Bermuda Straight

This article originally appeared in on April 18, 2002.

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 and Max Baucus, 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.

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.