Burger King’s Smart Move

The Capital Express Is On the Move

“Progressive”  ideology is generally anti-business, anti-profit , pro-taxes and pro-redistribution of property.   But in our modern world, “time” has moved on; capital and labour are now more global and international than ever before. Because trade is increasingly global, pay rates in China affect trading conditions in New Zealand.  Capital and labour are more mobile than ever and can move relatively freely around the world. 

In the face of this growing internationalism (theoretically favoured by progressive ideology) progressives have actually become more and more regressive, wanting to drive national economies back to a more autarkic past with higher taxes and more government interventions to control wages, prices, and business activity.  One manifestation of this retrogression is the complaint of governments that “business” is evading tax by setting up in lower foreign tax jurisdictions, channelling their profits through the lower tax regime and maximising returns thereby to their shareholders.  President Obama has moaned about this tax leakage in terms which suggest he regards the practice as unpatriotic, if not corrupt.  Left-wing politicians in New Zealand have chanted the same mantra with respect to multi-nationals doing business in New Zealand.

Naturally the most easy and straightforward solution to a shrinking corporate tax base is to lower corporate tax rates.  If taxes are lower, businesses are encouraged to stay put; international businesses are encouraged to set up shop if the tax rate is competitive.  But since progressive ideology calls for an ever vaster government, lowering taxes is a hard trick to perform.   Meanwhile, business is driven by economic rationality and the globalisation of business requires that one must remain competitive world-wide or eventually be driven under.

The most recent high-profile example is international conglomerate, Burger King which is moving its business headquarters out of the United States to Canada, where its tax burden will be less.
  The technique is known as “tax inversion” and involves a US company buying a company in a lower tax jurisdiction, and then moving its corporate headquarters to the new company, thus paying lower taxes.  This, from Breitbart:

Burger King says it struck a deal to buy Tim Hortons Inc. for about $11 billion, a move that would give the fast-food company a stronger foothold in the coffee and breakfast market. The corporate headquarters of the new company will be in Canada, which stands to help lower Burger King’s taxes. Such tax inversions have been criticized by President Barack Obama and Congress because they mean a loss of tax revenue for the U.S. government. Burger King and Tim Hortons said the chains will continue to be run independently and that Burger King will still operate out of Miami.

This has caused a brouhaha amongst the progressive chattering classes, with some talking heads proclaiming that they will never buy another hamburger from Burger King because they are “cheating” on their taxes.  The President himself has sniffed, “You know some people are calling these companies ‘corporate deserters.’” Warren Buffett, one of the world’s most successful investors and progressive Democratic Party stalwart, has said he wants to pay more taxes, and believes that tax inversion is immoral.  Nevertheless, Buffett financed the Burger King deal, which reveals just how compelling the business case must be.

News of Buffett’s investment in Burger King has sparked American ire and charges of hypocrisy, as the “Oracle of Omaha” was a strong backer of President Barack Obama and a vocal critic blasting citizens for not paying their “fair share” in taxes.

Business is now global.  Capital is mobile.  The best defence for the tax base of the state is to ensure that  tax rates are competitive with those in other countries.  The best defence against the problem of mobile capital eroding the tax base is to have lower corporate taxes than other countries.  Then capital will migrate into the country and the overall tax base will rise.  But such a rational move is likely impossible when progressive ideology is in charge.  Smaller government, requiring less tax to fund it, would be Apocalypse Now to the Progressive/regressive mindset. 

The Pillage of Progressive Government

Evasive Action Increasing

It’s a hard lesson to learn, but sooner or later even the antediluvians amongst us will begin to comprehend.  Point #1: Capital and labour are the core components of any commercial enterprise.  Point #2: Capital and labour are mobile.

Now this has not always been the case.  Before the development of technologies that can move people relatively quickly and inexpensively from one side of the globe to the other, labour was relatively immobile.  In a particular area, the number of jobs were necessarily limited; in times of recession, sometimes severely limited.  That meant that employees were effectively reduced to being “price takers”.  They had little economic leverage to increase wages.  The number of employment opportunities was small or fixed; there was often surplus labour chasing those jobs.

Now, labour is globally mobile–more so than at any time hitherto in our age.
  If labour conditions are inadequate, labour can get up and move to take advantage of more attractive opportunities–whether in the same country or overseas.  No longer is it a case of selling up everything and joining a wagon train to trudge westward for months and months, through mortal danger in search of economic advancement.  Once packed, you can be anywhere in the world in 36 hours.  The only obstacles are visas and work permits.  These, too, are eroding barriers as free-trade agreements expand and multiply.

Capital, likewise, is increasingly mobile.  Businesses will relocate to secure cheaper, more competitive manufacturing locations.

New Zealand has experienced both capital and labour mobility.  It helps keep everybody honest.  But the worst millstone encouraging capital and labour flight to more attractive locations is state-imposed costs (taxes, rules, regulations, pension costs, compliance–most of which are dead weight costs, with no productivity benefits to offset at all.) 

Consider the following in California–once the sixth largest economy in the world, but now a shrinking violet, well past its early morning glory.  California has one of the most, if not the most, “progressive” state governments in the United States.  This particular piece, documenting both labour and capital flight out of the state, published  in the Los Angeles Times caught our eye.  Toyota is on the road.

Toyota Motor Corp. plans to move large numbers of jobs from its sales and marketing headquarters in Torrance to suburban Dallas, according to a person familiar with the automaker’s plans. The move, creating a new North American headquarters, would put management of Toyota’s U.S. business close to where it builds most cars for this market.

North American Chief Executive Jim Lentz is expected to brief employees Monday, said the person, who was not authorized to speak publicly. Toyota declined to detail its plans. About 5,300 people work at Toyota’s Torrance complex. It is unclear how many workers will be asked to move to Texas. The move is expected to take several years.

Of course Texas is not dumb, despite all those long-drawled vowels.  Because it runs a low cost government, infrastructure and regulatory dead weight in that state is much less than elsewhere in the United States.  Its smart pollies have been out and about telling the good news.

(Texas Governor) Perry last month visited California to recruit companies. The group Americans for Economic Freedom also recently launched a $300,000 advertising campaign in which Perry contends 50 California companies have plans to expand or relocate in Texas because it offers a better business climate. Like these other companies, Toyota could also save money in an environment of lower business taxes, real estate prices and cost of living.

Because of the lower cost of living in Texas, employees who move from California and migrate to Texas also benefit from the lower taxes, lower real estate prices, and overall lower cost of living.  They get an immediate boost to their incomes by moving with the company.  Labour is now as mobile as capital.

What can Texas do?  Not much. 

Frank Scotto, Torrance’s mayor, said he had no warning of Toyota’s decision. He said he did know that the automaker planned a corporate announcement for Monday. “When any major corporation is courted by another state, it’s very difficult to combat that,” Scotto said. “We don’t have the tools we need to keep major corporations here.”  The mayor said businesses bear higher costs in California for workers’ compensation and liability insurance, among other expenses.  “A company can easily see where it would benefit by relocating someplace else,” Scotto said.

Both New York and Texas have aggressively pursued major California corporations by promising a number of financial incentives to get them to relocate, he said.

Progressive government progresses government–and more government rules, regulations, intrusions, feather-bedding, protections, political payoffs represent dead-weight costs to both capital and labour.  And once enacted and introduced they become permanent.  Nothing can be done to change the dead weight they represent, short of a political and social revolution.   The result: capital and labour flight–because now both are mobile.

Most politicians and bureaucrats are slow learners.  They think they are smarter then the average Joe.  They think they have unlimited license to govern, which they believe means ruling, regulating and intruding.  They also believe they know better than everyone else and can run others’ lives and business enterprises better than the owners, the managers and the staff.  They also think they have a higher calling.  They are not (they tell themselves) self-interested.  They represent the public interest.  But when it comes down to it they are captive to a cluster of pressure groups to whose interests they have sold their soul because there are votes in the transaction.  Consequently they are both self-interested and selfish.  Unlike capital and labour, they do not have to earn the right to exist every day, in the face of fierce, remorseless, unrelenting competition.

Capital and labour are both self-interested and pragmatic.  If it will make the business more profitable to move to a more attractive location they will do so, because they can–more easily now than ever before.  But competition creates another discipline: the first to move gains competitive advantage.  In the end, other (competitor) businesses, have no choice but to follow.  A trickle becomes a torrent.  Toyota could no longer earn the right to exist if it stayed in California.  It had no choice.  Its staff will be coming to the same conclusion.

The velocity of labour and capital mobility is rising.  Both are voting with their feet.  The Californias of the world end up commercial and economic Chernobyls.  We have seen their future, and it is called Detroit.