June 17, 2002

Unpatriotic?

Much has been said of the plan of The Stanley Works’ plan to reincorporate in Bermuda. The plan reputedly will save the company $20,000,000 or so per year in corporate taxes. Stanley, headquartered for the moment in New Britain, Connecticut, has been making tools in America for more than 150 years and is justly viewed as an American institution. Many, especially politicians, however, have called its planned move unpatriotic. On the other hand, one doesn’t have to be too cynical to suggest that using the laws of the country to make more money for your company is very much the American way!

For sentimental reasons, I would hate to see Stanley go. (The move actually involves few jobs—it may actually create some—and no manufacturing is to be transferred offshore.) The wonder, however, is not that Stanley wants to make this move, but that more American corporations are not doing the same. Perhaps Stanley will start a trend. In any case, the Stanley plan is a predictable result of the oft noted but never fixed double taxation that we impose on corporations. We tax corporations, and then we tax dividends they distribute. Partly, I think, this happens because we have declared corporations to be “persons,” and persons have an obligation to support the functions of government. I don’t want to deal with this notion in detail, except to say that Microsoft has neither the same ability to enjoy the fruits of liberty nor the same moral obligations of citizenship as does Bill Gates. We all know this, as we do not let corporations vote. (Well, not directly, anyway.) Moreover, one can certainly imagine revenue-neutral tax schemes that would transfer the burden of what corporations currently pay in taxes to shareholders, bondholders, and ex-shareholders who enjoy capital gains from the sale of stock. The corporate income tax has not been eliminated for two reasons. First, corporations can, through legislation, manipulate the tax system to benefit their operations or to penalize those of their competitors. This activity corrupts the political system and distorts the economy. The other great “advantage” of the system is that it makes it appear that corporations, and not individuals, are being taxed. This makes politicians happy because, as noted earlier, corporations don’t vote.

The Stanley case illustrates yet another way that tax laws can distort the economy. Does anyone think that The Stanley Works has any rational (i.e., not tax-related) reason be being headquartered in Bermuda? It is past time to consider seriously the elimination of the corporate income tax. Owners of corporations (stockholders) and owners of corporate debt (bondholders, etc.) can be taxed on their profits, at a high rate, if necessary. The biggest objection to this idea, other than pure inertia, seems to be that foreign companies can operate in the U.S. and export profits with impunity. Well, perhaps. But we live in a global economy, and few significant foreign firms are without U.S. stockholders or debt holders. Moreover, eliminating the corporate income tax would provide an incentive for foreign firms to come here, where they pay local taxes and create jobs. The biggest advantage of the elimination of the corporate income tax, however, would be the freedom it would give corporations to act with economic rationality, instead of distorting their actions to take advantage of tax laws. After all, money paid to lawyers, accountants, consultants, and auditors to avoid taxes is fundamentally wasted money. It produces no goods or services that contribute to human happiness. Even in the best of circumstances, determining whether a corporation has made a profit depends upon judgement and accounting rules; it is not clear-cut. Dividends and interest paid and capital gains earned, on the other hand, can be identified with great objectivity. The plan might even help keep politicians honest. Well, maybe not.

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