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Sunday, December 1, 2002

The Tax Code: Now That’s Outrageous!

Why Shouldn't Corporate America Be Tired of Oppressive Taxation?

If you’ve ever had the sinking suspicion that many in the mainstream media just don’t get it, then the September 2002 issue of Reader’s Digest was just for you. In its pages, conservative columnist Tucker Carlson penned his mighty attack on American business under the title “Artful Dodgers,” in the “That’s Outrageous!” department of the magazine. Mr. Carlson’s wrath was directed at the greedy, “unpatriotic” manner in which large American corporations were “dodging” their taxes.

“When you think of Enron, you think of Houston,” writes Mr. Carlson. “You probably don’t think of Mauritius, a tiny island republic off the east coast of Africa. . . . By the beginning of 2000, [Enron] had no fewer than 43 subsidiaries” there. “Why was Enron doing so much business on an island in the Indian Ocean?” he asks. “Taxes. Avoiding them.”

Tucker Carlson’s complaint stems from the fact that “Individuals pay income taxes on what they earn, no matter where they earn it.” By comparison, “Corporations play by different rules. They pay federal income taxes only on money that enters the United States. In other words, if your Mauritius-based company earns $10 million, and that money never comes back to the United States, you don’t pay taxes on it.”

And his litany continues: “It’s a nifty deal if you’re a corporation, infuriating if you’re an ordinary taxpayer,” he says. “Over the next ten years, tax-dodging companies are expected to cost the U.S. Treasury $6 billion—money that will have to come out of your pocket and mine.”

Please pardon a slight digression here. I remember when I was delivering pizzas a few years ago to earn some extra money for my household, my manager tacked up a newspaper story on his office door about how the Internal Revenue Service was going to begin cracking down on servers and delivery drivers, rather than their employers, for not declaring their tips. I’ll never forget my shock when reading that the IRS spokesman said that by not declaring our full income, we were depriving the government of money. By what stretch of the imagination, I wondered, could the federal government be considered to be “losing” money in this arrangement? After all, what if I had just stayed home?

But back to Mr. Carlson, and the “infuriating” evasions by corporate America. The only way that “tax avoidance” could possibly fall unfairly on “your pocket and mine” is if the government doesn’t adequately adjust its budget to reflect a lowering of expected revenues when a corporation moves out of the country. This any third-grader could figure out. If I have just $10, and my bills are expected to exceed $10, then perhaps I am spending too much money. But let’s not start talking fiscal responsibility to the federal government. That would be truly outrageous.

And speaking of fiscal responsibility, isn’t it just a little outrageous that a member of the “conservative” establishment, those fellows that are always talking about government being too big and the tax burden too great, could be upset over a business venture that, faced with an oppressive tax regime, opts for a loophole? Bear in mind that “loopholes” were described by one great economist as “remaining freedoms.” We should be happy they got away.

Move to Bermuda

Mr. Carlson does raise a good point that might lead the reader to conclude that he is on to the problem. He writes of the Stanley Works corporation, whose shareholders voted early in 2002 to relocate company headquarters to Bermuda. The shareholders cast their votes on the advice of CEO John Trani, who claimed that the decision would save the company $30 million in taxes and increase stock values.

What they didn’t count on, however, was the chunk Uncle Sam will get in corporate gains tax when the company leaves the United States. Mr. Carlson quotes a New York Times calculation which found that “even if Stanley’s stock price goes as high as Trani says it will, these shareholders ‘will barely break even after taxes.’”

But wait. Before you can say, “Why, Tucker, I think you’ve got it,” his next statement quickly dispels any illusion that he is actually on the right scent. “As for the government,” he concludes, “it would lose $240 million in corporate income taxes from Stanley over the next eight years.” The sky is indeed falling. The government might “lose” some more money.

But that is not Mr. Carlson’s only gripe. He appears genuinely upset that companies would be engaging in such chicanery at a time of crisis. “All this [tax dodging],” he laments, “at a time when the United States is straining its treasury to fight a war against terrorism.” And what blast of corporate America would be complete without someone to coin the perfect denunciatory slogan? “Republican Senator Chuck Grassley of Kansas calls foreign tax havens an example of ‘profit over patriotism.’” Which means, of course, that the government isn’t able to skim as much geld off of these corporations as it desires.

The fact is, if anyone bears responsibility for the endless quest on the part of corporate America to find the ultimate tax haven, it is the U.S. government and its lengthy, draconian, inconsistent, unfathomable, monstrosity of a tax code and the oppressive taxation it represents. Even if the tax code were perfect, no business should feel compelled to stay put simply out of nationalistic concerns. Corporations exist to turn a profit—they do not exist to keep the federal government in lots of tax revenue.

Much like the Wizard of Oz, who implored his visitors to “pay no attention to that man behind the curtain,” so Mr. Carlson wishes to distract us from the real issue. Capital tends to go where it isn’t penalized. If Mr. Carlson objects to corporations moving out of the United States, then he should be criticizing the disincentives that exist for them to stay put—especially since he so obviously recognizes that taxes are the underlying motive for corporate relocation. For it is obvious that corporate America, much to the disappointment of social engineers and military interventionists, is tired of being milked to quench government’s endless thirst for other people’s money.

Scott McPherson is a freelance writer in Fairfax, Virginia.

  • Scott McPherson is a policy adviser at the Future of Freedom Foundation, and author of Freedom and Security: The Second Amendment and the Right to Keep and Bear Arms. An advocate of the Free State Project, he lives in Portsmouth, New Hampshire.