The threat to exit

So, Arnold Kling is asked why companies don\’t just up sticks and bugger off if government gets to greedy/intrusive.

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.

True, but there\’s more to it than that.

In fact, we have one of those natural experiments going on right now. Those experiments which economists find exceedingly difficult to set up, but when they happen (ie, E v W Germany, 1945-1990) can tell us a lot about different policy choices etc.

Sticking with purely the movement of the actual company, so we\’re talking about the taxes and regulations that the holding company must suffer under, rather than simply locating a factory elsewhere but keeping ownership as was.

Until recently, in both the US and EU, to change the domicile of a company was akin to liquidating it and starting again. For example, all of the tax that was due (the accumulated captial gains taxes on that land bought in 1900 for the factory etc) became due on redomicile. This isn\’t wholly and exactly accurate, but it\’s a reasonable guide to the situation.

The US still has this sort of rule (indeed, it still has it for individuals, you want to give up your US passport then the IRS will be after you for all the tax you would have maybe paid in the future). As I say, not entirely, but it\’s a reasonable guide.

The EU doesn\’t. Part of the EU is that there is free movement of companies just as there is of individuals. And it goes outside the EU as well, to the EEA countries (Iceland, Lichtenstein and Switzerland).

So, we would expect to see greater mobility of companies in the EU across national jurisdictions than we would in the US out of that national jurisdiction. For international mobility for EU companies has now become of the same level of trivia as intra-State mobility is for US ones.

And, not surprisingly, we do:

Wolseley, the FTSE 100 plumbing and heating group, is relocating to Switzerland after failing to obtain a \”clear enough view\” from the Coalition government about their plans to overhaul the UK\’s corporation tax regime.

The claimed saving (which is all about how profits made outside the UK are taxed in the UK) is £23 million a year, say, $35 million. The costs are perhaps $10 million.

So, one reason US companies don\’t exit the jurisdiction is that the law makes it very difficult for them to do so.

3 comments on “The threat to exit

  1. For history just look at the creation of the Eurobond market. The Fed must have lost billions over the years as it was driven to London by ludicrous taxation.

    Paul

    p.s. sorry to hear about the cat, I have just lost mine:(

  2. Not to mention the creation of Euroclear and Clearstream in the 70′s – favorable tax and good lunches being key reasons. Companies are sticky – it’s inconvenient to move. and moving into switzerland is fine – but don’t try moving out – their rules on that are as bad as the US. But completely agree on the basic thesis that as the EU members finally get their tax rules sorted out it’s logical that companies’ headquarters should move. To be also seen if Ritchie-liked rules on domicile also change. A very interesting experiment.

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