Category Archives: markets

Another Look at Tax Inversion Mergers

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Burger King Worldwide Inc is in talks to buy Canadian coffee-and-doughnut chain Tim Hortons Inc, a deal that would be structured as a so-called tax inversion and move the hamburger seller’s base to Canada.

After all, Canada’s corporate tax rate is competitive even with Ireland’s 12.5% rate, at least from the lofty perspective of our own 35% top corporate rate: Canada’s rate is 15%. This inversion isn’t just the fiscally sound thing to do, it satisfies the company management’s fiduciary duty to control costs and maximize profits for the company’s owners.

BK isn’t alone in moving to Canada:

Valeant Pharmaceuticals International Inc, which had been based in California, combined with Canada’s Biovail Corp in 2010 and redomiciled in Canada. The company now has a tax rate less than 5%.

And there are others.

Naturally, the Progressives in Congress and the White House—and no few captured Republicans—are demanding a stop to the inversions. Not in any sensible way, though. Treasury, for instance, is looking at a range of “options to deter or prevent” inversions.

No, BK’s pursuit of an inversion deal only illustrates the distorting, anti-competitive nature of our current tax code, and Treasury’s “options” will only make the thing worse. The right answer is to lower US corporate tax rates to competitive levels. When it becomes more attractive to be in the United States, to invest in the United States, to have a chance actually to turn a profit in the United States, not only will the BKs, the Valeants, and the AbbVies and Covidiens, et al., stay, foreign companies will look to come to the United States, bringing their ideas, their money, and their jobs here.

Even Canada, right next door (the convenience…), is becoming host to these things. But (even) Canada has been improving its tax structure for some years, lowering its corporate tax rate since 2005 from over 22% (still lower than the US’ then) to just 15%. Indeed, here’s a hint:

Tim Hortons [originally a Canadian company until its acquisition by Wendy’s] initially kept its headquarters in Delaware after it was spun off by Wendy’s in 2006. The chain moved back to Canada in 2009, shortly after the Conservative government in Canada lowered the nation’s corporate tax rate.

Obamacare and Jobs

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The results are starting to come in, via three independently done polls by three separate Federal Reserve Banks.

The Federal Reserve Bank of Philadelphia:

  • 78.8% of businesses in the district have made no change to the number of workers they employ as the specific result of ObamaCare
  • 3% are hiring more
  • 18.2% are cutting jobs and employees
  • 18% shifted the composition of their workforce to a higher proportion of part-time labor
  • 88.2% of the roughly half of businesses that modified their health plans as a result of ObamaCare passed along the costs through increasing the employee contribution to premiums, an effective cut in wages

The Federal Reserve Bank of New York asked about the “number of workers you employ.”

  • 21% of Empire State manufacturers and 16.9% of service firms answered “reducing.”

The Federal Reserve Bank of Atlanta:

  • 34% of businesses planned to hire more part-time workers than in the past, mostly because of a rise in the relative costs of their full-time colleagues

And the pièce de résistance:

  • ObamaCare’s labor effects would be concentrated in some industries with relatively low-wage or marginal workers.

Hmm….

Drug Markets and Regulation

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With this attitude, we’re not going to have much of a drug development or production industry—to the detriment of our drug market.

“A big part of our concern is not just Sovaldi [a new, and so still very expensive, drug with a near-perfect cure rate for Hepatitis C], but all the other specialty drugs,” said Mario Molina, the CEO of Molina Healthcare that runs Medicaid and ObamaCare plans in nine states, on a July earnings call. He added: “I think that the government needs to step in here and make sure that the market is rational. If we as a health plan want a rate increase, we have to go to our regulators and get it approved. There’s no such thing going on in the pharmaceutical market.

Molina’s last is a valid beef. Health plan providers shouldn’t have to go to government regulators to get permission to set a price, either. Government simply should not have that regulatory power. But a man used to government regulation, indeed who’s dependent on his company’s status as a protected oligopolist, no longer even can conceive of having to compete on price and service.

He concluded his plaint:

Right now, pharmaceutical companies can charge whatever they want, and I think there needs to be a rational basis for all of this.

Of course, there is exactly that rational basis: it’s the supply and demand price setting of a free market.  Again, though, a concept lost on a man of a protected oligopoly.

A Trade War

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Russia has announced that it won’t buy certain goods from certain of the nations that are sanctioning Russia over its invasion of Ukraine and its fomenting of rebellion in eastern Ukraine. This is a trade war that Russia shouldn’t be expected to win.

For one thing, Russia’s economy is the size of Italy’s and more moribund, so any trade war can only hurt Russia relatively more than it can hurt the far larger economies of the US, the EU, Australia, Canada, even Norway, who are the targets of the Russian boycott.

For another thing, here are some facts related to this boycott.

[Russia has] banned imports of meat, fish, milk and milk products, and fruit and vegetables….  The ban has been introduced for one year

[Russia] may also introduce restrictions regarding imports of planes, navy vessels, and cars…

And

Russia depends heavily on imported foodstuffs—most of it from the West—particularly in the largest and most prosperous cities such as Moscow, where imported food fills an estimated 60-70% of the market. Food and agricultural imports from the US amounted to $1.3 billion last year, according to the US Department of Agriculture, and in 2013 the EU’s agricultural exports to Russia totaled €11.8 billion ($15.8 billion). [This is against GDPs of $17.3 trillion and €13.1 trillion for the US and the EU and ₱75.8 trillion ($2.1 trillion) for Russia.]

A year, though, is plenty of time for the banned sellers to find new markets, which reduces the long-term need to sell to Russia at all. This, in turn, produces a capacity functionally to embargo Russia with respect to those goods—not by explicitly and legally refusing to sell to Russia, but by voluntarily and economically selling elsewhere instead.

A year also is plenty of time for Russia to find other sellers: Latin America, Turkey, other ex-Soviet nations, and so on. Russians won’t starve. However, the reason these other sources aren’t current suppliers is because the boycotted nations can sell into Russia at lower prices than those alternatives. These alternative sellers will, almost necessarily then, cause higher prices in Russian stores.

Entitlements and Taxes

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Dr Ben Carson had a couple thoughts a while ago; they’re still valid.

On taxes:

What we need to do is come up with something simple. And when I pick up my Bible, you know what I see? I see the fairest individual in the universe, God, and he’s given us a system. It’s called a tithe.

We don’t necessarily have to do 10% but it’s the principle. He didn’t say if your crops fail, don’t give me any tithe, or if you have a bumper crop, give me triple tithe. So there must be something inherently fair about proportionality. You make $10 billion, you put in a billion. You make $10 you put in one. Of course you’ve got to get rid of the loopholes.

On health care:

Here’s my solution: when a person is born, give him a birth certificate, an electronic medical record, and a health savings account to which money can be contributed—pretax—from the time you’re born ’til the time you die. If you die, you can pass it on to your family members, and there’s nobody talking about death panels. We can make contributions for people who are indigent. Instead of sending all this money to some bureaucracy, let’s put it in their HSAs. Now they have some control over their own health care. And very quickly they’re going to learn how to be responsible.

The only place I disagree with him is on the degree of heritability of the HSA. Given the slowness of growth of the relevant supply (of health-related services) compared with the rapidity of growth of its demand, accumulating wealth in an HSA would over just a couple of generations create too much money earmarked for health services; this money would rapidly increase health services prices. And that would price those just starting out—newborns, new immigrants, and so on—out of the health services market, just as the present system and its immediate precursor have done. Instead, let the dearly departed’s remaining HSA be passed into his estate as an ordinary asset of the estate, and let each new entrant—those newborns, new immigrants, and so on—start their own HSAs anew.

Nonetheless, The Wall Street Journal titled their article about these thoughts “Ben Carson for President.” We could do worse.