Contact Information:

Center for
Freedom and Prosperity
 P.O. Box 10882
Alexandria, Virginia 22310-9998
Phone: 202-285-0244
Fax: 208-728-9639

U.S. Senator Charles Grassley

June 2, 2002


From U.S. Senator Charles Grassley:
A new tack on tax reform

Daniel Mitchell's May 8 Commentary article "Bad tax policy: You can run ..." of May 8 misrepresents several important points of my legislation proposed with Sen. Max Baucus to prevent U.S. companies from moving overseas to avoid paying taxes here.

Mr. Mitchell claims our bill forbids U.S. companies from rechartering in countries with better tax laws. That's false. Nothing in this bill prohibits a U.S. company from rechartering in a country with more favorable tax laws, so long as the company has some business operations there. As I said when we introduced this bill, I have no problem with U.S. companies operating in low- or no-tax jurisdictions for legitimate business purposes, including global competition. However, when a U.S. company creates a piece of paper in a filing cabinet in a tax haven where the company conducts no business, the purpose is usually to escape U.S. tax, not to compete in the global marketplace.

These file-folder inversions are the only inversions prohibited by our bill. Our bill is specifically designed not to impede legitimate cross-border transactions.

Mr. Mitchell argues that all corporations, regardless of where they're based, pay tax to the Internal Revenue Service on their U.S. profits. I wonder if Mr. Mitchell is aware that many inversions are created to generate bogus tax deductions for U.S. corporations. The most common scheme moves funds from the U.S. corporation to the foreign parent filing cabinet, then sends the money back to the U.S. corporation in the form of a loan. Why a loan? Because the interest paid by the U.S. corporation to the foreign filing cabinet is tax-deductible in the United States, but untaxed in the foreign jurisdiction.

Clearly, this structure is meant to escape U.S. taxes.

Requiring a company to pay its fair share of taxes is not enslavement, and Mr. Mitchell's comparison of our bill to the hideous Dred Scott decision is inappropriate and offensive. Paying one's fair share is a bedrock principle of our tax system. Everybody should have to pay only his fair share, not a penny more, to fund a government that serves us all. Companies that nominally move their headquarters to Bermuda and keep their operations in the United States retain access to a full array of U.S. taxpayer-funded amenities, such as the federal patent protection system, federal courts, federal highways, the Customs Service, and much more. Allowing companies to slice their tax obligation without cutting their use of federal services is unfair to individual taxpayers, who don't have the option of pulling up stakes and moving to Bermuda to avoid paying taxes.

Mr. Mitchell would have us believe that essential government services constitute government waste. He attempts to analogize inversions with moving from California to Nevada. But, as noted by former Sen. Patrick Moynihan, New York Democrat, no one has ever had to call upon the Bermuda Navy to defend our interests at home or abroad.

Mr. Mitchell ridicules my view that corporate inversions are immoral. He claims my morality would require companies to stay in the United States and fire their workers. My view that inversions are immoral is based on the fact that the companies recently engaging in inversions are taking advantage of economic conditions created by the lingering recession and the terrorist attacks of September 11. These conditions minimize the tax costs of escaping the United States, and the promoters of inversion transactions have confirmed this.

A recent Web cast featured a Big Five accounting firm partner hawking corporate inversions as a "mega trend hot topic" because of depressed stock prices. The Web cast was taped Nov. 30, 2001, fewer than 80 days after September 11. This individual also acknowledged that an impediment to inversions was patriotism, but she assured viewers that "the improvement on earnings is powerful enough to say that maybe the patriotism issue needs to take a back seat." This is why I view inversions as immoral. These companies and the inversion promoters are arbitraging one of the worst tragedies in America's history just to escape U.S. taxation.

I agree with Mr. Mitchell on one point: that companies are moving overseas because our international tax rules are flawed, and they have difficulty competing globally. When I introduced the inversions bill, I firmly stated this. On the Senate floor, I pledged to reform our international tax laws, particularly for those U.S. companies that rejected doing corporate inversions but are left to struggle with the competitive constraints of our international tax rules. I'm committed to remedying this inequity. I believe the current inversion crisis will awaken Congress to the dire need for reform of our international tax rules.

But we can't credibly undertake this reform if we allow these abusive file folder inversions to continue.

U.S. Senate.

Mr. Grassley, an Iowa Republican, is ranking member of the Senate Finance Committee.



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