INVERSION, SUBVERSION

Washington Post: It shouldn't be hard to agree that tax havens are a problem. Every time a U.S. corporation moves its nameplate to another country, it deprives the U.S. government of revenue, forcing the rest of us to make up the shortfall. Moreover, each corporate departure reinforces the suspicion among others that they better twist the rules as well just in order to stay even. But nothing about tax politics turns out to be easy. On Thursday a House hearing on the corporate exodus to Bermuda and other tax-free isles broke up in acrimonious confusion.
The simple answer to corporate flight is the one advocated by congressional Democrats: Refuse to change the tax treatment of companies that move their legal base abroad without changing where their real operations are located. In the most celebrated recent example, Stanley Works, a Connecticut toolmaker, plans to put its nameplate in Bermuda and so cut its U.S. taxes by $30 million annually. Several other firms have done the same; next Friday the shareholders of Nabors Industries, an energy company in Houston, are due to vote on a similar relocation. Given that such corporate "inversions" are done to deprive the U.S. government of tax receipts, why not pass a law shutting off this inversion subversion?
Worldwide income
Republicans, both in the administration and Congress, reply that part of the reason for corporate flight is that the tax code is pernicious. The United States taxes its companies on worldwide income; most other countries tax their firms only on their domestic profits. Because of this, U.S. companies are shifting their headquarters abroad in order to be on a level playing field with European or Asian competitors. This option ought not be outlawed, the argument goes. Republicans say the right policy is to allow firms to go abroad in order to escape worldwide taxation, and then to clamp down on efforts to escape tax on U.S.-generated profits. For example, companies currently set up headquarters abroad and then arrange for their U.S. operations to pay interest to the foreign shell, so reducing taxable profits in the United States to zero. This trick, it is argued, rather than corporate inversion, is what ought to be outlawed.
There are two problems with this position. First, companies will probably get around the narrow fixes that Republicans advocate. Second, the worldwide tax system may be cumbersome and in need of reform, but it is not as burdensome as Republicans say it is. Companies are theoretically on the hook for tax on their activities abroad, but in practice they can claim credits that offset this liability.
According to one study co-authored by a Treasury economist, switching from a worldwide system to a territorial one might actually increase the tax burden on U.S. nonfinancial companies. Admittedly, the worldwide system does hurt some firms, and these may be the ones that flee abroad. But any tax system has some losers. The current system is not so flawed that denouncing it should take precedence over preventing corporate flight -- which is primarily motivated not by problems in the U.S. tax code but by a desire to get around it.
SKEPTICISM GREETS BUSH PLAN
Orange County Register: At first look, we're not convinced that a new Department of Homeland Security, as President Bush proposed in a national address Thursday, is the appropriate and effective solution to terrorist threats. The new department, he said, would have as its "overriding and urgent mission" the security of Americans.
He called for moving the Coast Guard, the Federal Emergency Management Agency, the INS and other agencies into the new department. The new department would have four primary tasks: controlling U.S. borders, working with state and local authorities to enforce security, developing the best scientific means to prevent terrorism, and establishing a clearinghouse to "review intelligence and law enforcement" data.
The president promised that the reorganization would not "increase the size of government." Details of the plan will be released in the coming days and Congress will have to debate and legislate for the new department to be established. He called it the biggest reorganization of the government since the late 1940s.
FBI, CIA lapses
Certainly, there's nothing wrong with reorganizing the government to make it more efficient. And lapses by the FBI, CIA and other agencies that possibly allowed the Sept. 11 terrorist attack to happen are being investigated in Congress and should lead to substantial reforms.
But we believe it's just too early to say the best way to prevent terrorism is to create yet another federal department. The cart is being put before the horse. The first thing needed is a more precise diagnosis of the agency and process failures that preceded Sept. 11, which is under way. Then, further reforms should be carried out by the administration and Congress, pruning agencies, positions and policies that clog the federal government and prevent pertinent data from reaching the top officials. The ultimate answer to enhanced security might be a new agency, task force, different processes, different people -- or a combination.
In its June 17 issue, National Review, generally hawkish and a major Bush supporter, observed, "There's no reason to think things would improve under a Department of Homeland Security. To the extent that bureaucratic failure contributed to Sept. 11 ... the answer surely isn't more bureaucracy. Rather than shift around responsibilities and duplicate efforts, the Bush administration should focus on reforming the agencies that are currently in charge of homeland security."
Nothing would be more regrettable than if a massive reorganization results only in months of internal focus -- rather than the external watching, listening and sensing so critical at the moment.
The American people and Congress should scrutinize the specific Bush proposals carefully. More government won't stop terrorism; leaner, better government might.