The directors of Stanley Works, maker of hammers, tape measures, and other common tools, want to reincorporate in Bermuda. If they succeed in getting enough shareholder votes, they’d merely be the latest in a rapidly growing line of companies that have put tens of millions of dollars of taxes on permanent vacation by opening a post office box in an offshore tax haven.

The general consensus is that this is a sleazy move, cheating America out of tax revenue at a time when we’re facing an impending federal budget crisis in order to fight a war on terror. But defenders of the practice generally offer two arguments: 1) An expensive and confusing U.S. tax structure makes being incorporated in America a competitive liability; and 2) The move benefits shareholders because it will increase profits and send the stock higher.

First of all, the notion that being based in the United States is bad for business is simply ridiculous. There are few countries in the world where business enjoys more political influence and is encumbered by less regulation. The dollar is relatively stable compared to other currencies. U.S. transportation, infrastructure and telecom services are the most reliable in the world – and much of it is subsidized or provided to corporations for free.

The shareholder argument would also be seductive were it true. After all, if you invest in company X, your investment is likely to rise if company X’s profit rises. So, in theory, you should like the fact that Company X is reincorporating in Bermuda.

Unfortunately for shareholders, the benefits of reincorporation are a total lie, a fiction created by top management, who are the true beneficiaries of the offshore incorporation switcharoo.

The problem for shareholders is that they are required to pay capital gains taxes when the move is made. Normally, you would decide when you wanted to sell your stock in company X, anticipating the effects of the taxes from the sale. But if company X moves off-shore, you’re forced to exchange your U.S. shares for new offshore shares, creating an unanticipated and undesired tax liability that may well wipe out any gain.

The big winners of the offshore reincorporation game are the CEOs and top management, who are paid in stock options. There’s no capital gains tax on unexercised options. And when the options are cashed out, they’ll be worth more now, assuming the stock rises as a result of the offshore move.

But perhaps the most insidious part of reincorporating in Bermuda is that the laws of Bermuda heavily favor management and severely weaken the rights of shareholders. Unlike in the United States, Bermuda shareholders don’t have much decision-making authority on fundamental changes in the corporation. The ability to bring shareholder lawsuits is severely limited. And there are no laws in Bermuda limiting insider trading. For management, it’s a great deal. They can do what they want.

Other companies that have reincorporated in Bermuda include such paragons of ethics as Global Crossing and Tyco International. The list also includes construction giant Foster Wheeler, Cooper Industries, Ingersoll-Rand, Accenture (formerly Arthur Andersen consulting), Monday (formerly PriceWaterhouse Consulting), and as of last week, Nabors Industries Inc., the world's biggest onshore oil and gas drilling contractor.

Some experts expect a flood of such corporate inversions, much in the same way that corporations streamed into Delaware about 100 years ago to take advantage of rules that give corporations unprecedented freedom to write their own rules. But by comparison, Bermuda’s secrecy and limited liability laws make Delaware seem downright repressive.

A lot is at stake here.

First, there’s the money issue. These companies are saving tens of millions a year in taxes. That’s money that doesn’t go to the federal government, which means that either the rest of us get fewer government services (education, roads, parks, protection from terrorists, etc.) or the rest of us have to pay more taxes. Already, corporations are paying close to an all-time low in taxes as a percentage of the nation’s Gross Domestic Product, just 1.3% last year, according to Citizens for Tax Justice. That’s down from around 4.5% during the Truman/Eisenhower years.

Then there’s the corporate accountability issue. Already, investors are fleeing the stock market with serious doubts about whether they can trust corporate financial statements. Already, investors are frustrated with a failure of corporate governance that has allowed runaway CEO pay, insider loans, and other management indecencies to proliferate unchecked. A mass corporate exodus to Bermuda, land of secrecy and management unaccountability, would further erode investors’ shaky confidence and could hasten a stock market crash that would destroy an awful lot of retirements.

Republicans and Democrats alike agree that this trend does not benefit the United States. But they disagree on the solution. In general, Republicans believe this growing exodus indicates a fundamental problem with the American tax system. If our tax system were more favorable to corporations, the logic goes, corporations wouldn’t have to reincorporate somewhere else. Therefore, we should lower corporate taxes so there won’t be a need to reincorporate offshore. Never mind that our federal government is suffering a serious budget crisis in the wake of excessive tax cuts for the wealthy and a costly “war on terrorism.”

The Dems have a few other ideas. One bill, The Corporate Patriot Enforcement Act of 2002 [sponsored by Reps. Neal (D-MA) and Maloney (D-CT)] would tax companies that just nominally reincorporate as if they were still American companies. A bipartisan bill in the Senate, the Reversing the Expatriation of Profits Offshore (REPO) Act [sponsored by Sens. Grassley (R-IA) and Baucus (D-MT)] takes a similar approach (The REPO Act is currently into a bill stuck in the Senate Finance committee that gives new tax breaks for charitable donations).

A third bill, the Patriotic Purchasing Act of 2002 [sponsored by Rep. Turner (D-TX)], would prohibit companies that reincorporate offshore from being eligible for Federal contracts. Tyco, for example, has more than 1,800 government contracts, including one to provide alarms to the Treasury Department. Accenture has over $1 billion in government contracts, including a 5-year contract to run the IRS web site!

All three bills would help solve the problem of offshore corporate tax escapees.

In one sense, though, the Republicans may be right. These moves are symptomatic of a larger problem. But the larger problem is not that U.S. corporations are taxed too heavily. The problem is that greedy executives of U.S. corporations have lost any sense of shame. Offshore reincorporation is the latest tool in the corporate globalizers’ race to the bottom. It’s time to take this hammer out of the hands of the corporate globalizers before the rest of us get nailed.

Lee Drutman and Charlie Cray work with Citizen Works

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