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Monday, August 25, 2014 11:10 PM

Burger King Flips Obama the Bird; BK, Warren Buffet, Greg Mankiw, Barry Ritholtz, Mish on Corporate Tax Inversion "Fairness"

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Obama Condemns CEOs

President Obama is fed up with corporations not paying their "fair tax".

On August 24, Bloomberg reported Inversion Express Slows to Crawl as Obama Condemns CEOs

On July 24 Obama referred to companies looking to shift their domicile as “corporate deserters” and aides pledged to curtail the practice with or without Congressional approval.

Since then, no companies have announced any of these deals -- known as inversions -- and it’s no coincidence, according to lawyers and investment bankers. The presidential rhetoric has caused several companies exploring inversions to put on the brakes to see what emerges from the political debate, people familiar with the preparations said.

Between mid-June and late-July, when Obama ramped up his criticism of the deals by calling companies that strike them “corporate deserters,” at least five large American companies announced plans for inversions, including AbbVie Inc. and Medtronic Inc. (MDT) Since the start of 2012, 21 U.S. companies have announced or completed such deals, or almost half the total of 51 such transactions in the last three decades.

After Obama called for “economic patriotism” from business leaders in July, Treasury Secretary Jack Lew said the agency was examining options for new rules that wouldn’t require Congressional sign-off.
Burger King Tax Bonanza

The Bloomberg headline "Inversion Express Slows to Crawl" was good for precisely 1 day.

Today we see this Bloomberg headline: Burger King in Talks to Buy Tim Hortons in Tax-Saving Move
Burger King Worldwide Inc., the second-largest U.S. burger chain, is in talks to buy Tim Hortons Inc. and move its headquarters to Canada, becoming the latest American company seeking to relocate to a lower-tax country.

Burger King would create the world’s third-largest fast- food chain by merging with Canada’s biggest seller of coffee and doughnuts, the companies said in a statement. The Canadian corporate tax rate is typically 26.5 percent, compared with 40 percent in the U.S., according to auditing and tax firm KPMG.

The deal renews debate over American companies shifting their headquarters internationally in search of lower corporate tax bills. The trend drew criticism last month from President Barack Obama, and his aides vowed that the administration would take action to curtail the practice.

“There’s some modest political risk to the deal, but it’s difficult to say because we haven’t seen the administration move to block one of these yet,” said Will Slabaugh, an analyst at Stephens Inc. in Little Rock, Arkansas.
Burger King Dares Obama To Stop It From Fleeing To Canada

The Huffington Post had an Obama-mocking headline: Burger King Dares Obama To Stop It From Fleeing To Canada
Burger King’s plan to scurry across the Canadian border to avoid U.S. taxes could be seen as the corporate equivalent of flipping President Barack Obama the bird.

The White House vowed earlier this month to use an executive order to curb tax inversions -- deals in which U.S. companies buy smaller foreign firms in countries with lower taxes, then renounce their U.S. corporate citizenship and re-incorporate in that country.

Still, Burger King said late Sunday night that it was in talks to merge with Tim Hortons, Canada’s popular bakery and coffee chain. The new, combined company would be headquartered in Canada.

In a research note, Potomac Research Group political strategist Greg Valliere said Burger King’s move challenges regulators at the White House and Treasury to back up threats to crack down on inversions.

“So much for the theory that Treasury could chill future inversion deals by hinting of possible action,” Valliere wrote in the note. “We still don’t expect regulations to be finalized until early next year, after a deliberative comment period, but we think there’s a good chance that Treasury will get a phone call today from the White House, urging quicker action.”

The White House did not immediately respond to a request for comment. A Treasury spokesperson and Radina Russell, a Burger King spokeswoman, both declined to comment.
Warren Buffet the Hypocrite?

The Wall Street Journal reports Warren Buffett Enters Tax Fray With Plan to Finance Burger King Deal for Tim Hortons
Investor Warren Buffett is helping finance Burger King's planned takeover of Canadian coffee-and-doughnut chain Tim Hortons Inc. according to people familiar with the matter, in a surprise twist that thrusts the billionaire into a debate over U.S. taxes.

Mr. Buffett's Berkshire Hathaway Inc. would invest in the deal in the form of preferred shares, some of the people said. Berkshire is expected to provide about 25% of the deal's financing, one of the people said. The exact structure of Mr. Buffett's participation remains unclear and the discussions are ongoing.

The investment would also thrust Mr. Buffett, known for championing American companies like Coca-Cola Co. and for advocating that wealthy individuals pay their fair share of taxes, into an uncomfortable position at the center of a spirited debate over U.S. tax policy. The deal is to be structured as a so-called inversion that would move the new company's headquarters to Canada. Such deals, which can help companies sidestep taxes, have drawn stiff opposition in Washington.
Barry Ritholtz, Mish on Corporate Tax Inversion "Fairness"

I commented on corporate taxes many times, most recently on July 14 in Reader Emails and Other Reflections On the "U.S. Corporate Tax Dodge"

Ritholtz proposes 5 measures that would promote "fair taxes".

  1. Kick them out of U.S. stock indexes
  2. Create a one-time tax holiday that allows companies to repatriate off-shore cash at a reduced tax rate of 15 percent.
  3. Require “publicly traded U.S. companies and U.S. subsidiaries of publicly traded foreign companies to disclose two numbers from the tax returns they file with the IRS: their U.S. taxable income for a given year, and how much income tax they owed.”
  4. Lower the top tax rate from 35% 25% or 20% but close all the loopholes
  5. Stop single-company legislation: Thanks to K Street’s army of lobbyists, tax legislation, loopholes and giveaways are concocted that benefit single industries or companies.

"The U.S. provides an outstanding place for these companies to operate and for their employees and executives to live and work. They should pay their fair share," says Ritholtz.

I replied "Ritholtz wants uniformity and fairness. I agree. Taxation at 0% would not only provide it, businesses would come to the US instead of escape from the US. How bad would that be?"

One Way to Fix the Corporate Tax: Repeal It

I was somewhat shocked that Greg Mankiw, a monetarist who I have blasted on numerous occasions regarding monetary policy came to a near-correct answer on this debate.

Greg Mankiw says One Way to Fix the Corporate Tax: Repeal It.
“Some people are calling these companies ‘corporate deserters.’ ”

That is what President Obama said last month about the recent wave of tax inversions sweeping across corporate America, and he did not disagree with the description. But are our nation’s business leaders really so unpatriotic?

Such tax inversions mean less money for the United States Treasury. As a result, the rest of us end up either paying higher taxes to support the government or enjoying fewer government services. So the president has good reason to be concerned.

Yet demonizing the companies and their executives is the wrong response. A corporate chief who arranges a merger that increases the company’s after-tax profit is doing his or her job. To forgo that opportunity would be failing to act as a responsible fiduciary for shareholders.

Of course, we all have a responsibility to pay what we owe in taxes. But no one has a responsibility to pay more.

The great 20th-century jurist Learned Hand — who, by the way, has one of the best names in legal history — expressed the principle this way: “Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes.”

So here’s a proposal: Let’s repeal the corporate income tax entirely, and scale back the personal income tax as well. We can replace them with a broad-based tax on consumption. The consumption tax could take the form of a value-added tax, which in other countries has proved to be a remarkably efficient way to raise government revenue.

Some may worry that a flat consumption tax is too easy on the rich or too hard on the poor. But there are ways to address these concerns. One possibility is to maintain a personal income tax for those with especially high incomes. Another is to use some revenue from the consumption tax to fund universal fixed rebates — sometimes called demogrants. Of course, the larger the rebate, the higher the tax rate would need to be.

I do not support a VAT, but as long as we are going to have taxes at all (and we are), then we need to make them as fair as possible. A broad-based consumption tax on everything but food and medicine would do exactly that.

Everyone eats, everyone pays zero% on what they eat. At times we all need medical services, and everyone would pay zero% on that in my plan.

There is no favoritism, everyone pays a percentage on everything but those items. Perhaps we should limit food to groceries, not restaurants.

Given that the poor spend a far greater percentage of their income on food and medicine we can eliminate or reduce Mankiw's concern about being "too easy on the rich or too hard on the poor".

Big Fear: Tax Neutrality 

The US really needs to get spending under control. My big fear is the plan would not be tax neutral, and that Washington would take this as a chance to bring in more revenue.

Regardless, this talk about "Economic patriotism" and "Corporate Tax Fairness" is complete nonsense.

Reflections On Patriotic Duty

If there is a patriotic duty, it should be to pay taxes in accordance with the law. Anything beyond that is ridiculous.

Corporations have an even more stringent responsibility to shareholders. Patriotic duty above what is required by law, to the detriment of shareholders, should be (and likely already is) against the law.

The correct approach is exactly as I suggested earlier on numerous occasions and Mankiw stated two days ago: Abolish Corporate Income Taxes.

Mike "Mish" Shedlock

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