CORPORATE BOTTOM-FEEDING

It is appropriate and legitimate that major corporations, for all their protestations about being “good corporate citizens,” should look for the best deal they can get. If corporate planning is all about profits, then they have no alternative.

But, if corporate planning is also about “stakeholders” i.e. the government of the country where they make their living, and the citizens who work for them, and the customers who come to them, - then there is more to corporate management than short-terms gains.

I had never heard of Zug until I watched a recent 60 Minutes. It is a little town in Switzerland that is host to hundreds of head offices of corporations, many of them American. They are in Zug, for the same reason they moved to the “Celtic Tiger” Ireland. (And look where that one has gone.) They are there for a lower corporate tax rate which saves them billions. In the U.S. the corporate tax rate is the highest in the developed world: 35%. In Canada there is a plan to lower the corporate tax rate. The government says it is to attract business. On the other side, a high corporate tax rate loses jobs.

Dare I evoke the old “he who sows the wind will reap the whirlwind?” The Swiss don’t rely on a lower corporate tax rate any more than remote places like Lichtenstein or some sandbar of a Caribbean island. Bermuda, a very prosperous place, has for generations housed thousands of corporate “head offices.” All of this is companies taking their money offshore to avoid paying taxes in the place where they make their money in the first place! The joker is that they have to spend that tax gain offshore. The moment they repatriate those profits to the U.S (or to Canada I guess) they will be taxed. President Obama, during his campaign, vowed to end the practice of American corporations taking their money offshore. We’re still waiting for fulfillment of that empty promise.

There is nothing new about competition for corporate head offices and factories. In the U.S. despite its having some kind of national imperative, has states warring against each other to attract offices and factories. When BMW went looking for a place to locate in America, they were coaxed and seduced and lured by the state offering the best tax holidays and the lowest taxes.(Not to mention indifference to unions.) It’s called “bottom feeding.” The irony is that the minute some other jurisdiction offers and even better deal, they pick up and leave. It was not that many years ago that Harley Davidson was rescued from bankruptcy by federal funds. And it was only recently that they decided to vacate their historic home in Milwaukee, Wisconsin. (There was a lot more to it, with takeovers and corporate changes.)

The other irony, and this is the “whirlwind” comment – is that Ireland finds itself reduced from Celtic Tiger to fish bait. They have had to be bailed out by the E.U. Their largest bank could not survive a stress test. Ireland is proof, if you need it after what the U.S. meltdown proved, that if you overheat your economy and let the “invisible hand” of the marketplace take over, you run a risk. Ireland, with its lower tax rates suddenly found itself overwhelmed with major companies setting up shop.(Long before that they gave tax-free benefits to celebrities who would buy homes and come to live in Ireland.) There were thousands of jobs created. Prosperity was raising the cost of everything, especially real estate. Giving lower taxes meant companies suffering under the burden of that 35% American tax could save billions. It was another of those “win-win” situations. Except that in the same way that an advancing army lengthens its lines of communications, the economy lengthened the hazards of overheating. Just imagine the forgone revenues. The irony of coursed is that without those low corporate tax rates, there would have been no taxes to forego.

And because there is more than one direction an economy will go, “up” suddenly evaporates. The world financial crisis hammered businesses in a country that had already sold the farm on corporate taxes.

Who is to blame? Certainly not the corporations whose imperative is to show profits. Certainly not the consumer who drools at the thought of more jobs and high priced real estate and a building boom and all the other familiar “bursting bubble” stuff.

It is hard to assign blame. In Canada the Conservatives are determined to get in the race with the other tax-cutting countries. High corporate taxation is not good for business, or so they say. But where do you stop? There can be no international agreement about rates. It would be like a cartel operating in restraint of trade.

Come to think of it….