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Center for
Freedom and Prosperity
 P.O. Box 10882
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Phone: 202-285-0244
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CFP E-Mail Update, May 28, 2002

Center for Freedom and Prosperity's E-Mail Update

1) Alabama Senator sends letter to Secretary O'Neill urging opposition to "Information Exchange" Schemes

2) CFP Comments on Treasury's Mixed Message on Inversion: Treasury Report Properly Blames Tax Code for Expatriations, But Policy Prescriptions Fall Short

3) Wall Street Journal weighs in on corporate inversion:  "When companies are fleeing the U.S. tax code to stay competitive abroad, there's something wrong with the tax code, not with the companies."

4) Stanley Works' CEO John Trani Responds to The New York Times Articles, "Keeping our company competitive preserves thousands of United States jobs and creates new ones."

5) De Rugy: Setting the New York Times Straight

6) Denis Kleinfeld: When Multi-Nationals Vote On Taxes

7) CFP Trip to Panama

8) IEA/CFP co-sponsored London Conference on Tax Competition (May 27, 2002)

9) Mitchell: EU Trying to meddle with U.S. tax policy

10) UPI's Capital Comment on "European Union is taxing our patience"

11) Gilbert Morris of the Nassau Institute Calls Bahamian Financial Laws 'Unconstitutional'

12) Mitchell on Tax Reform:  Heritage Backgrounder and National Review Online article

13) Richard M. Salsman:  Capital on Strike: The Tax Haven Controversy

14) CFP Clips

 

1) Alabama Senator sends letter to Secretary O'Neill urging opposition to "Information Exchange" Schemes

U.S. Senator Jeff Sessions of Alabama, a member of both the powerful Armed Services and the Judiciary Committees, urges Treasury Secretary Paul O'Neill for the second time to reject the information exchange proposals of the OECD, EU and UN.

[Excerpts:]
Nations should not conspire against taxpayers. This represent bad tax policy, and it also is contrary to America's national interests. The United States has a relatively low tax burden compared to other nations, so we would undermine our competitive advantage in the global economy by agreeing to tax harmonization proposals like "information exchange." … These initiatives should be rejected. They would undermine America's economy, and they would be bad for other nations as well. [Link to full text of letter:]
http://www.freedomandprosperity.org/ltr/sessions2/sessions2.shtml

The above letter is Senator Session's second letter to Paul O'Neill. The link below is the text of Senator's August 3 letter to Sec. O'Neill
http://www.freedomandprosperity.org/ltr/sessions/sessions.shtml

Link to all letters sent to Bush Administration by Members of Congress:
http://www.freedomandprosperity.org/congress/congress.shtml

 

2) CFP Comments on Treasury's Mixed Message on Inversion: Treasury Report Properly Blames Tax Code for Expatriations, But Policy Prescriptions Fall Short

[Excerpt from CFP's press statement]
Andrew Quinlan, President of the Center for Freedom and Prosperity, said:  The Treasury's report is an indictment against America's complex and indefensible international tax rules. It correctly states that:

1) "…no country has rules for the immediate taxation of foreign-source income that are comparable to the U.S. rules in terms of breadth and complexity."

2) "[A U.S.-based company is at a] disadvantage relative to the foreign competitor… U.S.-based company has less income to reinvest in its business, which can mean less growth and reduced future opportunities for that company."

3) "A comprehensive reexamination of the U.S. international tax rules is needed. It is appropriate to question the fundamental assumptions underlying the current system. We should look to the experiences of other countries and the choices that they have been made in designing their international tax systems. Consideration should be given to fundamental reform of the U.S. international tax rules[.]"

Treasury needs to turn these good words into concrete action. Unfortunately, the report does not endorse territorial taxation. Even more worrisome, it calls for higher taxes on foreign-based companies that create jobs in America.

Treasury's Press Release:
http://www.treasury.gov/press/releases/po3109.htm

Treasury's Report
http://www.treas.gov/press/releases/docs/inversion.pdf

CFP's Corporate Expatriation:  Protecting American Jobs Page:
http://www.freedomandprosperity.org/corpexpat/corpexpat.shtml

News Clips on Treasury's report:

May 21, 2002, The Wall Street Journal, Review & Outlook: The Bermuda Inversion
http://www.freedomandprosperity.org/corpexpat/wsj05-21-02.pdf

May 24, 2002, Tax-News.com, by Mike Godfrey, CFP Says US Treasury's Message On Corporate Inversions Mixed
http://www.tax-news.com/asp/story/story.asp?storyname=8288

May 17, 2002, The Associated Press, By Curt Anderson, Bush Administration Says High, Complex Taxes Driving U.S. Corporations Offshore
http://ap.tbo.com/ap/breaking/MGAYFM6QC1D.html

May 21, 2002, Tax-News.com, by Mike Godfrey, US Government Blames Tax Code For Corporate Flight
http://www.tax-news.com/asp/story/story.asp?storyname=8245

 

3) Wall Street Journal weighs in on corporate inversion: "When companies are fleeing the U.S. tax code to stay competitive abroad, there's something wrong with the tax code, not with the companies."

[Excerpt]
The U.S. corporate income tax tops off at 35% and is applied to a company's income world-wide, not just to income earned domestically. This puts American-based multinationals at a huge disadvantage with foreign rivals in overseas markets. Most countries, particularly in Europe, have lower rates and tax only income earned within their borders. At 35%, the U.S. rate is the fifth-highest among 26 OECD nations.

In the case of Stanley Works, some 28% of its revenue is foreign-sourced, which means a Bermuda address will cut its tax bill by almost 30%. Mr. Trani says the other options are letting his company be acquired by a foreign rival or going under -- neither of which would be good for its consumers, employees or shareholders. No wonder Bermuda looks good.

Congress has responded to this sensible corporate activity with bad bills and worse arguments. Senators Max Baucus (D., Montana) and Chuck Grassley (R., Iowa) propose punitive fees and fines for companies that reincorporate offshore. Their House colleagues, Richard Neal (D., Massachusetts) and Scott McInnis (R., Colorado) want to redefine what constitutes a domestic corporation for tax purposes.

All of these measures are being pushed in the name of saving jobs and preserving the U.S. "tax base." But they ignore the incentive side of the equation. The reality is that U.S. companies are fleeing sky-high rates and a ridiculously complex tax regime. The legislation addresses neither problem, which means it does nothing to help make U.S. firms more competitive. [Link to full editorial below:]

May 16, 2002, The Wall Street Journal, Review & Outlook: The Flight to Bermuda
http://online.wsj.com/article_email/0,,SB1021504755589450840,00.html

 

4) Stanley Works' CEO John Trani Responds to The New York Times Articles, "Keeping our company competitive preserves thousands of United States jobs and creates new ones."

[Excerpt]
Reincorporation will allow us to compete with foreign companies on a level playing field. Keeping our company competitive preserves thousands of United States jobs and creates new ones.

Two companies that compete directly with Stanley have reincorporated, and other American companies will take similar actions until Congress creates a tax system that doesn't hurt United States companies trying to compete in a global marketplace. For the sake of our company, its employees and shareholders, we cannot afford to wait for Congress to act. [Link to full letter below]
http://www.nytimes.com/2002/05/20/opinion/L20STAN.html

Additional News Clips on Corporate Expatriation:

May 24, 2002, Financial Times, By Edward Alden, International Economy: US tax plans to hit foreign companies
http://search.ft.com/search/article.html?id=020524001024

May 24, 2002, Financial Times, By Edward Alden, International Economy: Legal pressures set stage for tax overhaul
http://search.ft.com/search/article.html?id=020524001056

May 23, 2002, The Royal Gazette, By Lilla Zuill, US Treasury tax report 'fell short'
http://www.theroyalgazette.com/apps/pbcs.dll/artikkel?SearchID=73099845500312&Avi s=RG&Dato=20020523&Kategori=BUSINESS&Lopenr=105230015&Ref=AR

May 21, 2002, The Houston Chronicle, by Jim Barlow, Islands a tropical haven from grind of U.S. tax code
http://www.freedomandprosperity.org/Articles/hc05-21-02/hc05-21-02.shtml

May 20, 2002, Tax-News.com, by Mike Godfrey, US Patriot Tax Bill Falls At First Hurdle
http://www.tax-news.com/asp/story/story.asp?storyname=8233

May 20, 2002, The New York Times, By David Cay Johnston, Officers May Gain More Than Investor in Move to Bermuda
http://www.nytimes.com/2002/05/20/business/20BERM.html

May 17, 2002, Tax-News.com, by Mike Godfrey, New York Times Continues Bermuda Smear Campaign
http://www.tax-news.com/asp/story/story.asp?storyname=8221

May 16, 2002, The New York Times, Vote on Tax Bill Blocked in House
http://www.nytimes.com/2002/05/16/business/16STAN.html

May 1, 2002, The Royal Gazette, By Lilla Zuill, It is an unpatriotic act': Leading US Democratic Party leader Richard Gephardt attacks company 'tax dodging'
http://www.theroyalgazette.com/apps/pbcs.dll/artikkel?SearchID=73099845500312&Avi s=RG&Dato=20020501&Kategori=BUSINESS&Lopenr=105010012&Ref=AR

May 2002, LawOffshore Newsletter, Draft Bill would Reverse Benefits of Offshore Re-incorporation
http://www.offshoreon.com/articles/3070.asp?docid=3070

 

5) De Rugy: Setting the New York Times Straight

To no ones great surprise, The New York Times chose not to print Veronique de Rugy's letter to the editor to Paul Krugman's column on corporate inversion. The following is Veronique's complete letter with a link to Mr. Krugman's column:

May 14, 2002

Dear Editor,

Paul Krugman (May 14) writes that when U.S. firms, such as Stanley Works, re-incorporate in lower-tax countries they are engaging in unpatriotic tax evasion. Actually, it appears that the company is engaged in legal tax avoidance, something which wastes too much time for too many companies. The root cause is a tax code that has become so complex that it essentially demands that firms hire expensive tax lawyers simply to avoid paying more than their fair share.

Mr. Krugman is misinformed with regard to the competitiveness of the U.S. corporate tax rate. According to a new KPMG survey, the U.S. corporate income tax rate (federal plus state) is the fourth highest in the 30-country Organization for Economic Cooperation and Development. The U.S. rate of 40 percent is higher than Germany (38.4 percent), France (34.3 percent), and Britain (30 percent), the three competitor countries cited by Mr. Krugman.

That suggests that the simplest way to reduce tax avoidance would be to reduce the U.S. corporate tax rate. Many tax experts have also pointed out that the "worldwide" system of U.S. taxation is uncompetitive and, for example, is thought to be a reason why Daimler-Chrysler established its headquarters in Germany, not in Detroit.

Mr. Krugman should take his nationalistic blinders off and think about what recent corporate actions are telling us about our tax system. If politicians what to be patriotic, they should work to enact a low-rate and vastly simpler business tax system that would be the envy of the world.

Sincerely,

Veronique de Rugy
Fiscal policy analyst
Cato Institute

 

May 14, 2002, The New York Times,  by Paul Krugman, The Great Evasion
http://www.nytimes.com/2002/05/14/opinion/14KRUG.html

 

6) Denis Kleinfeld: When Multi-Nationals Vote On Taxes

First appeared in the April 2002 issue of the Offshore Investment Magazine

Companies like individuals, can either pay tax or do something to avoid tax. They can, if the situation demands, move out from under the tax system. Multi-national companies, whether public or private, are showing just what they think of their home country tax systems. They are not paying but expatriating.  It is what is known as voting with your feet.

 As almost everyone in the world knows, Americans are typically very provincial. Likely, well over 90% of Americans do not even have passports. Basically, their attitude is that America is the best place to be and why would anyone want to go anywhere else? But the fact is that even American companies, of all sizes and shapes, are moving offshore.

It is clear that there is a confusing political war going on over the tax system of the United States of America.  The same arguments being raised in support of or against the current tax system are applicable to the other OECD countries. On the one side are the proponents who say that the tax system as it currently exists has got to go. As one presidential candidate said, "Put a stake through its heart".  On the other side, there are those who feel wealth redistribution and campaign contributions are all important so that the current system must be kept in place and even expanded. In my view, mere political and special interest ideologies are rarely supported by the economics of reality.  [Link to full article below:]
http://www.freedomandprosperity.org/Papers/kleinfeld/kleinfeld.shtml

 

7) CFP Trip to Panama

Andrew Quinlan, President of CFP, and Dan Mitchell of the Heritage Foundation just returned from a trip to the country of Panama. Quinlan and Mitchell meet with government officials, members of the Legislature, leading private sector Associations and many media outlets.  Both spoke on the need to defeat tax harmonization and the battle to protect tax competition, financial privacy and fiscal sovereignty. Below is a link to an editorial from one of the nations leading daily newspapers on Quinlan and Mitchell visit.  As more articles are translated we will post them in the "CFP Clips" section.

May 18, 2002, El Panamá América, Editorial, Against the OECD's Whims
http://www.freedomandprosperity.org/Articles/epa05-18-02/epa05-18-02.shtml

 

8) IEA/CFP co-sponsored London Conference on Tax Competition (May 27, 2002)

A standing-room only crowd descended upon the Institute for Economic Affairs in London Monday afternoon to hear five speakers explain the dangers of tax harmonization. Richard Vedder of Ohio University started the event by explaining how tax competition worked in the United States to control fiscal burdens. Barry Bricewell-Milnes of the UK discussed the economic damage caused by cartels - particularly government cartels. Dan Mitchell of the Heritage Foundation outlined the specific dangers associated with the EU Savings Tax Directive. Tim Congdon of the UK defended tax havens as a liberalizing force in the world economy, and Richard Rahn of the US-based Prosperity Institute gave a vigorous defense of financial privacy. The audience asked numerous questions, and it is quite likely that this event helped create a new appreciation for the benefits of tax competition.

 

9) Mitchell: EU Trying to meddle with U.S. tax policy

[Excerpt:]
You don't have to be an economist to know that when tax collectors from the European Union complain about "certain distortions of competition" — and announce a need to "correct" it — that a blueprint for higher taxes can't be far behind.

This normally wouldn't concern most Americans, but this time the EU wants to conscript U.S. companies to act as deputy tax collectors.

Specifically, U.S. companies that sell digital products such as music or computer software that can be downloaded from the Internet. European consumers who buy from U.S. companies online avoid certain "value-added taxes" (VATs-a form of national sales tax that can reach as high as 25 percent) that they would have to pay if they bought from EU companies instead.

The finance ministers don't like that. So the EU is demanding that U.S. companies be required to collect European VATs and send the money to European governments. [Link to full op-ed below:]

May 23, 2002, The Washington, Times, by Dan Mitchell, Trying to meddle with U.S. tax policy
http://www.washingtontimes.com/commentary/20020523-10813469.htm

 

10) UPI's Capital Comment on "European Union is taxing our patience"

[Excerpt from the United Press International's Capital Comment from May 17, 2002]
The European Union is taxing our patience -- Americans for Tax Reform, a non-profit citizen's lobby group, is telling the European Union to keep their hands off U.S. businesses. This week the European Union unveiled its plan to tax downloaded goods such as software, videos and music when they are bought by citizens of EU member states -- without regard to the location of the merchant. EU leaders say the scheme is part of an effort to remove competitive handicaps inherent in the tax structure. President Grover Norquist attacked the plan, authored by what he called "The greedy governments in Europe."

Norquist says the problem comes because EU countries "handicap their businesses by hanging boulders like the VAT (value added tax) around the necks of entrepreneurs. If they really wanted to do their businesses a favor, they would get rid of the tax. Instead, they've decided to slap it on companies in America as well."

 

11) Gilbert Morris of the Nassau Institute Calls Bahamian Financial Laws 'Unconstitutional'

Dr Gilbert NMO Morris, head of the Bahamas' Nassau Institute, says that many aspects of the plethora of new financial services laws passed in the jurisdiction last year are unconstitutional, and forecasts that the Courts, in Bahamas and elsewhere, will throw out or amend hastily-conceived legislation which flouts basic constitutional rights.

The new Bahamian government has come in for some stick for saying that it plans to review the 11 pieces of legislation that were passed last year, but Dr Morris says they are exactly right.

"I am not alone in suggesting that the 11 pieces of legislation with which we are concerned here are a riot of unconstitutionality; which I believe in all honesty the last administration did not themselves wish to pass," says Dr Morris, naming a number of prominent Bahamians who are against the laws (which secured the Bahamas' removal from the OECD and FATF's 'blacklists').

Dr Morris produces a number of legal judgements from the last few months which assert constitutional rights as against draconian secrecy-busting laws. [Link to full Tax-News article below:]

May 24, 2002, Tax-News.com, by Mike Godfrey, Bahamian Academic Calls Financial Laws 'Unconstitutional'
http://www.tax-news.com/asp/story/story.asp?storyname=8295

 

12) Mitchell on Tax Reform:  Heritage Backgrounder and National Review Online article

A) May 23, 2002, Heritage Foundation Backgrounder by Dan Mitchell:  The Next Step for Tax Relief and Reform

President Bush's tax relief package, by reducing tax rates on work, saving, and investment, will boost economic growth and reduce the burden of government for all taxpayers; but it should also be viewed only as a first step. Lawmakers should remember that simply handing money to people (for example, through rebates and credits) does not stimulate additional economic activity. To generate economic benefits, tax reform should focus on three goals: lower rates; less double taxation of savings and investment; and simplicity. Lower tax rates on productive behavior lead to a stronger economy because workers, investors, and entrepreneurs are not penalized for creating wealth. Good tax policy also helps control the size of government by reducing tax revenues and keeping resources in the productive sector of the economy. Tax cuts will improve the economy's performance only if they increase incentives to work, save, and invest. This, in turn, will help to generate at least some additional revenue and thereby create a virtuous cycle that will allow for further tax reductions.  [Link to full report below:]
http://www.heritage.org/library/backgrounder/bg1554es.html

B) May 21, 2002, Nation Review Online, By Daniel J. Mitchell, Avoidance Therapy: We need tax reform, not more audits.
http://www.nationalreview.com/nrof_comment/comment-mitchell052102.asp

 

13) Richard M. Salsman:  Capital on Strike: The Tax Haven Controversy

[Excerpt:]
If, indeed, the world's governments fear a loss of tax proceeds and view "economic liberalization" and "modern information technology" as threats to such proceeds, what does that say about the future prospects for freedom and technology? Who will most likely win such a conflict? After all, unlike companies, which must create wealth, tax authorities need only exercise their power to seize it through taxation (or regulation).

As long as welfare states exist (and expand) there will be pressure to raises taxes. That's why there's been an intensifying assault lately -- by high-tax governments (including the U.S.) -- on the world's low-tax nations. A coordinated campaign -- led by the 29 nations (including the U.S.) in the Organization for Economic Development (OECD), by the 15-nation European Union (EU), the World Bank, the International Monetary Fund (IMF), the U.N., the World Trade Organization (WTO), the U.S Treasury Department and the U.S. Congress -- has targeted what are referred to as the "harmful tax practices" of low-tax nations, territories and jurisdictions.

Who's really harmed? Of course, it should be understood that when these government agencies say low tax regimes are "harmful" they mean harmful, not to shareholders and investors, but to the tax collectors. Thus institutional investors should care about this issue -- because they must maximize after-tax returns, locate and invest in firms that maximize their after- tax profits and attract (usually) wealthy clients who maximize their after-tax incomes. If recent proposals are enacted to curb or shut down tax havens (and tax shelters within high-tax regimes) -- thereby lowering the after-tax return on capital -- it will only serve to diminish potential investment returns. IFI has shown that monetary policy is the most important factor affecting investment returns. And today there are reasons to be only mildly bullish about the markets, based on monetary policy alone. But tax policy -- in this case international tax policy -- runs a close second in terms of influence. And it's the taxation of entrepreneurs, corporations and the wealthiest individuals that matters most. All else equal, the growing assault on tax havens and shelters -- aimed, as it is, at the world's most economically-productive parties -- must be seen as bearish. [Link to full pdf version below:]

May 21, 2002, The Capitalist Advisor, by Richard M. Salsman, Capital on Strike: The Tax Haven Controversy, Part One
http://www.freedomandprosperity.org/Articles/salsman1.pdf

 

14) CFP Clips

O.E.C.D. Tax Haven Update
http://www.oecd.org/EN/document/0,,EN-document-22-nodirectorate-no-4-4393-22,FF.h tml

May 24, 2002, Tax-News.com, by Jason Gorringe, Prodi Proposals On EU Tax Slammed
http://www.tax-news.com/asp/story/story.asp?storyname=8289

May 23, 2002, The Advertiser, Al-Qaeda escapes assets freeze
http://www.theadvertiser.news.com.au/common/story_page/0,5936,4372459%255E401,0 0.html

May 20, 2002, Tax-News.com, by Ulrika Lomas, OECD Warns That Scope For Financial Crime Boosted By Market Integration
http://www.tax-news.com/asp/story/story.asp?storyname=8231

May 16, 2002, by Richard W. Rahn, The new fascism
http://www.freedomandprosperity.org/Articles/rahn05-16-02/rahn05-16-02.shtml

May 16, 2002, Column by Paul Craig Roberts, Fourth in a series on America's imperiled future
http://www.townhall.com/columnists/paulcraigroberts/pcr20020516.shtml

May 16 2002, Financial Times, By Jean Eaglesham, Revenue's claim to tax avoidance files rejected
http://news.ft.com/ft/gx.cgi/ftc?pagename=View&c=Article&cid=FT37K5B2B1D

May 2002, LawOffshore Newsletter, PricewaterhouseCoopers Says Bermuda Offshoot would Avoid Tax Bill
http://www.offshoreon.com/articles/3071.asp?docid=3071

May 6, 2002, Investor's Business Daily, Editorial: Statists' New Ploy
http://www.freedomandprosperity.org/Articles/ibd05-06-02/ibd05-06-02.shtml

 

Best regards,

Andrew Quinlan
Center for Freedom and Prosperity
President
202-285-0244
208-728-9639 (efax)
quinlan@freedomandprosperity.org
www.freedomandprosperity.org

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