Why Cruise Ships Don't Fly the American Flag

U.S. Commerce Secretary Howard Lutnick went on Fox News in February 2025 and said the quiet part about the cruise industry out loud.

"You ever see a cruise ship with an American flag on the back? ... None of 'em pay taxes ... this is going to end ... and those taxes are going to be paid."

Howard Lutnick, U.S. Commerce Secretary, in a Fox News interview

Royal Caribbean's stock fell as much as 9.3% that day before closing down 7%. Carnival dropped about 5%, Norwegian and Viking about 7% each. CNBC's Jim Cramer flagged the moment as it happened.

Post by @jimcramer

Then nothing happened. No bill, no new tax, no change to the paperwork. As of this month, the ships still fly the same flags they always have. The arrangement Lutnick was describing isn't a loophole anyone snuck past Congress; it's been built into how the industry works since 1972, when Carnival's founder registered its first ship in Panama rather than the United States.

Carnival Corporation & plc is incorporated in Panama. Royal Caribbean Group is incorporated in Liberia. Norwegian Cruise Line Holdings is incorporated in Bermuda. None of that is where their ships are actually registered, either. Carnival's fleet splits between the Panamanian and Bahamian flags, Royal Caribbean and Norwegian fly Bahamian flags almost fleet-wide, and MSC Cruises registers ships in both Panama and Malta. The one American-flagged cruise ship of any size, Norwegian's Pride of America, exists only because Congress carved out a special exemption so it could sail exclusively among the Hawaiian islands without a foreign port call.

A flag state, a tax bill and a different set of labor rules

A ship's flag isn't decoration. Under the United Nations Convention on the Law of the Sea, the flag state is the government that inspects the vessel, licenses its crew and supplies the legal system that governs how the company that owns it gets taxed and how the people who work on it get paid. Panama, Liberia, Bahamas and Malta all built modern shipping registries by offering the same pitch: register here, and you get our safety inspectors, our low fees and, for a corporation with the right paperwork, an escape from paying income tax anywhere at all.

That escape runs through Section 883 of the U.S. Internal Revenue Code, which exempts income a foreign corporation earns from operating ships internationally, as long as its home country grants the same courtesy to U.S.-flagged vessels. Panama, Liberia, the Bahamas and Malta all do. The result: cruise lines organized under those flags owe little or nothing in U.S. corporate income tax on the profit from carrying passengers, even when nearly all of those passengers boarded in Miami or Fort Lauderdale.

The numbers bear that out. In 2019, the last full year before the pandemic, Carnival paid $71 million in tax on $3.06 billion in income, an effective rate of 2.3%. Royal Caribbean paid $25.5 million on $1.8 billion, a rate of 1.4%. Norwegian paid $18.9 million on $911 million, or 2.1%. The U.S. statutory corporate rate that year was 21%. A Senate Commerce Committee analysis found the pattern goes back further: Carnival and Royal Caribbean, which together made up 71% of the global cruise industry, paid an effective worldwide tax rate of just 1.3% on more than $17 billion in profit over a seven-year stretch. A separate accounting found Carnival's profit from 2011 through 2015 topped $7.29 billion against $44 million in U.S. tax, under 1% a year.

Cruise lines note, accurately, that they pay other money into the U.S. system: an estimated $2.5 billion a year combined in payroll taxes, port fees and passenger head taxes, which run $5 to $15 per person at some ports and can add up to $45,000 for a single call by a 3,000-passenger ship. Carnival alone paid close to $600 million directly to U.S. port cities in 2019. What none of that changes is the corporate income tax line, which is why the industry was left out of the $2 trillion CARES Act rescue fund in 2020: the law required recipients to be "created or organized in the United States" with a majority of employees based here. "Corporations that operate foreign-flagged vessels do not pay taxes in the United States," Rep. Doris Matsui, D-Calif., said at the time, opposing any carve-out. Tax analyst Robert Willens put the industry's position more bluntly a few years earlier: "They're not giving up their tax exemption. I assure you that is sacrosanct."

What the flag means for the crew

The same registries that shrink the tax bill also set the rules for the roughly half a million people who crew the world's cruise fleet. Nearly 30% come from the Philippines alone; most of the rest hail from India, Southeast Asia, Eastern Europe and the former Soviet republics, according to an analysis published by the Milken Institute Review. Carnival and Royal Caribbean reported median crew compensation of about $15,000 a year in 2022. Because the ships are Bahamian, Panamanian, Maltese or Liberian rather than American, that pay and the hours behind it are governed by international maritime law and the flag state's own rules, not the Fair Labor Standards Act or the National Labor Relations Act. The Maritime Labour Convention caps working hours at 14 in any 24-hour period, or 77 a week, which is a ceiling, not a promise of a day off. A steward or line cook on a Bahamian-flagged ship has no claim to the U.S. minimum wage and cannot organize a union under U.S. law the way a hotel worker in Miami could.

What crew members do have is that same Maritime Labour Convention, a 2006 treaty that Panama, Liberia, the Bahamas and Malta have all ratified, and the International Transport Workers' Federation, the global seafarers' union that negotiates minimum pay scales directly with shipping companies since it can't organize a Bahamian-flagged ship the way a U.S. union would organize a Bahamian-flagged hotel. "Increases in the ILO minimum wage are very important for seafarers," said Mark Dickinson, a seafarers' representative who sat on the subcommittee that set the 2026 rate. The ITF backs that bargaining with enforcement: in 2025 it ran more than 9,000 ship inspections under 15,663 active agreements and recovered upward of $45.2 million in wages owners had failed to pay.

Why a Panama flag doesn't send your lawsuit to Panama

For passengers, the flag matters less than most people assume. A different, older piece of case law does the real work: in 1991, the Supreme Court ruled 7-2 in Carnival Cruise Lines, Inc. v. Shute that a forum-selection clause printed on the back of a cruise ticket was enforceable, even though a Washington state couple injured off Mexico said they never saw the clause until after they'd paid. That ruling is why nearly every major cruise line's ticket contract now routes injury claims to federal court in Miami or Fort Lauderdale, regardless of whether the ship that caused the injury flies Panama's flag, the Bahamas' or Malta's. The flag state still decides who inspects the ship's lifeboats and fire suppression systems and who investigates when something goes wrong at sea; it just doesn't decide where an injured passenger gets to argue about it.

It is a familiar pattern in travel: the terms that decide what a customer can actually do sit in fine print few people read, much as airline overbooking rules do on the ground.

None of this is hidden. It's printed in Carnival's own annual report, argued about on the Senate floor for over a decade, and now repeated on cable news by a sitting Cabinet secretary. What hasn't happened, in more than 50 years of politicians raising it, is a change to the underlying law. Cruise industry analysts have counted about 10 similar flare-ups in the past 15 years alone, and every one of them ended the same way: with the ships still flying the flags of countries most of their passengers will never visit.