It’s been a tough year for hapless Charlie Brown and his insouciant beagle Snoopy. First, they were let go by MetLife, which is seeking a more youthful image than a perpetual eight-year old. Now Iconix, a U.S. based company that owns the rights to Charles Schulz’s comic characters, has announced that it will sell those intellectual property rights to DHX Media of Canada. That makes Charlie Brown America’s latest expatriate. Surely, this does no harm to Thanksgiving Day parade celebrants who cheer the Snoopy balloon floating through midtown Manhattan, or to visitors to the new Snoopy Museum in Tokyo’s Roppongi district. But it sends a clear signal that U.S. corporate taxes are nudging business to go elsewhere, and that’s worrisome (a version of this post appears in the Wall Street Journal).
Schulz’s comic strips are uniquely American. Read in seventy-five countries, Schulz taught the world about entrepreneurial lemonade stands, the Fall football season, and the great pumpkins of Halloween. In 1950 when Schulz began his cartooning, only Americans and Canadians knocked on doors and shouted “trick-or-treat.” Now, costumed kids and Halloween stores pop up from London to Shanghai. The Peanuts brand generated for Iconix about $95 million in sales in 2016. The 2015 Peanuts Movie sold almost $250 million in tickets, about half from outside U.S. borders, far away from Schulz’s hometown of St. Paul, Minnesota. The Japanese are among the biggest fans these days.
So with such a successful brand, why did Iconix send Charlie, Snoopy, Lucy, and Linus packing? First, Iconix ran into debt management troubles with its other franchises, which include London Fog outerwear and Joe Boxer underwear. Iconix needed cash. But why Canada? The short answer is that DHX bid highest. But why? The U.S. corporate tax system, now being debated in Washington, hampers American-based businesses by subjecting them to worldwide taxation. Canadian firms face aggregate corporate taxes that are about 10 percentage points lower.
Let’s assume that DHX of Canada manages Peanuts and racks up exactly the same revenues and costs as Iconix, and does so with the same global distribution. DHX will enjoy greater after-tax earnings to either send back as dividends to shareholders or to reinvest in the company. How so? The U.S. tax system forces Iconix to pay U.S. taxes on profits earned in foreign countries; the Canadian territorial system does not. So when a Japanese girl buys her Snoopy backpack in Tokyo, DHX will not pay taxes to both Tokyo and Ottawa. That simple fact allows a Canadian company to outbid an American competitor.
Taxes are not everything, and it is obvious that many world-class owners of iconic cartoon characters from Marvel to Disney manage to keep their crown jewels under the American flag. But it becomes a tougher task over time as other nations develop a critical mass of talent, especially in intellectual property fields. For example, Hollywood has been struggling to maintain its grip and its grips in the motion picture industry as it faces the labor and tax advantages of Vancouver, London, and even former Soviet Georgia. For the last four years in a row, the Oscar for visual effects has gone to firms based in London’s Soho. There are also some unexpected advantages you might not find along Hollywood Boulevard. The head of Georgia’s film rebate program explained at a conference that “We have many derelict, abandoned small villages or factories. They are mostly state-owned still, and you can easily just blow (them) up.”
Speaking of things blowing up, recent congressional efforts to reform the tax code and keep American companies from moving abroad have ignited a political firestorm over a House Republican proposal to replace the current code with a border adjustable, destination-based cash flow tax. If enacted, exports would sail out of the country tax-free while imports would no longer be deductible. Proponents argue that it would level the international playing field and protect the country’s tax base. Opponents say it would hobble retailers unless the U.S. dollar sharply rises.
Regardless of whether this specific border adjustability proposal survives the incendiary debate, lawmakers have correctly identified the problem: America’s high corporate tax rate and system of taxing international income is out of step with the rest of the world.
The solution is so clear even a cartoon character should grasp it. (Hint: Cut tax rates and adopt a system for taxing international income that more closely resembles those used by our international competitors.)