The U.S. continues to have the highest corporate tax rate in the developed world. As such, companies domiciled within our borders are at a competitive disadvantage relative to corporations headquartered in other countries. Higher taxation means less money for expansion, factories, salaries and benefits. This has led many to use a legal process called a “tax inversion” to relocate their headquarters to lower tax nations.
Instead of fixing our broken tax code, some elected leaders continue to vilify anyone looking to lower their tax bill or identify other efficiencies.
This may play well in an election year, but it does not help America succeed. Bickering politicians make exaggerated claims that entities looking for lower taxes are traitors, if not criminals.
Perhaps the politicians fail to recognize that companies have a legal obligation to maximize shareholder wealth. Otherwise, why would shareholders risk investing hard earned savings in a company? They deserve the best return legally possible.
Interestingly, this dilemma and dynamic is not exclusive merely to nations and jurisdictions outside the U.S. It happens within our borders on a daily basis.
Texans have been the primary beneficiaries of companies looking to lower their cost of doing business.
Recent memory leads us to cheerfully welcome Toyota’s North American headquarters to Plano, as they bid farewell to California. However, they weren’t the first to seek a “domestic tax inversion.” In 1987 JC Penney left New York for Dallas and two years later Exxon made the same move for similar reasons—no state income tax, lots of land and lower regulation.
These are not cherry picked examples. In fact, a study published late last year by Joseph Vranich made interesting observations about doing business in a high cost state like California. The study highlighted that between 2008 and 2014, California lost all or some of 1,510 businesses. Of these, the largest number, or about 15% now call Texas home. They brought 37,553 new jobs and nearly $6.5 billion in investments to Texas in the process.
“This report echoes what businesses that relocate to Texas continue to say – they are sick and tired of being over-taxed and over-regulated and are making the economically sensible choice to move to Texas,” said John Wittman, deputy press secretary for the Texas Governor’s Office.
The report says the cost of doing business in California is 20% to 35% higher than other states. Of the jobs leaving California, the majority went to states that have no state income tax.
This movement to lower expenses was not just out of California and not just on the corporate side.
Investment manager David Tepper made news earlier this month when he announced he was moving his family and investment operation out of New Jersey to Florida—another state with no income tax.
New Jersey has the most punitive estate exemption in the country and is one of only two states to levy both an estate and inheritance tax. Additionally, it has a top income tax rate of 8.97% and the highest property taxes in the country.
If a jurisdiction taxes at higher rates than other areas—any company or family will logically assess where it is most efficient to set up shop. In the process, capital flows to where it is most efficiently utilized. Those jurisdictions that tax at a moderate level and encourage the formation of business will stimulate growth and provide for economic success.
In the process, as entrepreneurship expands and succeeds, more jobs are created. When more jobs are created, more revenue to fund local, state and federal governments are produced.
It is a delicate balancing act that is neither Republican nor Democrat in nature. Rather, it is a logic argument that affects all Americans. No jurisdiction should be so aggressive that they kill the goose that lays the golden egg.
In the end, capital flows where it is most efficiently used. Governments of all sizes must understand this simple, but critical lesson in business and economics.
Dave Sather is a Victoria certified financial planner and owner of Sather Financial Group. His column, Money Matters, publishes every other week.