February 26, 2004

February 26, 2004 | Commentary on Taxes

Will Kerry's False Charges Create Real Damage?

America's number-one enemy isn't Al Qaeda, Libya, North Korea or Cuba. It's Bermuda! At least that's what John Kerry seems to want American voters to believe. At almost every campaign stop, he attacks "Benedict Arnold corporations" that move to Bermuda. One could almost conclude that Bermuda is a predatory regime that shelters scoundrels.

These irresponsible charges recur on the Kerry campaign's Web site. "John Kerry will save jobs by ending the unpatriotic practice of U.S. corporations moving jobs offshore (known as inversions) to avoid paying their fair share of taxes," it states. "He isn't afraid to crack down on corporations that are hiding their money in Bermuda to avoid paying their fair share and will end special tax giveaways to companies that ship jobs abroad."

It's difficult to decide which is most objectionable, Kerry's smear of a friendly regime or his disregard for accuracy. The denigration of Bermuda is certainly reprehensible, particularly since the territory's market-based tax policy and race relations are both much better than can be found in the United States. (It's worth noting, too, that Bermuda has much tougher anti-money laundering laws than America.)

But Kerry's inability to understand the issue also is troubling. He and his campaign staff make obvious errors with the simplest facts.

The language on his Web site provides several good examples. First, he confuses "outsourcing" with "inversions." Outsourcing occurs when a company purchases labor services in another country. Inversion is when a company re-charters in another jurisdiction. And while it is correct to say that outsourcing "moves jobs offshore," this has nothing to do with the inversion issue. Inversions take place because America's worldwide tax system and high corporate tax rate make it difficult for U.S.-chartered companies to compete with foreign-chartered companies, most of which come from nations with lower tax rates and territorial tax regimes.

Inverting to places such as Bermuda actually saves U.S. jobs. Inversions help companies compete on a level playing field with their major competitors worldwide. This makes it easier to keep jobs and factories in America. And criticizing inversions can be costly: Tool manufacturer Stanley, for example, had to lay off more than 1,000 workers after political pressure forced it to abandon a planned inversion.

Having a charter in Bermuda -- as opposed to Delaware -- also reduces the likelihood of a foreign takeover and the subsequent loss of high-level jobs for management and research. A good example is the Daimler-Chrysler merger. The combined firm is a German-based company in part because of America's anti-competitive tax code.

Kerry's Web site also accuses companies of hiding money in Bermuda. Kerry would be completely accurate if he said inversions allow tax avoidance, but this is perfectly legal and isn't hidden. It is not evasion when a company takes legal steps to ease the burden of America's uncompetitive worldwide tax system, just as it is not evasion when I buy a house and take a deduction for home mortgage interest.

Perhaps Kerry meant to say that U.S.-chartered companies "hide money" by using "offshore" subsidiaries, something that has become an issue because of the Enron scandal. But even this charge would be inaccurate. Enron was hiding losses, not profits. Moreover, almost all of Enron's subsidiaries were in Delaware, Holland and the Cayman Islands, not Bermuda. There are many companies that do have subsidiaries in low-tax jurisdictions such as Bermuda, of course, but this is a legitimate form of tax planning and is fully reported to the IRS.

So what happens on this issue if Kerry is elected president? Nobody knows for sure. He may never mention Bermuda again. Many politicians use certain issues as convenient props during an election.

But maybe a President Kerry would revisit this issue. His Web site states that "… inverters should not get government contracts or any other perks or incentives from the government." This type of protectionism could become quite prevalent under a Kerry administration. Bermuda's reinsurance industry also could face discriminatory treatment. Kerry already has endorsed big tax increases, and there is proposed legislation in Congress to impose special new taxes on companies that purchase reinsurance through Bermuda-based companies. (This is the same Bermuda reinsurance industry, incidentally, that came to New York's rescue after the World Trade Center disaster, paying its claims while U.S. insurance companies often resisted payment, sometimes even going to court in an effort to avoid their responsibilities.)

The United States should be emulating Bermuda, not attacking it. Unfortunately, election years usually are not the best time for rational discourse.

Daniel J. Mitchell is the McKenna fellow in political economy at The Heritage Foundation (heritage.org).

About the Author

Daniel J. Mitchell, Ph.D. McKenna Senior Fellow in Political Economy

Related Issues: Taxes

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