Jigsaw puzzles and American corporate taxes

Some of my shorter and younger friends and I have been playing with jigsaw puzzles lately. We started with a few from Ravensburger. These are made in Germany. Every piece from every puzzle has been perfect. Then we moved on to a 550-piece puzzle from White Mountain Puzzles. The box is proudly stamped “Made in USA”. The price is about the same but the quality is ridiculously poor by comparison with “hanging chads” marring a lot of pieces as well as some delamination of the photo and cardboard. I thought “If I cared about making puzzles I would emigrate to Germany.”

This dovetailed with news reports of American politicians fulminating against multinational companies officially relocating from the U.S. to Ireland, Switzerland, England, and other countries with lower corporate tax rates. The language used is more or less the same as what I’ve heard from Third World leaders over the past four decades as various forms of currency controls are imposed in an attempt to stop capital flight. The main objection seems to be that the relocation is a sham and that the top executives stay put in the U.S. and run the company from here. I’m wondering if we wouldn’t ultimately be sorry if we got what our politicians say that we want.

Consider a multinational such as Procter and Gamble. Their executives sit in Cincinnati. The growth that they are supposed to be managing is mostly in Asia, Africa, South America, etc. The company might do better if the executives relocated to Dubai, for example, closer to growing markets, or to Switzerland, with its inherently international character. If we put a stop to corporate relocations where the top managers stay put in the U.S., pay U.S. income tax rates, pay U.S. property tax rates on their mansions, etc., wouldn’t the next logical step be a wave of corporate relocations in which the executives move as well? To save billions of dollars in corporate taxes would it be such a hardship to move from Cincinnati to Geneva? Just catch the company Gulfstream for a ride back to the high school reunion…

 

 

11 Comments

  1. john galt

    August 8, 2014 @ 11:03 am

    1

    How about lowering corporate rates to 0%? Corps can (eventually) only do 2 things with their profits: re-invest them (which creates more jobs+profits), or pay them out as income to individuals (which is already taxed). By taxing corp profits we are creating fewer jobs and paying less income – does this really benefit society?

  2. lelnet

    August 8, 2014 @ 11:16 am

    2

    Any sane person who’s been to both Cincinnati and Geneva would do that move for free, if it weren’t for the fact that the corporation they work for (and/or run, in the case of senior executives) requires them to stay.

  3. Ed

    August 8, 2014 @ 11:34 am

    3

    In contrast to what lelnet says, I think you are overestimating the cosmopolitanism of American corporate executives. My guess is that P & G executives really, really like living in southeastern Ohio, and to some extent the firm selects for executives who are at least comfortable with that lifestyle. After all, there is nothing from stopping P & G from relocating away from the heartland within the US and they don’t. A corporate executive who prefers Cincinatti to New York won’t want to relocate to Geneva.

    My main point is that I completely miss why the U.S., as a policy matter, would be interested in the executives and owners of companies that manufacture mostly outside the US, and sell mostly outside the US, to live in the US. Consider an Indian company, that of course mostly manufactures in India and sells in India, though they may have made some small investments in American companies and real estate. Would you advocate the government try to convince the Indian excutives to live in the US, even though their manufacturing operations and much of their market is in India? By contrast, keeping some highly paid people in the US, that are associated with companies that have already effectively moved elsewhere, drives up costs for the people who have to live where they live, and may act as a barrier for a new American company to emerge that would otherwise replace the one that just left.

  4. John Blackburn

    August 8, 2014 @ 1:21 pm

    4

    First, nice use of fulminating. Second, not all jigsaw puzzles made in the USA are flawed. The puzzle pieces in Art Scrambles, our iOS app, are flawless! :-)

  5. Izzie L.

    August 8, 2014 @ 1:35 pm

    5

    What lelnet said. I visited my daughter in Cincinnati this summer (she was an intern at GE Aviation) and while the people were very nice in a Midwestern way, it was not exactly Paris or Geneva. You have to wonder why P&G hasn’t left already. Mostly I think it is because they have historic roots there (very deep roots) and feel loyalty to their community. But if the government demonizes them as dirty unpatriotic capitalists enough to make them feel unwelcome, they may think twice about this, especially given that the US has the highest corporate tax rates of any major industrial nation.

    I’m guessing that all the noise about “inversions” is just to please the left side of Obama’s base. There is little if any chance that Congress will change the Internal Revenue Code in order to prohibit inversions with Republicans in control of the House (and probably soon the Senate). Without changes in existing law, it would be very hard to stop the inversions, which are perfectly legal under existing law. If anything, the pronouncements may have a paradoxical effect – companies will do them now, while they are still grandfathered in, rather than take the chance that they won’t be able to later. A serious President would have legislation prepared (with a retroactive date) and a plan to get that legislation passed before he said anything publicly. That’s how adverse changes in the tax code have been done in the past.

    It’s hard for Americans to get used to the idea that we are no longer the center of the universe, but that’s the truth. In industry after industry (auto production, steel production, many agricultural products, etc.) not only is the US no longer #1, but in many such areas we are barely a pimple on China’s butt. Just to give one example, the US is the #2 apple producer, at 4 million tons, but China produces 36 million tons.

    Philip is right that these kind of pronouncements just make Obama (and the US) look weak and pathetic like some tin-pot 3rd world Chavez. The question should be, why aren’t companies seeking to move their domiciles TO the US instead of out of it? There are many more examples of counter productive moves. Recently there have been stories about cities raising their minimum wage to $15/hr and also stories about the NLRB ruling that even though many McDonald’s locations are individually owned by their franchisees, for union bargaining purposes they should all be treated as if McDonalds was their employer. And then even more recently, we heard stories about self-checkout systems being implemented at McDonald’s restaurants. Who could have seen that coming?

  6. Vince

    August 8, 2014 @ 8:35 pm

    6

    The language used is more or less the same as what I’ve heard from Third World leaders over the past four decades as various forms of currency controls are imposed in an attempt to stop capital flight. The main objection seems to be that the relocation is a sham and that the top executives stay put in the U.S. and run the company from here.

    Is it not reasonable to call it a sham?

    Another important point to consider is that a corporate headquarters consists of more than just a few executives. Procter and Gamble probably has a large number of employees in Cincinnati coordinating its worldwide activities. Moving them all to Europe would be no simple matter. On top of that, everything is more expensive in Geneva due to the strong Swiss franc.

    Also, Izzie, this article from a couple of days ago referenced an article written by a Harvard Law professor that suggested that there are things that president can do in this area without Congress:

    http://www.nytimes.com/2014/08/06/business/Action-in-washington-on-corporate-inversions.html?_r=0

  7. Izzie L.

    August 9, 2014 @ 12:18 am

    7

    From the article: “It’s also a politically opportune time for the president to focus on the issue, as he works to contrast his economic vision with that of Republicans in advance of the midterm congressional elections.” Just as I said.

    This is what the WSJ says in an article about the professor’s article:

    http://blogs.wsj.com/moneybeat/2014/08/08/meet-the-law-professor-whos-crashing-the-inversion-party/

    “Two tax lawyers involved in possible inversion deals said even some of his more novel ideas, which appear at first glance to be radical interpretations of the Treasury secretary’s powers, are prompting conversation.”

    “Radical interpretations” of executive branch powers are often looked upon skeptically by the courts and there is certainly enough money at stake here to pay for a fight.

  8. Marcel Popescu

    August 10, 2014 @ 2:08 pm

    8

    “A serious President would have legislation prepared (with a retroactive date)…”

    Something like that is illegal in my country (Romania); I am really surprised to hear that it’s legal in the US.

  9. philg

    August 10, 2014 @ 2:30 pm

    9

    Marcel: There’s some discussion of retroactive laws in http://www2.law.mercer.edu/lawreview/getfile.cfm?file=47407.pdf ; it seems that tax rate changes can easily be applied retroactively but entirely new retroactive taxes may not be Constitutional unless they were “foreseeable” (though now that the U.S. government owes about 500% of GDP (5 years worth) in debt and obligations such as Medicare and Social Security (see left sidebar of http://www.nytimes.com/2010/03/12/business/global/12pension.html?hp=&pagewanted=all&_r=0 , one could argue that any and all new taxes were foreseeable).

  10. Izzie L.

    August 12, 2014 @ 10:27 am

    10

    At the very least, the effective date of tax law changes is usually the date that the legislation is first proposed rather than the date that it is passed by Congress – otherwise taxpayers would rush to do transactions in the interval between announcement and passage. Also, taxpayers are put on notice at that point, so there is no question of unfairness.

    Generally speaking “ex post facto” laws are Constitutionally forbidden in the US – you can’t retroactively make some act a crime that was legal at the time the conduct occurred. However, tax laws are apparently different since they are “only money”. Frankly, the logic the Carlton line of cases is somewhat tortured, but when the government needs the money, whaddaya gonna do?

  11. Maureen Coffey

    August 17, 2014 @ 3:40 pm

    11

    “A corporate executive who prefers Cincinatti to New York won’t want to relocate to Geneva.” – No, probably not to the relatively expensive, rich, costly, French-speaking Geneva. But there are regions in Switzerland where someone from Cincinatti might want to live as easily. However, there’s more to relocating to any one place in particular if you are a global company. The Earth is round so if the company is truly, truly global, then relocating the headquarters to anywhere on the globe is essentially moving it further away from one place and closer to another. You might as well stay put. This does not go for manufacturing and distribution centers – they need to be optimally close to either raw materials or consumers which is why they will be scattered and be all over the place while head quarters are always in one place and on a globe any place is about as good as another which speaks always, almost always, for the incumbent location …

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