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
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
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
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
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
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
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
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
Mitchell is the McKenna fellow in political economy at The
Heritage Foundation (heritage.org).
Distributed nationally on the Knight-Ridder Tribune wire