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Matthew Hoy currently works as a metro page designer at the San Diego Union-Tribune.

The opinions presented here do not represent those of the Union-Tribune and are solely those of the author.

If you have any opinions or comments, please e-mail the author at: hoystory -at- cox -dot- net.

Dec. 7, 2001
Christian Coalition Challenged
Hoystory interviews al Qaeda
Fisking Fritz
Politicizing Prescription Drugs

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Tuesday, May 14, 2002
Like a public restroom, Paul "Line 47" Krugman seems to collect more than his fair share of excrement.

In Tuesday's New York Times Krugman attacks...wait for it...President Bush for not coming out and decrying the decision by Stanley Works, a Connecticut tool company, to move its operations overseas. (Krugman does note that the company has reportedly postponed the very move that he is lambasting.)


But the Bush administration, always quick to question the patriotism of anyone who gets in its way, has said nothing at all about Stanley Works, and little about the growing number of U.S. corporations declaring themselves foreign for tax purposes.

To be fair, the administration didn't create the loophole Stanley wants to exploit. And it's not enough just to denounce corporations that exploit tax loopholes; the real answer is to deny them the opportunity. Still, the administration's silence is peculiar. What's going on?


Is the Bush administration's silence really that peculiar? Can anyone remember Clinton making it a point to complain about these types of practices? Would Krugman actually feel better if Bush came out tomorrow and called Stanley Works move evil, un-American, worse than Sept. 11, and if they do it the terrorists will have won?


The closest we have to an official statement on the issue of companies moving offshore comes from the Treasury Department's chief of tax enforcement: "We may need to rethink some of our international tax rules that were written 30 years ago when our economy was very different and that now may be impeding the ability of U.S. companies to compete internationally."


Well, that's the Bush administration's statement, but let's flashback to the Clinton administration. From the July 8, 1996 Boston Globe:


The Clinton administration says that closing some tax breaks may force companies to raise prices and lose customers, and therefore pay less taxes. ``There are two sides to every part of this,'' says Leslie Samuels, until recently the Treasury Department's tax policy chief. ``If you're thinking that there's hundreds of billions of dollars, it's not there.''


So it's not like Bush is any different from his predecessor when it comes to this subject, as much as Krugman would like to solely blame Bush.


Unfortunately, that statement misrepresents the issue. For one thing, U.S. companies don't necessarily pay higher taxes than their foreign counterparts; Germany's corporate tax rate is significantly higher than ours, France's rate is about the same, and Britain's is only marginally lower.


What Krugman says is undoubtedly true. But a simple look at the corporate tax rates doesn't tell the whole story when it comes to the cost of doing business in those countries.

For example, labor laws in France mandate minimum benefits that would be excellent benefits for most Americans with a decade of tenure at the company.


Minimum of 5 weeks paid vacation per year.

Excessive non-compete provisions, once employment is terminated by either the employer or the employee.

Possibly a 13th month of salary each December, in accordance with the applicable "convention collective", a fact of life discussed below.


Take laws like these into account and it doesn't matter if the United States' and France's tax rates are similar -- it still costs more to employ the Frenchman in France than it does the American here.

Krugman sets the tax rate question up as a straw man, but that's not really his point.


Anyway, the Treasury statement makes it sound as if we're losing revenue because U.S.-based companies are moving their headquarters to lower-cost locations, or because they are losing market share to foreign rivals. Neither proposition is true. In fact, we're losing revenue because profitable U.S. companies are using fancy footwork to avoid paying taxes.

By incorporating itself in Bermuda, a U.S.-based corporation can -- without moving its headquarters or anything else -- shelter its overseas profits from taxation. Better yet, the company can then establish "legal residence" in a low-tax jurisdiction like Barbados, and arrange things so that its U.S. operations are mysteriously unprofitable, while the mail drop in Barbados earns money hand over fist. In other words, this isn't about competition; it's about tax evasion.


Aha! There's the rub. What Krugman is really steamed about is loopholes in the tax law. Instead of challenging the Congress, especially the Democrat-controlled Senate, to close the loopholes, Krugman wants to blame Bush for laws that were in place before Bush was president, even before he was governor of Texas.

If companies are finding illegal methods to avoid paying taxes, then they will be prosecuted. Krugman seems to believe that a Republican president would never prosecute a corporation for avoiding taxes. It's an extremely cynical and laughable view. It's similar to saying that a Democratic president would never prosecute labor unions for any illegal acts they may commit.


The natural answer would seem to be to crack down on the evaders -- to find a way to tax companies on the profits they really earn in the U.S., and prevent them from using creative accounting to make the profits appear somewhere else. It's hard, but not impossible.

But here's the key point: Administration officials don't want to help collect the corporate profits tax. Unable to push major corporate tax breaks through Congress, the administration has used whatever leeway it has to offer such breaks without legislation. The Hill, a nonpartisan publication covering Congressional affairs, recently reported on "a series of little-noticed executive orders . . . that will provide corporations with billions of dollars in tax relief without the consent of Congress."


You can find the story that Krugman is referring to here. I'll admit that the story does not bode well for President Bush or Treasury Secretary Paul O'Neill. If the objective truth is how the majority of the article portrays it to be, then most of these new rules will be struck down. There is some small defense in the article, from an unnamed tax lawyer.


One tax attorney, however, defended the administration's actions, arguing that in many cases they simplify the tax code and save businesses and the IRS time and money. She noted that the IRS spent a quarter of its examination resources on deciding whether assets can be deducted or should by amortized over a number of years, a controversy that would be solved in part by the new rules proposed this year.


I'm disturbed that this attorney is anonymous -- but that's a journalism ethics issue.

Having said that, let me say this. Every president has used executive orders to bypass Congress. As long as it is in the chief executive's power to do it, he can do it. Does anyone remember former President Clinton using his executive powers to create new National Monuments without the consent or even the consultation of Congress? If the new rules violate the law, the courts will take care of that. Legislators have never been shy about challenging the president, whatever his party, or of filing lawsuits in federal courts.


And now the silence on Stanley becomes comprehensible. The administration doesn't want to say outright that it's in favor of tax evasion; but it also doesn't really want to collect the taxes. Better to say nothing at all.

The trouble is that hinting, even by silence, that it's O.K. not to pay taxes is a dangerous game, because it can quickly grow into a major revenue loss. Accountants and tax planners have taken the hint; they now believe that it's safe to push the envelope. Tax receipts this year are falling far short of expectations, even taking the recession into account; my bet is that it will turn out that newly aggressive tax avoidance by corporations (and wealthy individuals) is an important part of the story. And it will get worse next year.


Silly. Just silly. I'd love for Krugman to say just once what he thinks of the Laffer Curve, because everything I've seen him advocate ignores that economic theory.


Furthermore, what does it say to the nation when companies that are proud to stay American are punished, while companies that are willing to fly a flag of convenience are rewarded?


Was that a slip? Is paying taxes a punishment? Liberals like Krugman aren't supposed to say that about taxes.


If the administration wants to eliminate the corporate profits tax, let's have a real, open debate -- starting with an explanation of how the lost revenue will be replaced in a time of severe budget deficits. Meanwhile, let's crack down on tax evasion.


No arguments here.

12:23 AM

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