American Elephants

Obama’s Corporate Refugees—Fleeing For Their Lives. by The Elephant's Child

Wristons Law

Fear of violence and mayhem has led to millions across the world to grab their stuff and run, to become refugees in another country with  little in the way of resources. But what causes corporations to move to another country, to become corporate refugees domiciling their business in another country. That’s a big move!

Incentives matter. Thank the Obama administration. This is not a case of corporations offshoring jobs, but of corporations moving their headquarters elsewhere. Democrats don’t seem to understand incentives. The late Walter Wriston stated it succinctly in The Twilight of Sovereignty:

Capital will go where it is wanted and stay where it is well treated. It will flee from manipulation or onerous regulation of its value or use and no government regulation can restrain it for long.

One of the latest examples is Medtronic, famous for its high-tech cardiac and spinal devices. Medtronic’s planned acquisition of Covidien has been accompanied by the announcement that the combined company will be domiciled in Ireland. Medtronic says the move will mean at least $850 million in annual cost savings by 2018. The combined company will have more leverage to defend their prices when negotiating with consolidating hospital and physician groups. Their technology combined with Covidien’s manufacturing, research and development assets, the company says, will give it an edge in emerging markets.

Senator Carl Levin (D-MI), who chairs the Senate Permanent Subcommittee on Investigations, has been conducting show trials against companies who legally seek to minimize their tax bills. So businesses are apt to not talk a lot publicly about that particular need.

So what’s the incentive? America’s federal corporate tax rate is 35%, which when combined with state and local levies climbs to nearly 40%. Ireland, where politicians care about economic growth has a corporate tax rate of 12.5%. Almost alone among civilized nations, Washington also insists on being paid on a company’s world-wide earnings, rather than just on money earned in the US. This tax is due whenever a company’s overseas earnings are returned to this country.Medtronic has about $14 billion parked overseas, and rather than bringing it home and triggering the tax, they will use the money to fund most of the cash portion of its $42.9 billion purchase. Pretty major incentive. Somebody should explain this to Senator Levin.

The nearly 40% average tax rate in America is almost double the 21% average tax rate in the European Union, or the 22% rate in Asia. The only place outside of captive Marxist countries with a higher rate than the U.S. is the United Arab Emirates, but their top rate of 55% is mostly applied to foreign oil companies.

The business of business is to return a profit to the shareholders. People band together to make a product or deliver a service in order to get a return on their effort. People get strange ideas about what a business is supposed to do. An employee is a cost to a business. Providing someone with a desk and a computer, let alone more elaborate equipment is expensive. Why do companies pay one worker more than another? Competition. There is seldom if ever a company that does not have competitors. The one of the competitors who has better employees is apt to do better in the marketplace. Companies offer better benefits or extras like free parking or a corporate gym to lure better employees. It’s a business decision, not an obligation.

Note that I have just mentioned two words that are anathema to the left: “profit,” and “competition.” Oddly enough the left thinks that profit is a bad thing, and competition is unhealthy. They’ve even tried to eliminate kid’s games that involve competition. Everybody should get a prize — no winners. You see the problem. When you add in the inability to understand the power of incentives, you see the source of a remarkable amount of political dissension.

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Levin has apparently made a few noises about “investigating” Medtronic for their planned move. I asked several people I know who work for Medtronic (including the VP of Marketing) what they think. The general response? If they ever do come back to the U.S. (which would be what they prefer), they certainly will not be locating their headquarters in Michigan.


Comment by Lon Mead

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