease adding new items to the “con” side. As currently constituted, the U.S. tax code is an impediment to business, keeping trillions of dollars in corporate earnings parked offshore. Converting that liability into an asset would do a great deal more for the real well-being of the American people than another witless speech about “economic patriotism.”