Cato Institute Corrects NY Times On 'Patriotism' And Taxes

Tax-News.com, New York

29 May 2002

After New York Times columnist Paul Krugman joined the newspaper's popular Bermuda-bashing sport with an article entitled The Great Evasion, Veronique de Rugy of the Cato Institute wrote to the editor with a letter called Setting the New York Times Straight. Needless to say, the letter wasn't printed, but here's what it said:

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 want 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

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