Freeman

POTOMAC PRINCIPLES

Patriotic Tax Avoiders

America's Corporate Tax Rate Is Excessive

JANUARY 01, 2003 by DOUG BANDOW

Filed Under : Government Spending, Taxation

Doug Bandow, a nationally syndicated columnist, is a senior fellow at the Cato Institute and the author and editor of several books.

Little upsets politicians more than people attempting to escape their control. So it is with U.S. companies that have fled overseas, now attacked as being unpatriotic and worse by Washington pols.

Over the last decade, at least 25 major firms have reincorporated in Bermuda or the Cayman Islands. Eleven have emigrated since 2000.

The reason is simple: taxes. As Jonathan Weisman of the Washington Post put it: “The United States, with its 35 percent corporate income tax and its Byzantine rules for taxing worldwide profits, is not a particularly friendly tax environment, especially when compared with Bermuda, where there is no corporate income tax.”

But the economic incentive isn’t enough. Unlike European rules, U.S. law allows companies to shift to another country without shifting their headquarters.

Naturally, the legislators who enacted both the tax rates and the tax loophole are furious. Charles Grassley of the Senate Finance Committee says such inversions are “immoral and unethical.” Representative Jim Maloney calls firms that migrate “unpatriotic and immoral in a time of war.”

Even some nominal conservatives have joined in the hunt. Former Reagan administration defense aide Ken Adelman wants to go after companies that aren’t paying their “proper share of taxes to the U.S. Treasury.” Moving offshore to reduce Washington’s take is “shady” and “just awful.”

A half dozen laws have been drafted in response. The companies responded with their usual weapon of choice, lobbyists. Said Todd Malan, executive director of the Organization for International Investment: “They’ve hired everybody in town.”

Corporate inversion is one of those issues that invite demagoguery. Yet moving to lower one’s taxes is common in America. States without an income tax attract retirees; many people compare the level of taxation before deciding between adjoining states. Many people even avoid cities, such as New York, which hit up their residents coming and going.

Moving across national borders is more difficult, but makes equal sense. It’s not just small Caribbean nations that have lower corporate tax rates. So do Hong Kong and Taiwan, Norway and Sweden, Chile and Ecuador, Hungary, and Switzerland.

Playing by the tax rules enacted by Congress in order to lower one’s taxes hardly seems immoral, unethical, and unpatriotic. Rather than complaining, legislators could, perish the thought, lower tax rates and rationalize the regulations to make America more competitive.

Indeed, when it comes to blame, Congress is the obvious culprit. First, consider the mess Congress has made of international taxation. Senator Orrin Hatch admits that the foreign tax credit doesn’t fully offset foreign levies, resulting in double taxation. Thus, he says, “the effective tax rate of American-based firms is often much higher than that of their non-U.S. competitors.”

The second problem is the overall tax burden. Despite the modest Bush tax cut, the government’s take remains at historically high levels.

According to the Tax Foundation, Tax Freedom Day, when Americans stop paying for government, ran to April 27 in 2002. The good news is that this is down from May 1 in 2000, after the Clinton tax hikes. But it’s still the record before 1998. It’s almost a month longer than in 1945, at the end of World War II, because state and local governments then took so much less. Americans are working for government almost two weeks longer than they did in 1984, the low point over the last two decades.

Third, toss in the regulatory burden and you get Cost of Government Day. That, reports Americans for Tax Reform, came to July 1 last year, up six days over 2001. By this measure, people spend half their lives working for the state.

Thus, it seems a little churlish to demonize people as they attempt to lighten this burden a bit. That applies to corporate America too. For one thing, individuals, not businesses, pay the taxes.

High Taxes

In any case, U.S. tax rates are excessive. America’s corporate rate, combining federal and state taxes, averages 40 percent, 8 percent higher than the average of other industrialized states. Indeed, last year U.S. levies went from fourth to second highest in the developed world. Compliance costs in America are also among the highest in the world.

This extra money is going for an orgy of spending. In fact, the increase in outlays in George W. Bush’s first two years equals that in the first five years of Bill Clinton. Since February 2001 Congress increased discretionary spending by over $400 billion.

This isn’t due to the War on Terrorism. Representative John Spratt admits it: “The cost of 9/11 is a small fraction of the total deterioration of the surplus.” About two-thirds of increased spending is due to other factors. Reports Jeffrey Birnbaum of Fortune: “The rest is testament to a fact that predates Sept. 11: the era of big government has returned.” Indeed, he adds, the fight against terrorism has been a “ruse to justify all sorts of spending.”

Citizens Against Government Waste reported that last year the House and Senate included $662 million and $801 million, respectively, in pork in the 2003 military construction appropriations bill. No occasion is to be missed when it comes to lathering federal cash on constituents.

Rather than cut spending, in recent years the GOP majority elected in 1994 worked to shift the money to Republican districts. By 2000 the average Republican district was getting $612 million more in federal funds than the average Democratic district. “To the victor goes the spoils,” observed then-House Majority Leader Richard Armey. The National Taxpayers Union has found that the average legislator has been casting votes to increase the so-called budget baseline by twice as much as two years ago. Observes Brian Riedl of the Heritage Foundation: “Republicans and Democrats basically make a deal with each other—‘I’ll vote for your increase if you’ll vote for my increase.’”

People should feel immoral, unethical, and unpatriotic when they avoid this?

Congress should deal with corporate inversions, but not by punishing companies tired of seeing a large share of their revenues seized by politicians to reward favored interest groups and buy votes. It wouldn’t be easy: restricting inversions would make U.S. firms more susceptible to a foreign takeover, which would automatically result in a lower tax rate.

Restrictions would also encourage established firms to move their headquarters overseas and startups to begin there. For example, a company that located in Ireland, with a corporate tax rate less than half that in America, would be protected by a tax treaty from punitive retaliation.

The real immorality is when politicians take people’s money for their own purposes. The real lack of patriotism is when politicians put their interests before freedom.

ASSOCIATED ISSUE

January 2003

ABOUT

DOUG BANDOW

Doug Bandow is a senior fellow at the Cato Institute and the author of a number of books on economics and politics. He writes regularly on military non-interventionism.

comments powered by Disqus

EMAIL UPDATES

* indicates required

CURRENT ISSUE

December 2014

Unfortunately, educating people about phenomena that are counterintuitive, not-so-easy to remember, and suggest our individual lack of human control (for starters) can seem like an uphill battle in the war of ideas. So we sally forth into a kind of wilderness, an economic fairyland. We are myth busters in a world where people crave myths more than reality. Why do they so readily embrace untruth? Primarily because the immediate costs of doing so are so low and the psychic benefits are so high.
Download Free PDF

PAST ISSUES

SUBSCRIBE

RENEW YOUR SUBSCRIPTION

Essential Works from FEE

Economics in One Lesson (full text)

By HENRY HAZLITT

The full text of Hazlitt's famed primer on economic principles: read this first!


By FREDERIC BASTIAT

Frederic Bastiat's timeless defense of liberty for all. Once read and understood, nothing ever looks the same.


By F. A. HAYEK

There can be little doubt that man owes some of his greatest suc­cesses in the past to the fact that he has not been able to control so­cial life.


By JEFFREY A. TUCKER

Leonard Read took the lessons of entrepreneurship with him when he started his ideological venture.


By LEONARD E. READ

No one knows how to make a pencil: Leonard Read's classic (Audio, HTML, and PDF)