The reality for anyone opening or operating a business is to evaluate locating it where you get the best sovereignty services. This is referring to how that area is governed by both local and national authorities. Some considerations include:
- Is crime or corruption high or low?
- Which does the government respect more: protecting liberty or its own control?
- Is there a high or low level of excessive regulations?
- Is there a high or low level of government debt and mismanagement?
- And finally, are taxes high or rising, or are they low or falling?
Taxes are a very big consideration when there is a large gap among different sovereign areas. This is because the companies operating in a high-tax locale cannot compete against a similar company that is domiciled in a low-tax locale. The low-taxed company will continually have more money available for: research, product development, marketing, higher salaries and benefits to attract better workers, buying higher quality raw materials, accessing lower loan rates, and many other reasons. Each year this financial gap will continue to benefit the lower-taxed company and punish the higher-taxed company.
In this way, there is an easy allegory for locating your business in a high-taxed country, state, or city; and that is entering a running competition. In this case, you are the only competitor in the race that must drag a 50-pound weight the entire time. What is your chance of ever winning a race with this limitation? Zero. And each day is a new race for business customers so that your company can thrive.
When companies realize that they are competitively hindered from tax disparities, they relocate to survive. There are countless examples of both individuals and companies relocating when a U.S. city or state raises their tax rates. For a long time now the U.S. has the highest corporate-tax rate in the world, 39.1% while the average for industrialized nations is only 25%.
In order to remain globally competitive, companies have been ex-patriating from the U.S. to more favorable tax locales for years. Whenever a high-profile company leaves the U.S., Washington politicians impose more penalties and regulations that prevent additional companies from leaving. Passing a law that imprisons companies is easier to do than the hard work of making your country more competitive with reasonable tax rates. But imprisoning a company is also self-defeating in the long term because the business will choose to expand overseas where it is treated better, and not here.
One of the last ways that a public company can ex-patriate to a country with more favorable treatment is called a “tax inversion.” This is when a U.S. company merges with a foreign company located in a country with lower corporate taxes, and re-incorporates in that country. Several large companies that you may recognize have done this: Burger King, Sara Lee, Fruit of the Loom, Seagate, and Pfizer. The latest big company that used an inversion to flee high taxes is Johnson Controls. They are a $23 billion dollar automotive-manufacturing company and they will save $150 million – each and every year going forward – by moving to Ireland.
Politicians call moving your corporate domicile an “unpatriotic-tax dodge.” But I view these companies as welcomed heroes that are helping to put pressure on lazy politicians to actually get to work and focus them on completing the correct task: To make the U.S. the most attractive location to domicile any business by every quality metric; which includes a reasonable tax structure for both individuals and corporations. Plus, everyone with these inversion stocks in their portfolios (which is likely to be anyone with a pension or stock fund) will receive permanent financial gains.