Let US Corporations Off the Tax Leash

Every economic slowdown brings with it something of a Marxist revival and this one is no exception.

Playing the role of capitalist villain this time is Stanley Works, the Connecticut toolmaker that wants to reincorporate in Bermuda to reduce its tax bill. Playing oppressed proletariat are Stanley workers, whose corporation is seen to be abandoning them - after a century and a half of workerly fealty! - in the hunt for profit.

Fuelling the drama is the fact that Stanley is a national symbol of self-reliance - and so something Americans prize. How can you not feel a tiny bit emotional about the firm that sold you your "Big Dawg Pearhead Ratchet"? Stanley's flight is not regarded merely as corporate greed; it is also seen as unpatriotic.

This all makes for a fine morality play - but one that neglects some central truths about what is good for American workers. What is worse, the huffing and puffing obscures another important issue, which is that Stanley's story reveals the need for reform of the US tax system.

While workers argue that the move will eventually cost US jobs, in fact it saves US jobs and helps domestic workers. The company has before now moved a good deal of its production overseas, to spare itself high labour costs. The $30m (£20m) a year or so it is now saving by domiciling in Bermuda means it will be better able to afford the wages of the 6,700-odd workers it continues to employ in the US, including 1,000 or so in Connecticut.

It is important to recall that New Britain, Connecticut, where Stanley is based, used to be America's hardware capital. Most of the other makers have long since dissolved, or fled New Britain. Were it not for Stanley's Bermuda incorporation, New Britain might became the hardware ghost town that critics of the company argue it is creating.

The benefits of the move are not confined to New Britain's workers. A number of pension funds, including the funds for state workers in Connecticut and California, hold or have held shares in Stanley. The retirements of those pink-collar and blue-collar workers will be enriched by this rationalisation of the company's tax bill.

Then there are Stanley's loyal customers, the ones allegedly angered by the notion of an expat Stanley. They will also benefit because their brand stands a better chance of surviving against competitors, some of whom have moved offshore.

Above all is the larger question of whether a company can really be the villain that Stanley's antagonists would have us believe. Corporations, after all, are not people. They are vehicles that act as intermediaries, taking in revenues and dispensing profits to employees and shareholders.

There is a sound economic argument that corporations do not truly shoulder the burden of taxation, whatever the books say. Investors do (they are taxed doubly or triply on corporate income), workers do (in the form of lower wages) and customers do (through higher prices).

The entire US corporate tax structure is, looked at this way, an exercise in inefficiency. If corporations did not have to have big tax departments (Stanley employs more than 20 in its own), they could pass those savings along to shareholder, customer and employee alike.

Doing away with corporate taxes is something economists have long advocated. So have some politicians: a year ago Paul O'Neill, the Treasury secretary, argued that it would be better if the government "collected taxes in a more direct way from the people, who were paying the taxes in any event". If the abolition of corporate tax is too challenging, America could at least lower corporate taxes, currently the fourth highest among countries in the Organisation for Economic Co-operation and Development.

But the big tax problem, one that is triggering so many firms to move domicile like Stanley, is the US system of global taxation. This system, which differs from the territorial regimes of many developed nations, means that US firms must pay US tax on income earned anywhere - on top of taxes levied by local governments. Tax treaties and other exceptions can ameliorate the burden - but the system still puts US corporations at a disadvantage vis-a-vis competitors from Europe and Asia, which pay taxes only in the countries where they operate.

This disparity is so serious that US companies have a motive to be swallowed by foreign ones in order to escape the US worldwide system. As many have noted, DaimlerChrysler could easily have been ChryslerDaimler but for Germany's advantageous corporate tax treatment. So if lawmakers and citizens are really concerned about keeping their Stanleys American, they would go down that road.

Switching to a territorial system could also help the US in another one of its ongoing flaps, the fight with the European Union over America's treatment of export-related income. The US currently gives corporations a preferential rate for the income of some foreign subsidiaries, or exports. The World Trade Organisation has ruled this to be an unfair subsidy. But if the US adopted a territorial tax system there would be no need for such a subsidy: profits in overseas subsidiaries would not be subject to US tax anyway.

Naturally, most members of Congress do not see the story this way; they prefer the morality play. And Senate legislation would chain companies to the US by requiring that they pay US taxes no matter where they are officially domiciled. But that would not halt the flow of investment to cheaper tax domiciles. Capital, as a scholar once noted, is unstoppable; it "must nestle everywhere, settle everywhere, establish connections everywhere" and it chases opportunity around the globe. And who was that wise guy? Karl Marx, of course.

© Copyright 2002 Financial Times

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