Aon, which describes itself as “the world’s leading provider of risk management and HR solutions,” is a classic American business success. Formed from the merger of two entrepreneurial startups, the company grew to be a commercial insurance powerhouse, even if most individuals have never heard of it.
Now, however, if you want to visit Aon’s headquarters, you have to book a flight to London.
In addition to moving its headquarters from Chicago to London, the company has switched its jurisdiction of incorporation from Delaware to England. The move was announced in January and approved by shareholders in March. Aon has said it will maintain its Chicago office as its headquarters of the Americas.
A press release explained that the company “believes this move will … have several near- and long-term financial benefits, including increased financial flexibility and improved capital allocation.”
For too long now, the U.S. has assumed that our country is simply the natural place to do business and that we can, therefore, squeeze all the money we want out of corporations without any risk of them going elsewhere. However, as I’ve written before, corporations are not magical sources of endless money; they are simply human creations, constructed for legal convenience. Legislation affecting corporations affects human interests, and humans, when they see harm come to their interests, are apt to look for more hospitable places. When they do that, they take jobs, taxes and future opportunities with them.
Aon had $11.2 billion of revenue in 2011. In the short term, Aon has promised that the move will not result in any job losses in the U.S. and is even planning to move 750 new jobs to Chicago. In the long term, however, Chicago and the United States will lose out on new jobs that might be created in the company’s headquarters and in future lines of business.
A key factor in our waning appeal is our corporate tax rate. After Japan cut its top rate from 39.8 per cent to 36.8 per cent at the start of April, the U.S. became the country with the highest combined national and local rate: 39.2 per cent. The federal rate alone is 35 per cent. The U.K., on the other hand, is cutting its corporate tax rate from 26 per cent to 24 per cent and will reduce the rate to 23 per cent by 2014.
The problem extends beyond tax rates, to the peculiarly American insistence on trying to tax U.S.-based companies on profits earned abroad. American companies must pay income tax on any foreign profits that are brought back to the U.S. to be reinvested or distributed to shareholders as dividends. This system stands in stark contrast to the “territorial system” used by most of the rest of the world, including the U.K., in which income from foreign subsidiaries is subject to tax only in the country where it is earned.
This was likely an important consideration in Aon’s decision to move. The press release cited “greater access to emerging markets” as one of the deciding factors. It simply makes no sense to require that Aon’s German, British or other foreign shareholders pay U.S. tax on profits the company earns in China, for example, solely because the business is incorporated in Delaware.
While the prospect of losing established businesses to other countries is worrisome, another risk of our anti-business regulatory environment may loom even larger: the possibility of not nurturing new businesses. In the years to come, more and more entrepreneurs will simply go elsewhere to start their companies – because they aren’t citizens and can’t get visas to work here, because they can’t raise capital here, because they find our tax rates too high, or because our regulatory structure is too rigid. While many of these entrepreneurs will fail or achieve only moderate success, a few will found the Apples and Starbucks and Googles of the mid- and late 21st century. We will never know what we have lost.
In a Wall Street Journal column in March, Jack Markell, the governor of Delaware – the legal home of nearly two-thirds of the Fortune 500, as Markell mentions – decried the decline in initial public offerings in the U.S. The number of IPOs in this country each year has dropped to only about 100, compared to around 360 a decade ago, he points out. He blames this largely on the corporate tax structure and the hefty regulatory burden that companies face when going public in the U.S. Markell overstates the case; poor economic conditions, not country-specific legal factors, have been the primary cause of the dearth of IPOs. But that doesn’t fully account for the fact that, as Markell mentions, fewer than 10 per cent of all global IPOs now list on U.S. exchanges, down from 48 per cent in the late 1990s.
This corporate flight from the U.S. is not unstoppable, but in order to compete for business internationally, we first have to acknowledge that there is a competition in progress. Established businesses are under no obligation to stay in the U.S., nor are new companies required to get their start here. If we don’t change our attitude and our policies, the quintessential American corporation may soon be the one that got away.