WASHINGTON, August 27, 2014 —Burger King has just purchased the Canadian coffee and donut chain Tim Horten. This looks to be a good corporate marriage, blending Horten’s well-known coffee and donuts to Burger King’s well-known hamburgers and fries. It fills a crucial gap in Burger King’s business: breakfast. Burger King is losing market share to McDonalds because of breakfast, losing a great deal of money while McDonalds is making it.
Timmie’s dominates the breakfast market in Canada, selling 80 percent of the coffee sold by the cup. The merger makes perfect sense for Burger King. But was the real reason to avoid paying high U.S. corporate taxes? If it was, what can be done to stop other companies from doing this?
Tax inversions mean that U.S. companies relocate their legal headquarters to another country. This allows the company to avoid paying America’s high corporate taxes and instead pay less in another country. In the U.S., corporate income is subject to a 35 percent federal tax. In Canada, the corporate tax rate is 26.5 percent.
Companies seek tax inversion because it increases their after-tax income substantially. If a multi-billion dollar U.S. company is paying 35 percent before moving to Canada, the tax savings can be enormous. While this greatly benefits the corporation and its stockholders, it reduces tax revenue for the U.S. government, which continues to run huge deficits. In fiscal 2014, the federal deficit will exceed $500 billion, continuing a string of deficits larger than any seen prior to 2009.
But tax inversions are not the only economic problem facing the U.S. In the last two years, IRS behavior has been exposed as corrupt and intimidating. New ethical lapses and corruption at the agency are exposed on a regular basis. That needs to stop.
For the past five years of the recovery, economic growth, at 2 percent, has barely exceeded population growth. Contrast this to the almost 5 percent annual growth rate that occurred during the five years following the 1981 recession. This low growth rate has resulted in high unemployment and the lowest percentage of adults participating in the labor force in 40 years, 62.9 percent.
Is there an easy fix for all of this?
Yes, although implementation will be politically difficult. All we have to do is change the complicated, counter-productive federal income tax with this: A 15 percent, single-rate tax on all income above a livable minimum with no deductions for anything. All income is treated the same whether it is earned by wages, rent, interest, profit, dividends or capital gains. All deductions are completely eliminated.
The livable minimum would be determined by the poverty rate and family size. For instance, we might set the livable minimum at twice the poverty rate. For a family of four, that would be about $50,000. The first $50,000 that the family earned would be income tax free. Above that, a 15 percent tax would be paid on each additional dollar, no matter how many more dollars are earned.
The tax form would very simple. Just add up all income from all sources, subtract the livable minimum and pay 15 percent of the balance as a tax. There would be no receipts, no market distorting influences to spend or earn money in any manner, and no IRS looking over your shoulder, thus no IRS intimidation.
Not only would tax inversions end, but since the U.S. corporate tax rate would now be near the lowest in the developed world, the opposite to tax inversion may occur. We could see foreign companies in countries with corporate tax rates above 15 percent relocating to the U.S. This would have a positive effect on tax revenue and would help reduce the deficit problem.
It would also add significant growth to the economy. In the short term, we could see growth accelerate to 4 or 5 percent perhaps for the next three to five years. In the long term, this policy would likely add about ½ percent to the average growth rate that we have seen in the past.
Revenue from personal income taxes would also increase, mostly from high income earners who currently use tax breaks to reduce their tax burden to less than 15 percent. Additional revenue would come from the tax on the new income generated by the growth. And as the economy expands, new jobs would be created, reducing unemployment. Literally everyone would win.
So why will there be opposition?
Opponents will say this is merely a tax cut for the wealthy. The reality is that the wealthy pay about this rate now, and the tax cut for corporations will generate more total revenue, as tax inversions are eliminated and corporations can no longer shield their profits. While the rate may be lower, the total tax revenue would increase.
This is a simple solution that solves many problems. Are you listening Washington?