- The Washington Times - Friday, May 31, 2002

What do Stanley Works, Fruit of the Loom, Seagate Technologies, Weatherford International, Cooper Industries, Nabors Industries, Ingersoll-Rand, Tyco International, and PricewaterhouseCoopers Consulting have in common? Executives of all these major U.S. corporations, headquartered across the country and across industry lines, felt it necessary to incorporate at least a portion of their business outside the United States in order to compete in today's global marketplace.
The "move" by these firms has elicited screeches of outrage from all quarters including the chairman and ranking member of the Senate Finance Committee. Typical was the comment by Rep. James Maloney, Connecticut Democrat, in response to the vote by shareowners of Stanley Works to re-incorporate in Bermuda, "Connecticut hasn't seen such a shameful day since Benedict Arnold sailed away."
Political rhetoric aside, the fact is that Stanley and the other companies conducting a foreign re-incorporation aren't going anywhere. The only thing new would be a post office box in Bermuda, the Cayman Islands, or another low- or no-tax country, an addition that would be in the best interest of the companies' customers, employees, and owners. In fact, a strong case can be made that re-incorporation is a sincerely patriotic act that shareowners should be proud to support.
American companies operating globally are at a distinct disadvantage compared to their international competitors. U.S. federal tax law forces these firms to pay a tax rate of 35 percent on every dollar of income, whether earned here or abroad. Only a few other countries have such a high corporate tax rate and most don't bother with income earned outside their boundaries. As Ways and Means Chairman Bill Thomas said recently, "The U.S. is out of sync with the rest of the world we have to reform the U.S. tax code not out of desire but out of necessity."
The United States' relatively high corporate tax rate compounds another underlying problem with the U.S. tax code, income earned through the corporate structure is taxed twice, once at the corporate level and then again at the individual level.
In the face of such a cumbersome tax code, corporate executives have two options: either charge forward hoping to survive against the odds or find legal ways to structure their business in order to minimize the negative consequences of the current tax code.
The choice from a practitioner's standpoint is clear. At a recent meeting of tax professionals, one top corporate tax lawyer surveyed his peers and asked whether it would be a breach of professional ethics to recommend against re-incorporation in a low-tax jurisdiction. The overwhelming response was that it would, indeed, be a breach of ethics to recommend such a move.
The choice from a public policy standpoint should be equally clear, but it is unfortunately muddled by political flimflammery that would have one believe paying taxes is the highest form of patriotism.
Consider the case of Stanley Works, the New England maker of handyman tools. Stanley accountants estimate the company's re-incorporation in Bermuda will save the firm $30 million a year. That is $30 million that Stanley could use to increase employment, raise wages, lower prices and bolster the company's stock price.
Of course, that's $30 million that would not be sent to the politicians in Washington. Here are a few examples from recent spending bills of what Congress typically does with $30 million: $25 million to support the International Fund for Ireland, which is intended to create jobs and equal opportunity for Irish workers by funding such projects as a national water sports center, golf videos, and a sweater exporting program; $14 million in economic assistance for South Pacific Island nations to fulfill the terms of a recently signed "Tuna Treaty;" and $21 million to print transcripts of congressional hearings.
So, which is more patriotic and better for the economy: job security for Stanley workers, retirement safety for their families, and lower-priced construction tools or Irish golf, South Pacific tuna and endless reams of congressional paperwork?
Executives of U.S. multinational companies should be worried about their business, not their taxes. But by sustaining an overly burdensome and mind-numbingly complex tax code, federal lawmakers have left them no choice.
No fewer than five bills have been introduced in Congress aimed at stopping U.S. companies from re-incorporating overseas. These bills have such ominous-sounding titles as the "Reversing the Expatriation of Profits Offshore (REPO) Act" and the "Uncle Sam Wants You Act of 2002." All these bills would direct the IRS to follow companies to low-tax countries and tax them just as if they were still incorporated in the U.S. All of these bills completely miss the point.
Instead of trying to punish companies that are doing what is best for their employees, customers and shareholders, Congress should be addressing the underlying cause of these moves: high and complex corporate income taxes. If Uncle Sam really wants more job-creating businesses, Congress should act swiftly to lower, if not eliminate, corporate income taxes so American businesses can compete mano y mano with their foreign counterparts.

John S. Barry is director of research and chief economist at the Tax Foundation.


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