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Archive for May 1st, 2012

I’ve been fighting for more than 10 years to stop an IRS regulation that would force American banks to put foreign tax law above US tax law.

Sadly, I recently lost that battle when Treasury Secretary Tim Geithner finalized the third version of the regulation (it was first proposed by Clinton, and then a second version was put forth by the Bush White House).

In previous posts, I explained why this regulation represents bad tax policy and undermines the rule of law. I also have explained that it will hurt the American economy and why it endangers the human rights of people living under tyrannical and thuggish regimes.

But such concerns don’t matter to the tax cheat who is serving as the Treasury Secretary.

Richard Rahn is not happy about this outcome, either, and here is some of what he wrote in the Washington Times.

Over the past several years, Treasury Secretary Timothy F. Geithner was warned by many private economists and members of Congress of the adverse consequences of a proposed rule that would force U.S. banks to be uncompensated tax collectors for foreign governments. On April 17, Mr. Geithner issued the rule anyway. …To put it simply, the Obama Treasury Department and Internal Revenue Service (IRS) are forcing U.S. banks to report to foreign governments that often are corrupt or worse on lawful deposits their citizens hold in U.S. banks, thus putting those citizens’ lives at risk. As the former governor of Oklahoma and now president of the American Bankers Association, Frank Keating, wrote: “While the IRS minimizes potential security issues, nonresident aliens are unlikely to feel reassured by promises that their information won’t fall into the wrong hands. These pledges could be met with apprehension when countries with questionable human rights records remain on the recipient list. This rule gives nonresident aliens every incentive to pick up and move their deposits elsewhere.” …Looking at the actions and words of Mr. Geithner, you can conclude that he is consciously trying to destroy the U.S. economy, he lacks a sufficient number of brain cells and nerve connections for the job, or his ego and desire to pander to his boss and well-known economic illiterates has caused him to be willfully negligent over and over again. The latter is probably closest to the truth.

What makes this new regulation so disturbing is that it is a gross abuse of the regulatory process. For more than 90 years, Congress has maintained a policy of seeking to attract capital to the American financial system. Lawmakers repeatedly have looked at this issue of “nonresident alien” deposits, and they always have decided that America should be a safe haven for foreigners who want a good place to deposit money.

Yet the IRS, which is supposed to issue regulations that enforce existing law, proposed a regulation that overturns the law. And Geithner approved it. No vote from Congress. No legislation from the White House. No need to bother with the rule of law or democracy (and people wonder why there is rhetoric about a gangster government!).

I cover some of the key points in this video about the proposal.

You may be wondering why the Obama Administration is in favor of such a bad idea. Well, there’s no great mystery. Politicians get very upset if people have the freedom to shift economic activity to jurisdictions with better tax law. This process, known as tax competition, creates pressure for better tax policy.

Statists from all around the world have united in a campaign to undermine tax competition and expand the power of governments to impose bad tax policy. Obama and his team are simply doing their part to advance this dystopic vision.

The implementation of this IRS regulation means we’ve suffered an unfortunate defeat in this battle. So if we care about promoting good policy and restraining the greed of the political class, we need to redouble our efforts.

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We know that the United States and most other developed nations are in deep trouble if we leave government policy on auto-pilot. And we know the painful day of reckoning will arrive even faster if we continue the Bush-Obama policies of expanding the burden of the public sector.

All this sounds very depressing, but the good news is that we know the types of policies that will solve the problem.

The bad news is that we often don’t do a very good job of convincing people of the changes that are needed.

Part of the answer is that libertarians and small-government conservatives are probably too utilitarian. Not in our hearts, but in the way we talk.

Arthur Brooks of the American Enterprise Institute addresses this problem in a column for the Washington Examiner.

…many who strongly believe in free enterprise steer clear of all public “moral” arguments. This is a mistake and a missed opportunity. A great deal of research shows that people from all walks of life demand a system that is morally legitimate, not just efficient. …Privately, free enterprise’s champions…celebrate capitalism because they believe that succeeding on merit, doing something meaningful, seeing the poor rise by their hard work and virtue, and having control over life are essential to happiness and fulfillment. But in public debate, conservatives often fall back on capitalism’s superiority to other systems just in terms of productivity and economic efficiency. …The dogged reliance on materialistic arguments is a gift to statists. It allows them to paint free enterprise advocates as selfish and motivated only by money. Those who would expand the government have successfully appropriated the language of morality for their own political ends; redistributionist policies, they have claimed to great effect, are fairer, kinder, and more virtuous. …Average Americans are thus too often left with two lousy choices in the current policy debates: the moral Left versus the materialistic Right. The public hears a heartfelt redistributionist argument from the Left that leads to the type of failed public policies all around us today. But sometimes it feels as if the alternative comes from morally bereft conservatives who were raised by wolves and don’t understand basic moral principles. …There just doesn’t seem to be a good alternative to the “statist quo,” and as a consequence, the country is slipping toward a system that few people actually like.

I think Brooks is correct. Most libertarians and conservatives are not motivated by GDP numbers. They believe in small government because it is morally sound (no government-imposed stealing) and fair (you don’t get rich without offering something of value).

During public policy debates, though, we rely on utilitarian arguments.

I offer myself as an example. When the flat tax became a big issue in the 1990s and I started giving lots of speeches about tax reform, I would make dry and technical arguments about marginal tax rates and capital formation. But I quickly learned that much of the support for the flat tax was motivated by a belief in a fair and moral system – no cronyism, treating everybody equally, ending corruption, shutting down loopholes, etc. So I modified my speeches and gave much more attention to the moral arguments.

That being said, there’s no silver bullet in public policy fights. We probably need a combination of morality and utilitarianism. And it’s obviously important to put things in terms ordinary people can understand. That, I believe, is what made Reagan so effective. And it’s what I try to do with this blog (albeit on a much more limited level).

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