When Toyota announced that it was moving its U.S. headquarters from California to Texas, some were surprised, but everyone understood why. Because of its high taxes and regulations, California ranks among the worst states in the nation in which to do business, and a move from California would have an immediate positive impact on Toyota USA’s bottom line. And Toyota is only the latest.
There are certainly costs involved in moving a business, including disruptions to the lives of its employees. But the migration of businesses from antagonistic states like California and New York to business-friendly states like Texas suggests that, for many businesses, it’s worth the move.
Freedom means both voice and exit. We tend to emphasize the “voice” part of freedom—democracy and participation in the political system—but exit is just as important. Free people are free to leave, and they’re free to take their capital with them when they do. That’s why, historically, anything that hints at restrictions on the movement of capital is a leading indicator of creeping fascism or totalitarianism.
Politicians have two choices when they see their policies driving people and capital to the exits. The wise ones learn from it and change their ways. Others, however, prefer their social vision above the freedom of the people, so they try to punish capital flight, which only hastens more people to the exits.
Because California is a state, rather than a nation, California can’t impose capital or border controls. That means that, while today California still doesn’t get it, eventually math will win and California will learn from the harm caused by its high tax policies.
Of greater concern is the fact that the same thing is going on at the national level, and there is no sign our politicians are learning. Pfizer, an iconic, major R&D-based American company, is seeking a deal with Astra-Zeneca that would facilitate moving its legal domicile to the U.K, which has lowered its corporate tax rate every year since 2007 toward an eventual 20 percent rate which will be achieved in 2015. As part of this reform, the U.K. also moved from a worldwide to a territorial tax system.
If that sounds familiar, it’s exactly the sort of corporate tax reform that groups like the Institute for Policy Innovation and others have been pushing for decades. And while our global competitors have learned the lesson and have adjusted their policies to attract capital, here in the U.S. our politicians just don’t seem to get it.
In other words, to go back to our Toyota illustration, the U.K. is Texas and the U.S. is California.
Meanwhile, what tune is the President fiddling while American jobs and capital are fleeing? He’s laying the groundwork for new environmental regulations on business that will increase the cost of doing business in the United States. And the Obama administration included a provision in its 2014 budget that would punish companies for moving capital offshore. That’s exactly the wrong impulse.
We can’t afford to go any longer without business tax relief. Short of fundamental tax reform, which will apparently require a different political climate, how about an emergency bill that simply guarantees that no U.S. business will pay more than a 20% tax rate?
Or something? Is anyone home in Washington DC? Or are they all just fiddling while capital flees?
May 7, 2014