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Burger King Reminds Us About the Laffer Curve: Too Much Tax Kills the Tax

The best way to keep people and businesses from moving away is to cut their taxes - will it actually happen?

An illuminated Burger King sign is seen on August 25, 2014 in Washington, DC. Fast-food chain Burger King plans to buy Canadian chain Tim Hortons in an acquisition that will make it the world's third largest in the fast-food sector. As part of the deal, Burger King will move its headquarters to Canada where the company would benefit from Canada's more favorable tax code. AFP PHOTO/Mandel NGAN MANDEL NGAN/AFP/Getty Images

Burger King and Tim Hortons (Canada’s largest fast food chain) have announced their merger.

This union will create the third largest fast food chain on the planet, behind McDonalds and Kentucky Fried Chicken.

It will also move BK’s headquarters from Miami, Florida to Oakville, Ontario (west of Toronto), meaning BK will pay Canadian rather than U.S. taxes – this is the so-called tax inversion.

This has pro-government zealots beside themselves. There are already calls for government to close (unilaterally if necessary) a loophole that allows U.S. companies that have more than 20 percent of their capital in a foreign country to pay taxes in that country. It won’t be long before people label BK as a “corporate traitor” and call for their boycott.

There is no problem with the latter action. When one isn’t satisfied with a business, whatever the reason, then one is free not to buy there. This may push the business to change its ways, as Walgreens seemingly did by rethinking its plan to move to Switzerland.

[sharequote align="center"]The best way to keep people and businesses from moving away is to cut their taxes[/sharequote]

However, labelling “tax inverters” as traitors would make sense only if a government had the right to their money… which it doesn’t. That’s right: no one has a right to someone else’s money, lest one wants to be a slave owner.

Indeed, if owning 100 percent of one’s work is slavery, at what percentage does it stop being slavery? Without the use of the middleman (government), this would clearly be theft.

But let’s put this utopian tax-free world aside for a moment and admit that *some* taxes are necessary for the functioning of government (public security and justice, mainly). Even when one adds up the (inefficient) welfare state in the equation, one still has to remember that government money was first taken from someone else. Money can also be printed out, but it invariably ends up terribly.

And when extracting that money for public purposes, officials often forget about the power of incentives. Imagine for a moment that, for every dollar you earn, 40 cents went directly to the government – that’s how high corporate tax is in the U.S. right now when averaging federal and local taxes.

SAN FRANCISCO, CA - AUGUST 01: Customers dine at a Burger King restaurant on August 1, 2014 in San Francisco, California. Fast-food chain Burger King reported a 19 percent surge in second quarter net income with earnings of $75.1 million, or 21 cents per share, compared to $62.9 million, or 18 cents per share one year ago. Justin Sullivan/Getty Images Justin Sullivan/Getty Images 

Would you be motivated to work as hard? Or you would look for ways around the taxes like fiscal haven or inversion? This way of acting has been dubbed the Laffer Curve, after the late economist who was the first one to illustrate a concept known since at least the 14th century.

The Laffer Curve can be summarized like this: Too much tax kills the tax. It makes sense; at first, you realize that some taxes are necessary in order to pay for a working justice system and to protect from domestic and foreign enemies. As taxes increase, government revenues increase too.

However, there comes a point where taxes are so high – somewhere between 15 and 70 percent of gross domestic product – that an increase actually decreases revenues because people’s incentives are shifted. Therefore, they look for means to keep more of their hard-earned money. This may explain why so many people are renouncing their U.S. citizenship.

In other words, the best way to keep people and businesses from moving away is to cut their taxes. Considering that the country has numerous examples of tax cuts that increased revenues, then it’s a no-brainer. Of course, there needs to be a concomitant decrease in spending; it explains most of the deficits since the 1960s.

Democratic Sen. Sherrod Brown (Ohio) agrees that the corporate tax rate needs to be lowered. Check out the story from Pete Kasperowicz on TheFurnace.

Feature Image: AFP/Getty Images

TheBlaze contributor channel supports an open discourse on a range of views. The opinions expressed in this channel are solely those of each individual author.

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