Arnold Kling  

Why Don't U.S. Corporations Threaten to Exit?

PRINT
Rational Religious Ignorance?... Dorman on Minimum Wage...

A reader has the following question:


corporations have the power to exit, by locating headquarters overseas, essentially trading its "US citizenship" for one of a number of more attractive locations. Though I admit, corporations can't do this costlessly.

Why is the threat of exit, in this case, not leading to corporations getting more of what corporations want from politicians?

In fact, the threat of exit does get used and it does work. "If you do X, then this financial market will move to London" was a threat that was often used to talk Washington out of doing X with respect to financial regulation.

However, the threat of exit is often not credible, for various reasons. For one thing, once you relocate your headquarters, your ability to influence U.S. policy diminishes. For example, suppose that AIG or Goldman had moved their headquarters overseas five years ago in order to escape high U.S. corporate tax rates. Would they have received as much government support in the crisis?

Within the U.S., there is some evidence that economic activity has shifted away from business-hostile "blue" states to business-friendly "red" states. To the extent that this is true, it does not seem to have caused politicians in blue states to switch colors.

[UPDATE: Tim Worstall says that it is easier for European companies to relocate within the EU than it is for a U.S. firm to leave to go to the EU. The next question is whether one can see an effect of this greater mobility on policy. That is, does the greater mobility increase the political effectiveness of the threat to exit?]


Comments and Sharing


CATEGORIES: Political Economy



COMMENTS (21 to date)
ThomasL writes:

I recall Microsoft threatening to move to Ireland if a certain piece of legislation passed.

This wasn't too long ago--within the last 2 or 3 years.

I'll look up the details later. The threats do happen though. How often they work, I couldn't say.

jsalvatier writes:

This happens a lot between states. As I recall, Boeing threatens to move from Washington pretty frequently.

jsalvatier

I think they already moved some production to some Southern state from Washington last year.

Patrick R. Sullivan writes:

Boeing has done more than threaten. It is opening its new 787 plant in S. Carolina

Guy In the Veal Calf Office writes:

Both individuals and corporations must pay an exit tax when they leave, generally under IRC 877A and 367(b)/482. The benefit might be limited because the U.S. taxes foreign corporations on income arising in the U.S. (moving to a no-tax country almost guarantees the absence of a tax treaty and the presence of a tax treaty almost guarantees you're paying a real foreign corporate tax).

A multinational can defer taxes of foreign divisions or subs by leaving cash there. The tax on repatriating that cash is a very nice incentive to make future acquisitions and investments abroad, not in the U.S. So future growth organically occurs abroad, a kind of slow moving expatriation that avoids the exit tax.


ajb writes:

I think Arnold underestimates the power of regional competition. If there hadn't been such a variety of states and jurisdictions I claim that the US would long ago have fully mimicked European social democracy. It is precisely the Federal system coupled to high mobility and diversity that explains why the US never fully went down the Euro welfare state route after WWII.

Has that competition produced IDEAL adjustment?
Let's be serious. What ever does that in the real world?

Brad Warbiany writes:
Why is the threat of exit, in this case, not leading to corporations getting more of what corporations want from politicians?

Who said corporations aren't getting what they want from politicians?

Tax policy is only one aspect of the ball game, and as the "Guy in the veal calf office" above points out, once a corporation is multinational they have all sorts of ways of avoiding paying US corporate taxes on their profits.

But I don't buy the premise that US corporations, at least at the size at which they can successfully lobby Washington DC, are not getting what they want.

After all, it's often pointed out on blogs like this (although perhaps more at places like Cafe Hayek and Coyote Blog) that regulations are often written to hurt the small competitors, thus leading to an oligopoly of suppliers. Taxes may be a small price to pay for regulations raising the barrier of entry for new competitors.

tjames writes:

It seems a further proof of this is the desire of the high tax Eurozone countries to "harmonize" tax rates with the lower tax Eurozone countries. Harmonize, in this context, always mean "you low tax countries need to charge the same high rates we do to stop the flow of companies and business out of our countries and into yours."

This, to me, is one of the strongest arguments in favor of simply doing away with corporate taxation. We don't need any more incentives for coporations (i.e. employers) to move away from the US, and we could use the positive pressure for coporations to locate more operations here. Corporate tax burdens eventually fall on someone anyway, so just tax people directly instead.

Huxley writes:

Boeing did in fact move its headquarters to Chicago several years ago. Transocean and Foster Wheeler are American corporations that moved their headquarters to Switzerland.

GU writes:

More on the tax issues. Congress recently enacted tough new laws (I.R.C. §7874) to prevent corporate "inversions" where U.S. corporations with overseas operations (or at least holding companies) "invert" via a token transaction, making their place of incorporation overseas (usually in a low-tax jurisdiction) and keeping the U.S. operations as foreign subsidiaries.

Absent §7874 , this inversion setup can be used to obtain extremely favorable tax outcomes for the corporation, with little real changes to the underlying business operations. (I won't bore you with the details).

So, "old" U.S. corporations are "trapped" in the U.S. (unless they are bought out in a bona fide, arm's length acquisition by a foreign person/business). Once you incorporate in the U.S., the power to "exit" is pretty limited. We should expect new business to incorporate overseas for tax reasons (apart from potential regulatory reasons). For those interested, a new paper explores some of these issues. See here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1683642

R. Richard Schweitzer writes:

you write:

"To the extent that this is true, it does not seem to have caused politicians in blue states to switch colors."

Yet !

It is just possible that we are about to enter another stage in the "evolutionary" development of business organizations - "Firms."

The prevailing Corporate Type firms are already being replaced with other structures and means of relationships.

The relationships are no longer limited to, or in some cases even dominated by, those of "Capital & Labour."

Brian Singer writes:

Small companies, smaller than those able to influence public policy, can easily locate offices outside the US and keep foreign sourced revenue from entering the US. There would be no big public splash, but the potential drain on the US economy is not insignificant. People and institutions respond to incentives, larger companies have an incentive to play the political game.

Bill Drissel writes:

Boeing did move their HQ to Chicago in 2001.

Bill Drissel
Grand Prairie, TX

Bruce True writes:

I'd think it suggests that corporate complaints about being over regulated and the like are overblown.

Greg Ransom writes:

Businesses move from California to Nevada every day.

They now number in the hundreds.

Nevada even advertises on TV encouraging more firms to pick up and move.

If I'm not mistaken, California is no longer the headquarters of any major oil company.

Here's a list of companies that have recently left:

http://thebusinessrelocationcoach.blogspot.com/2010/07/calif-business-exodus-explodes-in-1st_15.html

I doubt there is a person in California who doesn't know someone who has left the state do to a job relocation out of California.

Matthew Gunn writes:

If firms can freely exit, wouldn't the cost of corporate taxation and regulation be borne by those less able to exit, for example, customers and workers?

If firm owners don't bear the burden of taxation, then they would gain nothing by relocating to lower corporate tax countries. Workers and customers could gain by switching countries, but it's difficult for them to switch. Anyway, it's not clear to me at all that changes in tax rates necessarily should cause significant relocation by firms.

Hyena writes:

Perhaps the issue is simply more complicated than they imagine with large losses that are not part of the average person's calculations.

That happens a lot when economic theory doesn't match facts.

Doc Merlin writes:

@Arnold: Um, corporations do threaten to exit all the time.

@ Hyena:
Nah, Arnold is just wrong in this case, it happens constantly.

Here are some examples:

Here is an article in businessweek about companies moving to switzerland.
http://www.businessweek.com/magazine/content/09_38/b4147062134006.htm

Here an article about Houston oil companies.
'Noble Corp. plans to move head office to Switzerland

By BRETT CLANTON Copyright 2008 HOUSTON CHRONICLE
Dec. 19, 2008, 2:25PM
Noble Corp. today became the latest in a recent string of Houston oil and gas firms to announce plans to move their corporate headquarters to Switzerland, a change experts said is cheifly for tax purposes'

"The announcement came the same day Transocean, the world’s largest offshore driller, completed the process of changing its incorporation from the Cayman Islands to Switzerland."

"Last year, Houston oil field services firm Halliburton Co. cited similar reasons for establishing a dual headquarters in Dubai and moving CEO Dave Lesar there"

Note, Halliburton actually tried to move straight up, to Dubai, but were convinced to just split up the headquarters.


Here is an article entitled "Corporate oil booms in low-tax Switzerland" http://www.reuters.com/article/idUSTRE52B08T20090312


Here is a blogpost about it:
"Energy Companies Make Plans to Move to Switzerland to Avoid Obama’s Taxes"
http://americaswatchtower.com/2009/03/13/energy-companies-make-plans-to-move-to-switzerland-to-avoid-obamas-taxes/


Here is microsoft threatening to move jobs overseas:
http://www.fiercecio.com/story/microsoft-threatens-move-jobs-overseas/2009-06-06

PrometheeFeu writes:

And let's be honest here. Where will US corporations move to? Quite honestly, for most corporations, I would argue that the US still provides the most attractive institutional setting. It's kind of the same reason the economic crisis despite being centered in the US resulted (partially) in a flight to the dollar. Sure, the dollar isn't doing well, but it's still a heck of a lot better than anything else out there.

Doc Merlin writes:

@PrometheeFeu

Switzerland and Dubai are both common.

Joost writes:

The same happens in Europe where I come from. Companies are also threatening to go abroad to influence politicians.
I think it is true that the influence of the "threat" is bigger when companies are more mobile like here in Europe.

Comments for this entry have been closed
Return to top