05/15/2002

No, the management of Stanley Works, that ancient New Britain, Conn., toolmaking company, is not being very patriotic. But it is doing what the law permits it to do and what company managements are paid to do, among other things: maximize profit by playing the tax "code" for all it's worth.

Rather than single out Stanley Works, the public should ask the government to change the law so that it and many other companies do not do what Stanley's management plans to do: Reincorporate the company in Bermuda to take advantage of loopholes in the tax code and deprive Uncle Sam of many millions of dollars a year in taxes. We have a hunch, by the way, that most shareholders strongly support the offshore move; profits and stock price usually trump patriotism, despite the rhetoric.

(All this assumes, of course, that no one will visit the whole idea of whether companies should pay income taxes at all. After all, in the end companies don't pay taxes; people do, including those who buy a company's goods and services, into which is injected the cost of corporate taxes. Our tax "system" would be considerably more honest and efficient if we recognized that.)

Anyway, by organizing itself as an offshore entity (based merely on having a mail drop in Bermuda), Stanley, which has major international operations, can shield from federal taxes the profits it makes outside the United States. And this may be just the start of Stanley's tax-avoidance schemes in warm climes. The company could also set up a corporate office in Barbados to which its domestic profits could be transferred and manipulated in such a way as to avoid taxes.

But wait, there's more! The Bermuda incorporation could also let Stanley's management be less accountable to shareholders. Gee, why wasn't Enron based in Bermuda? This proviso could be the worst aspect of Stanley's move, which is sure to soon be replicated by many other companies unless these loopholes are closed. This certainly will not increase investors' faith in the accounting and other transparencies of such companies. So, incorporation abroad could, of all things, ultimately be bad for their stock price.

Again, Stanley's management is just doing what comes naturally -- and legally. It is up to Congress and President Bush to take steps to close these loopholes posthaste.