Bermuda Straight Government greed is causing corporate flight.

April 18, 2002, 8:30 a.m.
Bermuda Straight
Government greed is causing corporate flight.

As an oppressed French taxpayer, I finally decided to move to the United States. No American ever blamed me for my move. And everyone I have met recognizes that this effort to improve my living standards does not mean I hate my home country. Yet when U.S. firms re-incorporate in low-tax jurisdictions like Bermuda because the U.S. internal revenue code kept them at a competitive disadvantage, we are told that it's because they are "greedy" and "unpatriotic." And politicians are trying to hinder competitive relocations with laws that represent narrow-minded and insular fiscal protectionism.

Efforts to restrict companies from relocating in jurisdictions that have more attractive tax and regulatory environments are an affront to what should be America's core value: freedom. In essence, such legal restrictions aim to levy U.S. taxes on all income, including foreign revenues and sales, earned by corporations that reincorporate outside of the United States. This combination of protectionism and imperialism has a name. It's called government greed.

The debate over the bill titled Reversing the Expatriation of Profits Offshore Act, or REPO, pushed by Sens. Chuck Grassley (R) and Max Baucus (D), has largely focused on Bermuda-based companies such as Tyco International, Global Crossing, Ingersoll-Rand, Accenture, and Stanley Works. But the bill could apply to firms moving to any low-tax country. The underlying assumption is that when a firm relocates in Bermuda or the Cayman Islands it engages in tax evasion. This is factually misguided. This view reflects the mentality that the government owns corporations and controls what they do.

Sadly, the government's claim of ownership over U.S. citizens is not new. As taxes continue to soak up a larger percentage of the GDP, the number of U.S. citizens moving out of the country is increasing. Unfortunately for them, the United States is one of the few countries that taxes its citizens on global income, even when they are living abroad. As a consequence, some Americans living abroad have renounced their U.S. citizenship to protect their family's interests. The federal government responded in 1996 with a law that taxes the earnings of such individuals for 10 years after they've adopted a new nation [the 1996 Health Insurance Portability and Accountability Act (HEPA)].

But people and corporations should be free to move. Besides, Americans and companies are moving abroad because of an overly aggressive and unfair tax policy in the United States. Tax rates are too high — the U.S. corporate income tax is the fourth highest rate of all OECD countries — and should be reduced. Today, U.S. firms have to pay U.S. taxes on money earned in foreign countries, even though the countries in question have already taxed it. This "worldwide" system of taxing corporate income is very anti-competitive. It provides companies with an incentive to give up their U.S. charters and instead become foreign-based companies.

There is nothing unpatriotic about "expatriation" because it is consistent with U.S. tax law, allows a firm to compete on a level playing field with international peers, and lets a company's tax savings be reinvested for the benefit of the firm's shareholders. Expatriation helps U.S. workers and U.S. shareholders.

Rushing to enact laws that have tough-sounding titles (Sen. Max Baucus has dubbed the REPO act "Schemes, Scams and Cons") and will ultimately damage the U.S. economy is a mistake. Instead, lawmakers should adopt tax rates that encourage firms to remain in the country and switch to a territorial tax system that taxes only income earned in the United States.

— Veronique de Rugy is a fiscal policy analyst at the Cato Institute.(For convenience, I added links to the referenced legislation in the above text.)

For a number of years now, web sites like Action America have been warning of the increasing expatriation of the wealthy, caused by the increasingly wealth punitive laws and an increasingly aggressive IRS. But, even Action America only takes about 60,000 to 100,000 hits each month, so without the attention of the major media, it has gone largely unnoticed. However, this article is just one of several similar articles that have begun to show up in respected large distribution publications.

This expatriation has been quietly growing for years. But, now that the major media has taken notice, all that will change. Look at how wealthy investors react to the news of a Piper airplane crashing into a building in Italy or a boiler explosion in New York.

Now that the cat is out of the bag, you can expect other major media sources to jump on the band wagon, for fear of missing out on the story, resulting in many more articles about expatriation. This will certainly cause a sharp increase in expatriation among already nervous wealthy investors and corporations.

The problem is that, as wealthy individuals and corporations leave, the tax base is disproportionately eroded. The obvious result is an increase in the level of taxation on those left behind, just for the government to stay even. Worse yet, it means that the IRS will have to become even more abusive than they already are, in order to get even more financial blood out of a worsening, economically anemic public body.

Rather than attacking those who pay the majority of the bills (top 1% pays more than 1/3 of taxes) with laws meant to discourage them from leaving, they should be passing laws that encourage them to stay (or even to return), by insuring them protection from confiscation, a territorial tax system (such as the NRST) and lower tax rates. By choosing to use the negative approach of disincentives rather than the positive approach of incentives, Congress and the Whitehouse are actually contributing to the problem and forcing many wealthy individuals and corporations to choose expatriation as the only legal method left to protect what they have rightfully earned from potential government confiscation.

These and other such oppressive laws just confirm that the native capital flight that Action America has alerted readers to for years, is real. This demonstrates conclusively that our lawmakers are seriously worried about losing the power that they have over these wealthy corporations and individuals. It cannot be denied.

Wealthy individuals and corporations are leaving.

Until the Income Tax and IRS are abolished, this will continue. Well, to be more precise, this capital flight will continue as long as the Income Tax and IRS exist or the government moves to confiscate all wealth. The only plan that is currently being offered in Congress that will not only stop, but reverse this dangerous trend, is the National Retail Sales Tax (NRST).

See the "Tax and Economy" section of Action America for more info on IRS induced capital flight.

Also see the related article on FR, "Five firms answer call of islands."

[Stanley Tools] point was very clear: Screw America, its Workers and it's Tax laws.

That is certainly the spin that Grassley, Gephardt and many others in Congress would like people to believe. But, that just doesn't hold water.

It was more than just the board that made that decision. The stockholders had to vote on the move. And, guess what? The stockholders voted to reenergize their Stanley stock and keep Stanley competitive in the market, by reducing production costs to the level of their competition through a move offshore. The stockholders had the final word and they chose to keep Stanley viable.

It has nothing at all to do with greed. In fact, they knew that by moving offshore, they would face a backlash from misinformed buyers, who bought into the government's spin. But they were backed into a corner by the government. It isn't greed, when all that you are doing is just trying to stay competitive. In business, you either compete or go under. The US government made it impossible for them to compete as a US company and I somehow don't believe that the board or the stockholders saw going under as an option. Stanley took the only legal route left open to them by our government.

Well actually, it was prompted by greed, but not corporate greed. It was caused by the greed of our elected officials in Washington, who want to control wealth that they did not earn.

You must remember that a corporation is not a living entity. It is not even just one or two rich people who control it. Those board members have to answer to the stockholders. And, many of those stockholders are little guys, whose retirement may depend in large part on the future success of that corporation. I didn't happen to have any Stanley stock, but from what I heard, I would have probably voted for the move. Their offshore competition was going to eat them alive within ten years if they didn't leave and it was all because of US tax compliance costs.

Several studies have concluded that if the United States were to implement a National Retail Sales Tax, new capital would stream into the United States, much of it previously expatriated capital.

Bottom line... That attitude of "punish the wealthy for protecting their hard earned wealth" is the same attitude that has led Congress to cause this whole debacle. The plain fact is that you cannot legislate wealth to come to your country or stay there. You can only entice or discourage. The greed of those in Congress has led them to attempt to legislate that which cannot be legislated and that is what is discouraging the wealthy. That is why they are leaving.

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