Bad Tax Policy: You Can Run

The worst Supreme Court decision of all time? One of the leading candidates has to be the infamous 1857 Dred Scott decision, in which the Supreme Court ruled that slaves did not gain freedom by escaping to non-slave states. Instead, they were considered property and had to be returned to their "owners."

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 elsewhere.

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 borders.

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.

This is just one of many articles on expatriation that has begun to show up all over the major media. It's looking more and more like the ticking "Economy Bomb" that Action America has been writing about for years, is now ticking down to zero. Whether by design or ignorance, this expatriation of wealth has been ignored by the major media up to now. But all of a sudden, it seems that everyone has something to say about it. Here are just a few such articles, posted here on FR:

The problem is that when capital flight reaches a level high enough to get the attention of the press, the resultant publicity only serves to alert more of the wealthy to the problems causing capital flight, which in turn, causes capital flight to increase to even higher levels. That increase in capital flight then becomes news itself and causes even greater capital flight. That increase in capital flight then becomes news itself and... well you get the picture. It effectively becomes a snowball, thus the reference to the ticking down of the "Economy Bomb".

The companies discussed in the above article are not actually moving operations offshore - yet. However, if the proposed legislation, should be signed into law, you can bet that a large number of those companies will see that legislation as justification for taking the logical next step - complete expatriation of offices, money and jobs. That, of course, will create even more headlines, which will create even more capital flight, which will create more headlines, which will... well, there it goes again.

Tick - Tick -Tick ...

We must stop such attacks on wealth before a large number of the wealthy just reach their abuse limit and finally decide to leave. If just most of the top earning 1% (just over a million taxpayers) were to leave, it would reduce the tax base by over a third, which would force Congress to raise everyone else's taxes by over 50%, just to stay even (data from IRS FOI records and compiled by the Tax Foundation). In fact, the current rate of expatriation is already around 100,000 per year. How many of those do you think are poor?

Here are just a few of the points in the above article that I would like to emphasize:

"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 elsewhere."

Looks like we get the best of both worlds.

The politicians who support this are acting as if these companies belonged to the government.

That belief among politicians of both parties has been common for a long time.

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.

Sen. Grassley is a perfect example of what voting the party line gets you.

Indeed, every tax reform plan, including the flat tax, is based on this common-sense principle of "territorial" taxation.

This applies to the National Retail Sales Tax (NRST), as well and the NRST gets rid of the principle cause of expatriation - the IRS.

According to the Tax Foundation, in 2001 the tax burdent on the average American was 23.6% of his or her income in federal taxes, plus 10.2% in state and local taxes - 33.8% total.

Unfortunately that is just the beginning, The burden of government in this nation is much more than the federal revenue collected each year.

Dr. James Payne of the University of California, Reason Magazine '94; found that in addition to direct taxes we also pay huge, hidden taxes including:

Tax compliance costs: record keeping, reporting, filling out forms, and learning about tax regulations.
Costs of tax enforcement: resources expended in responding to the tax authority. Each act of tax enforcement--each audit, each notice, each levy--entails a burden for the citizen subject to it.
Tax disincentive costs: the loss of production because of the discouraging effect of taxes on investment and labor.

"When the overhead costs are added together, (24 percent compliance costs, 33 percent disincentive costs, and 8 percent other costs), they total 65 percent of tax revenue."

And even that figure doesn't include the cost of import duties, license fees and other government regulations. For a typical U.S. family, the real cost of taxes and regulations as a percent of gross income is at least:

Federal taxes              23.6%(taxfoundation)
State & local taxes     10.2%(taxfoundation)
Overhead costs          21.9%(James L. Payne)
Regulatory costs         13.0%(M.W. Hodges)

More than 68% of one's income is now consumed by government through tax collections, compliance costs & regulation.

The bottom line:

Rep. Bill Archer, Chairman, House Ways and Means Committee:

"A recent survey was done, in Europe and Japan, of the major corporations and I was astounded at the results. They were asked, 'If the US abolished its income tax and went to a sales tax, would that have any impact on your decisions?' Eighty percent of the corporations said they would build their factories in the United States of America. Twenty percent said they would move their international headquarters to the United States of America."

If Congress wants patriotism, I suggest they start looking to change government policies that drive Americans away to safer harbors instead of attempting to squeeze that turnip any more.

The next step from corporate expatriation, is to move the entire manufacturing base to nations that can appreciate the value of commerce and jobs that it brings to the people.

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