Some U.S. companies soon may be treated in a similar manner,
thanks to legislation being touted by Sens. Max Baucus, D-Mont.,
and Charles Grassley, R-Iowa.
It all starts with the internal revenue code, which forces
U.S.-based companies to pay an extra layer of tax on income earned
in other countries. In an effort to protect the interests of
workers, shareholders and consumers, some of these companies are
escaping bad U.S. tax law by re-chartering in Bermuda.
This is a win-win situation for America. We get to keep
factories and headquarters in America, and our companies remain on
a level playing field with businesses based in Europe and
Not so fast, Sens. Baucus and Grassley are saying. They want to
stop "corporate expatriations," even though they keep American jobs
in America and help U.S. companies compete with their counterparts
in Europe and Asia. Their legislation would forbid U.S. companies
from re-chartering in countries with better tax laws.
The politicians who support this are acting as if these
companies belonged to the government. Yet when House Minority
Leader Richard Gephardt, for instance, accuses them of being
"unpatriotic," he never explains what's so patriotic about higher
taxes and non-competitive tax policy.
Republicans are doing their share of business-bashing, too. Sen.
Grassley claims that corporate expatriations are "immoral," as if
companies would be moral if they instead kept their U.S. charters
and fired some of their workers.
If politicians are upset that some companies want to re-charter,
they should blame themselves for trying to tax "worldwide" income.
An American firm competing against a Dutch firm for a contract in
Ireland, for instance, must pay a 35 percent tax on its income --
and the lion's share goes to the IRS. The Dutch firm, by contrast,
pays only the 10 percent Irish tax on its Irish-source income
because Holland doesn't tax income earned outside its
Before giving the IRS more power, politicians should consider
- Expatriation helps control government waste. High-tax California can't stop companies from moving to low-tax Nevada. Knowing this helps deter the big-spenders in the state capitol from wasting even more money. The politicians in Massachusetts must exercise some restraint because they know local businesses can flee to low-tax New Hampshire. Nations also should be subject to market discipline. This is why Washington politicians shouldn't stop companies from escaping bad U.S. tax law.
- Expatriation protects American jobs. Re-chartering in another jurisdiction doesn't mean that factories will go overseas. Nor does it require a company to move its headquarters. It simply means that a company is chartered under the laws of a different jurisdiction, much as many American companies are chartered in Delaware but operate factories and have their home offices in other states. In the case of expatriations, the newly formed foreign company still maintains its U.S. operations, but now won't have to fire workers since it can compete more effectively with overseas businesses.
- Expatriation is not tax evasion. All corporations, regardless
of where they're based, pay tax to the IRS on all profits they earn
in the United States. This is true of U.S.-based companies, and
it's true of all foreign-based companies -- including those that
expatriate. All that changes is that expatriating companies no
longer have to pay taxes on income earned outside America's
borders. Since worldwide taxation is misguided tax policy, this is
a positive result. Indeed, every tax reform plan, including the
flat tax, is based on this common-sense principle of "territorial"
Now is hardly the time, with the economy in the midst of
recovery, for Washington politicians to make U.S. companies less
competitive. Nor is it the time to give the IRS the power to
prohibit businesses from re-chartering in jurisdictions with more
sensible tax laws. Instead of treating companies as if they're
federal property, Sens. Grassley and Baucus should be fixing the
problems in the tax code.
Daniel Mitchell is the McKenna senior fellow in political economy at The Heritage Foundation (www.heritage.org), a Washington-based public policy research institute.
Distributed nationally on the Knight-Ridder Tribune wire