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Escaping the Tax Hikes: When Businesses Go Overseas

Back when he was the Democratic vice-presidential candidate, Joe Biden got on the air and told the American people that paying taxes was patriotic. Hindsight suggests that he was trying to put America on a guilt trip over what his boss had in mind for the nation. Whether that was the intent of the now famous “bidenism” or not, one has to wonder if he expected a rising number of companies to be so unpatriotic (at least by his definition) as to flee the country altogether and set-up shop in places that are far more congenial to business than America under Obama is shaping up to be.

The Swiss Energy Boom

According to Reuters, “over the past six months companies including offshore drilling contractors Noble Corp and Transocean, energy-focused engineering group Foster Wheeler and oilfield services company Weatherfield International have all announced plans to shift domicile to Switzerland.” For the canton (state) of Zug, some 30 miles from Zurich, the moves have been called a “virtual energy boom.”

The reason? "Switzerland has a stable and developed tax regime and a network of tax treaties with most countries where we operate," Transocean Chief Executive Bob Long said in a statement in October, when it announced its move. "As a result, the redomestication will improve our ability to maintain a competitive worldwide effective corporate tax rate."

In other words, these are companies that compete on a global scale and they need to be based in a country where that kind of competition is understood and supported. They need to be able to make profits that make their investments worthwhile. They need to be somewhere other than the United States.

The Effects of Redomestication

If you were to pull up stakes and move your business to another state, redomesticate your business, what would happen? Most likely, the folks who work for you would be out of a job, unless they moved with you. Local tax revenues would drop. The fiscal stimulus that your business—through the salaries you pay, the things you and your staff purchase, the rent you pay for facilities, the community things you sponsor, and so on—would vanish.

The new home for your business would benefit, but in the place you left there would be an economic hole in the ground. When companies like these go overseas, they don’t leave holes. They leave craters.

Not only do Americans lose jobs when the company itself leaves, the businesses that service the departed company also lose out, and if their income from that company was large enough, that could mean layoffs at those businesses as well. That effect can ripple through the economy, and the bigger the business, the larger those ripples will be. Not only that, but the tax revenues sought by the Administration will be lost for good. After all, the IRS has no power overseas. On top of that, people who are out of work, companies that have lowered revenues, also don’t pay the sort of taxes that Washington is expecting from America. We have seen what happens when this is taken to its logical conclusion.

Back in the good old days, the Studebaker company, the famed automobile manufacturer, faced a similar economic crisis. It wasn’t taxes. South Bend, Indiana, had welcomed the plant and the company was one of the pillars of the community. Studebaker’s issue was over labor costs. The autoworkers union wanted the same pay as their brethren in Detroit. The company said they could not match the wage and so the union called a strike. Negotiations failed several times over and then Studebaker closed the plant for good and moved to a more business-friendly place—Canada. The closing of the plant, the redomestication of the company, left hundreds unemployed and resulted in the small businesses that serviced the company and were supported by the now out-of-work workers laying off many of their own workers or shutting down completely.

Should the Studebaker company have remained and given in to the union for the good of the town? Should these companies that are on their way to the mountains and trim little alpine villages stick around and be “patriotic”? What would you do?

The Bottom Line

High taxation or low, the fact is that either way, someone prospers. In the case of Transocean and these other companies, the folks in Switzerland will benefit from President Obama’s tax policies, which is kind of ironic given all the talk about stimulating the American economy.

High taxes and high energy costs (cap and trade) are a 1-2 punch to American business at the best of times. They are doubly so during the kind of recession we are suffering through now. As for businesses fighting back: Some will keep swinging, others will escape the ring altogether, and the rest will simply go down after they take one hit too many.

If America is to fight its way back to greatness and prosperity, it will never be through the kinds of policies being forced upon the nation today. American businesses, large and small, need to be nourished and supported by solid, prosperity-oriented policies that have, throughout history, worked. If we don’t, expect to see more companies voting with their feet.