Art Laffer has a guaranteed spot in the liberty hall of fame because he popularized the common-sense notion that you can’t make any assumptions about tax rates and tax revenue without also figuring out what happens to taxable income.
Lot’s of people on the left try to denigrate the “Laffer Curve,” but it’s worth noting that even left-wing economists now admit that you don’t maximize revenue with a 100 percent tax rate.*
After enjoying an average growth rate above 3.5% per year between 1960 and 1999, Americans have had to make do with less than one-half that pace since 2000. The consequences are already dramatic and will become even more so over time. Overall we are 20% poorer today than we would be had the pre-2000 growth rate persisted.
That’s a great point. I’ve also tried to get people to focus on the importance of long-run growth.
In his column, Art also correctly defines good tax policy.
The principle of levying the lowest possible tax rate on the broadest possible tax base is the way to improve the incentives to work, save and produce—which are necessary to reinvigorate the American economy and cope with the nation’s fiscal problems.
But he then asserts that an Internet sales tax cartel somehow will result in better policy.
…there are reforms that can alleviate the problems associated with declining sales-tax bases and, at the same time, allow the states to move closer to a pro-growth tax system. One such reform would be to have Internet sellers collect the sales taxes that are owed by in-state consumers when they purchase goods over the Web. So-called e-fairness legislation addresses the inequitable treatment of retailers based on whether they are located in-state (either a traditional brick-and-mortar store or an Internet retailer with a physical presence in the state) or out of state (again as a brick-and-mortar establishment or on the Internet). …The exemption of Internet and out-of-state retailers from collecting state sales taxes reduced state revenues by $23.3 billion in 2012 alone, according to an estimate by the National Conference of State Legislatures. The absence of these revenues has not served to put a lid on state-government spending. Instead, it has led to higher marginal rates in the 43 states that levy income taxes.
This is a very disappointing collection of sentences. Let’s review.
1. States have declining sales-tax bases because state lawmakers treat that levy the same way that politicians in Washington treat the income tax – they put in loopholes in exchange for campaign cash and political support. For them to complain about declining sales-tax bases is sort of like the old joke about the guy who murders his parents and then asks the court for mercy because he’s an orphan.
2. Art offers zero evidence that state governments would use the additional revenue from a state sales tax cartel to reduce income tax rates. What’s next, a column saying we should have a value-added tax because the politicians may use the revenue to get rid of the income tax? Yeah, good luck with that approach.
3. Why is it “inequitable” for there to be different tax policies in different states? That’s another way of describing federalism, and it’s something we should be celebrating and promoting. Particularly since it promotes tax competition, which is one of the most effective ways of restraining the greed of the political class.
4. The Internet sales tax cartel being promoted by Art and various politicians requires that governments have the ability to tax sales that tax place outside their borders. That’s an assault of sovereignty, particularly since out-of-state merchants will be coerced into being tax collectors for a distant government. This is the same dangerous ideology that is used by high-tax governments to promote global anti-tax competition policies.
5. Art offers zero evidence that the absences of a state sales tax cartel has led to higher income tax rates. Yes, some states have raised tax rates in recent years, but others have lowered tax rates.
I reiterated these sentiments in a debate that was posted today by U.S. News & World Report. Here’s some of what I wrote.
The debate over the so-called Marketplace Fairness Act is not about a level playing field. It is an attempt by politicians to grab more tax revenue to facilitate bigger government. …they want to create an elaborate and intrusive system to force out-of-state merchants to act as tax collectors. …To understand why this is a radical step, imagine if you took a trip to Las Vegas and played blackjack, but then got arrested when you returned home because your state doesn’t allow gambling. That would be an outrage because a state only has sovereign power to enforce laws (good ones or bad ones) on things that take place within its borders. And it would be equally outrageous if state governments tried to force Las Vegas casinos to discriminate against non-Nevada residents.
I also explain why this type of system is bad news for reasons other than fiscal policy.
This legislation also has very troubling implications for privacy. It can only work by creating a massive database that matches online purchases with the state and local sales tax rates for every consumer. I don’t know about you, but I’m not confident that this type of untested system will be secure. We’ve already seen major leaks of confidential data from both government and private companies. This database will be a magnet for identity thieves and other hackers looking for credit card information.
If you agree, feel free to give me an “up” vote on this U.S. News page featuring all the debate participants.
I’ve explained before that I’m skeptical of the Fair Tax, hostile to the value-added tax, and opposed to other forms of a national sales tax for the simple reason that I don’t trust politicians to get rid of the income tax.
For the same reason, I’m inherently hostile to proposals that would create a new tax on the basis of how much we drive. As I explain in this interview for Fox Business News, the politicians would treat this tax as a new source of revenue and not get rid of gas taxes and/or property taxes on cars.
That motivated me to take the next step and unveil the madras.
P.S. Never trust politicians when they introduce a tax at a low rate and claim it won’t be a big burden. I mentioned in the interview how the first income tax in 1913 morphed into the nightmare we face today, but I also call your attention to the British tax on air travel, which has ballooned since its introduction in 1994.
State and local governments should compete with each by offering the best fiscal climate. Sadly, just as high-tax nations such as France and Germany are trying to hinder global tax competition, high-tax state governments are seeking to undermine fiscal rivalry inside the United States.
I explained this issue last week for a standing-room-only audience on Capitol Hill.
The entire discussion is posted online, including the very astute observations of my former Heritage Foundation colleague, Adam Thierer, now at the Mercatus Center.
Investor’s Business Daily also has opined on why this is a bad idea, but if you want to get really worried, the clowns at the United Nations want to power to tax and regulate the Internet.
This blurb from the IFC Review may give readers a sense of the regulatory onslaught facing financial institutions.
Banks and other financial services firms had to deal with 60 regulatory changes each working day during 2011, according to a report from Thomson Reuters Governance, Risk & Compliance, reports City AM. Regulators around the world announced 14,215 changes in 2011, a 16 per cent increase from the 12,179 announcements in 2010. The report shows that the majority of regulatory activity, 57 per cent, came from the US… Scott McCleskey, head of financial services regulation at the GRC unit, said: “This growth in activity also has an effect on the level of compliance spending leaving less to lend, invest, and do the other core activities which will be necessary to revive the global economy.”
Wow, an average of 60 regulations every single day. Great for lobbyists and politicians. Not so good for competitiveness and prosperity.
But are there some offsetting benefits? Unfortunately, the answer seems to be no. Professor Jason Sharman explains, starting with an explanation of the scope and cost of AML policies.
It is now just over 20 years since the first international anti-money agreements were concluded….Since then, the monitoring and implementation of AML standards have morphed into a global industry. …A vast array of financial institutions, from banks to brokers, insurance firms to casinos, money remitters to hedge funds, have now been conscripted into monitoring their clients for signs of suspicious financial activity. All this has imposed substantial costs on governments, private financial firms, and, indirectly, consumers, with the burden being especially significant for International Financial Centres.
He then raises a very important question, but one that everyone else seems to ignore.
…it is disconcerting how seldom the most obvious questions about this system are asked. First amongst these is whether AML standards actually work. That is to say, is there any less money laundered now than there was 20 years ago? Is there any less predicate crime that gives rise to these dirty funds in the first place? Despite all the evaluations performed by the FATF, other international organisations, national governments and the army of private AML experts that has grown up, it is striking that these sort of first-order questions are almost never asked, let alone answered.
Given the incompetence of government, you won’t be shocked to learn that the bureaucrats view the laws as an excuse for empire building and bloat.
Surprisingly, however, one can read through thousands of pages of FATF reports, covering everything from football to free-trade zones, without finding much, if any, attention devoted to these measures. Instead, the international surveillance and monitoring system that judges almost every country to see whether they have ‘the right stuff’ in AML terms has tended to foster a bureaucratic game of goal displacement: means to an end have become ends in themselves.
And what about stopping crime?
The most careful studies of effectiveness (both in absolute terms and relative to the cost) have been done by those outside the system, for example scholars like Peter Reuter, Edwin Truman, Jackie Harvey and Michael Levi. Each of these observers notes the mismatch whereby we have an incredibly extensive and intrusive policy apparatus, but very little knowledge about the results produced. On the basis of the fragmentary evidence that is available, however, it is hard to see any impact that AML rules have made on the incidence of crime. The general conclusion is that the expansion of the AML regime owes more to a political imperative to ‘do something’ in response to hot-button issues like crime or terrorism, rather than any track record of success.
Remarkable. Billions upon billions of regulatory costs. The immeasurable loss of privacy because of government-mandated snooping and spying. Yet all for naught.
Maybe the answer is less regulation? Maybe the answer is that politicians and bureaucrats should do cost-benefit tests? But those types of rules would mean less government and more freedom, so don’t hold your breath.
The bureaucrats at the Organization for Economic Cooperation and Development threatened to have me thrown in a Mexican jail for the horrible crime of standing in the public lobby of a hotel and giving advice to low-tax jurisdictions.
But if that makes it seem as if the battle is full of drama and (exaggerated) glory, that would be a gross exaggeration. More than 99 percent of my time on this issue is consumed by the difficult task of trying to convince policy makers that tax competition, fiscal sovereignty, and financial privacy should be celebrated rather than persecuted.
Sort of like convincing thieves that it’s a good idea for houses to have alarm systems.
And it means I’m also condemned to the never-ending chore of debunking left-wing attacks on tax havens. The big-government crowd viscerally despises these jurisdictions because tax competition threatens the ability of politicians to engage in class warfare/redistribution policies.
To determine whether tax havens are immoral, let’s peruse Mr. Vallely’s column. It begins with an attack on Ugland House in the Cayman Islands.
There is a building in the Cayman Islands that is home to 12,000 corporations. It must be a very big building. Or a very big tax scam.
If lying is immoral, this is a quick black mark on Mr. Vallely rather than tax havens. I’ve already explained, in a post eviscerating an empty-suit Senator from North Dakota, that a company’s home is merely the place where it is chartered for legal purposes. A firm’s legal domicile has nothing to do with where it does business or where it is headquartered.
In other words, there is nothing nefarious about Ugland House, just as there is nothing wrong with the small building in Delaware that is home to more than 200,000 companies. Obama, by the way, demagogued about Ugland House during the 2008 campaign.
Now that we’ve established that the author is a careless and know-nothing hack, let’s see what else he has to say.
Are there any legitimate reasons why anyone would want to have a secret bank account – and pay a premium to maintain their anonymity – or move their money to one of the pink dots on the map which are the final remnants of the British empire: the Caymans, Bermuda, the Turks and Caicos and the British Virgin Islands?
o Persecuted ethnic Chinese in Indonesia and the Philippines?
o Political dissidents in places such as Russia and Venezuela?
o Entrepreneurs in thug regimes such as Venezuela and Zimbabwe?
o Families threatened by kidnapping failed states such as Mexico?
o Homosexuals in murderous regimes such as Iran?
As this video explains, there are billions of people around the world that are subject to state-sanctioned (or at least state-permitted) religious, ethnic, racial, political, sexual, and economic persecution. These people are especially likely to be targeted if they have any money, so the ability to invest their assets offshore and keep that information hidden from venal governments can, in some cases, be a life-or-death matter.
And let’s not forget the residents of failed states, where crime, expropriation, kidnapping, corruption, extortion, and economic mismanagement are ubiquitous. These people also need havens where they can safely and confidentially invest their money.
The author of the column is probably oblivious to these practical, real-world concerns. Instead, he is content with sweeping proclamations.
The moral case against is clear enough. Tax havens epitomise unfairness, cheating and injustice. .
But if he is against unfairness, cheating, and injustice, why does he want to empower the institution – government – that is the source of oppression in the world?
To be fair, our left-wing friend does attempt to address the other side of the argument.
Apologists insist that tax havens protect individual liberty. They promote the accumulation of capital, fair competition between nations and better tax law elsewhere in the world. They also foster economic growth. …Yet even if all that were true – and it is not – does it outweigh the ethical harm they do? The numbered bank accounts of tax havens are notoriously sanctuaries for the spoils of theft, fraud, bribery, terrorism, drug-dealing, illegal betting, money-laundering and plunder by Arab despots such as Gaddafi, Mubarak and Ben Ali, all of whom had Swiss accounts frozen.
But he can’t resist trying to discredit the economic argument by resorting to more demagoguery, asserting that tax havens are shadowy regimes. Not surprisingly, he offers no supporting data. Moreover, you won’t be surprised to learn that the real-world evidence directly contradicts what he wrote. The most comprehensive analysis of dirty money finds 28 problem jurisdictions, and only one could be considered a tax haven.
Last but not least, the author addresses the issue that really motivates the left – the potential loss of access to other people’s money, funds that they want the government to confiscate and redistribute.
Christian Aid reckons that tax dodging costs developing countries at least $160bn a year – far more than they receive in aid. The US research centre Integrity estimated that more than $1.2trn drained out of poor countries illicitly in 2008 alone. …Some say an attack on tax havens is an attack on wealth creation. It is no such thing. It is a demand for the good functioning of capitalism, balancing the demands of efficiency and of justice, and placing a value on social harmony.
There are several problems with this passage, including the (perhaps deliberate) mixing of tax evasion and tax avoidance. But the key point is that the burden of government spending in most nations is now at record levels, undermining prosperity and reducing growth. Why should add more fuel to the fire by giving politicians even more money to waste?
Let’s now shift from the inaccurate ramblings of a left-winger to some real-world evidence. The Wall Street Journal has an article on the Canton of Zug, Switzerland’s tax haven within a tax haven. This hopefully won’t surprise anyone, but low-tax policies have been very beneficial for Zug.
Developed nations from Japan to America are desperate for growth, but this tiny lake-filled Swiss canton is wrestling with a different problem: too much of it. Zug’s history of rock-bottom tax rates, for individuals and corporations alike, has brought it an A-list of multinational businesses. Luxury shops abound, government coffers are flush, and there are so many jobs that employers sometimes have a hard time finding people to fill them. …If Switzerland is the world’s most famous tax haven, Zug amounts to a haven within a haven.
Here’s some of the evidence of how better fiscal policy promotes prosperity. This is economic data, to be sure, but isn’t the choice between growth and stagnation also a moral issue?
Zug long was a poor farming region, but in 1947 its leaders began to trim tax rates in an effort to attract companies and the well-heeled. In Switzerland, two-thirds of total taxes, including individual and corporate income taxes, are levied by the cantons, not the central government. The cantons also wield other powers that enable them compete for business, such as the authority to make residency and building permits easy to get. …businesses moved in, many establishing regional headquarters. Over the past decade, the number of companies with operations of some sort in the canton jumped to 30,000 from 19,000. The number of jobs in Zug rose 20% in six years, driven by the economic boom and foreign companies’ efforts to minimize their taxes. At a time when the unemployment rate in the European Union (to which Switzerland doesn’t belong) is 9.4%, Zug’s is 1.9%.
It turns out that Zug is growing so fast that lawmakers actually want to discourage more investment. What a nice problem to have.
Describing Zug’s development as “astonishing,” Matthias Michel, the head of the canton government, said, “We are too small for the success we have had.” …Zug has largely stopped trying to lure more multinationals, according to Mr. Michel.
…the Swiss are mostly holding fast to their fiscal beliefs. Last November, in a national referendum, they overwhelmingly rejected a proposal that would have established a minimum 22% tax rate on incomes over 250,000 francs, or about $315,000.
This global tax cartel will be akin to an OPEC for politicians, and the impact on taxpayers will be quite similar to the impact of the real OPEC on motorists.
If that’s a moral outcome, then I want to be a hedonist.
To conclude, here are two other videos on tax havens. This one looks at the economic issues.
And here’s a video debunking some of the usual attacks on low-tax jurisdictions.
I’m depressed about the global network of tax police being organized by the OECD and high-tax governments. If successful, it will lead to much bigger, more oppressive government. But maybe there’s a way of fighting back. Here’s a video from the folks at Reason TV about something that governments would hate – anonymous, digital money.
And here’s a video from the bitcoin people. I have no way of knowing how well this system will work and how insulated it will be from government interference, but I very much hope it will be successful. Governments will never behave if they think people have no escape options.
If anybody has an informed opinion about this, I’d welcome some feedback.
I commented yesterday about the silly idea, being promoted by a few politicians, to impose a tax on toilet paper. That post mostly was an opportunity to have some fun mocking greedy government because even a dour pessimist like me doesn’t expect that idea to get very far.
But there’s a new tax idea that sounds equally absurd, but actually is a much greater threat to taxpayers. The bureaucrats at the Congressional Budget Office have issued a report suggesting a tax based on the number of miles driven. Since such a tax almost surely (despite initial assertions to the contrary) would be in addition to existing gas taxes, this would be a way for politicians to grab more of our money.
But that’s not the only thing we should worry about. To impose such a tax, the government obviously would need the ability to track our vehicle usage. At the risk of stating the obvious, my driving patters are not the government’s business.
The Congressional Budget Office (CBO) this week released a report that said taxing people based on how many miles they drive is a possible option for raising new revenues and that these taxes could be used to offset the costs of highway maintenance at a time when federal funds are short. The report discussed the proposal in great detail, including the development of technology that would allow total vehicle miles traveled (VMT) to be tracked, reported and taxed, as well as the pros and cons of mandating the installation of this technology in all vehicles. …The report was requested by Senate Budget Committee Chairman Kent Conrad (D-N.D.), who held a hearing on transportation funding in early March. In that hearing, Transportation Secretary Ray LaHood said the Obama administration is hoping to spend $556 billion over the next six years, much of which would go to federal transportation improvement projects. Conrad said in response that federal funds are tight, and in asking for recommendations on how to raise that money, he noted the possibility of a VMT tax as a way to solve the problem of collecting less in taxes as people move to more fuel-efficient vehicles.
Here’s a new mini-documentary from the Center for Freedom and Prosperity, narrated by Natasha Montague of Americans for Tax Reform, that explains why the process of tax competition is a critical constraint on the propensity of governments to over-tax and over-spend.
The issue is very simple. When labor and capital have the ability to escape bad policy by moving across borders, politicians are more likely to realize that it is foolish to impose high tax rates. And they oftentimes compete for jobs and investment by lowering tax rates. This virtuous form of rivalry helps explain why so many nations in recent years have lowered tax rates and adopted simple and fair flat tax systems.
Another great feature of the video is the series of quotes from winners of the Nobel Prize. These economists all recognize competition between governments is just as desirable as competition between banks, pet stores, and supermarkets.
The issues discussed in this video generally don’t get a lot of attention, but they are critical for the long-run battle to restrain government. Please share widely.
P.S. This speech by Florida’s new Governor is a good example of how tax competition encourages governments to do the right thing.
One of the good features of the Internet is that it gives people more options. But this is bad news for politicians, who like to control – and tax – what people are doing. But it’s not easy for politicians at the state level to impose high sales taxes on consumers when people have the freedom to buy things sold in other states. Politicians do impose “use taxes,” which supposedly require people to pay taxes on goods purchased in other states, but 99 percent of consumers evade this tax since there’s no feasible way to enforce the levy. In an effort to gain more control (and more money), greedy politicians at the state and local level want Congress to impose a nationwide sales tax cartel. I wrote about why this was a bad idea back in 2001, both because it would undermine tax competition between states and because it would be a gross invasion of privacy. Here’s an excerpt from a report on the latest battle in this fiscal war:
The halcyon days of tax-free Internet shopping will, if Rep. Bill Delahunt gets his way, soon be coming to an abrupt end. Delahunt, a Massachusetts Democrat, introduced a bill on Thursday that would rewrite the ground rules for Internet and mail order sales by eliminating the option for many Americans to shop over the Internet without paying state sales taxes. At the moment, Americans who shop over the Internet from out-of-state vendors usually aren’t required to pay sales taxes. Californians buying books from Amazon.com or cameras from Manhattan’s B&H Photo, for example, won’t be required to cough up the sales taxes that they would if shopping at a local mall. …The National Conference of State Legislatures applauded Delahunt’s legislation, saying he should be commended for allowing states to collect as much as $23 billion in new taxes. …the pro-tax forces have offered a proposal that they hope Congress can be persuaded to adopt. The concept is called the Streamlined Sales Tax Agreement, invented in 2002 by state tax officials hoping to straighten out some of sales tax laws’ most notorious convolutions. Since then, some 24 states have signed on, either wholly or partially, to the agreement, meaning they agree to simplify their tax codes and make them uniform. If enough states participate, proponents believe it will be easier to convince Congress to make sales collection mandatory for out-of-state retailers. …State tax collectors haven’t exactly been idle while waiting for Congress. They’ve been trying to force Amazon to turn over purchase records in North Carolina, attempting to force retailers to become tax-tattlers in California and Tennessee, and putting the squeeze on affiliate programs in Colorado.
Here’s a bit of good news to begin the weekend. Arizona politicians have been forced to suspend a statewide speed camera program. I’m especially pleased to see that civil disobedience played a role in forcing politicians to pull the plug on the Orwellian system. Here’s an excerpt from the news:
Arizona is ending a groundbreaking and contentious program that put speed cameras along Phoenix-area freeways and in vans deployed across the state. Opponents have argued the cameras open the door for wider “Big Brother” surveillance and are more about making money than safety. The program has been the target of an initiative measure proposed for the November ballot. Even Gov. Jan Brewer has said she doesn’t like the cameras, and her intention to end the program was first disclosed in her January budget proposal. That was followed by a non-renewal letter sent by the Arizona Department of Public Safety this week to the private company that runs the program. Scottsdale-based Redflex said Thursday that the 36 fixed cameras will be turned off and the 40 vans taken off highways on July 16, the day after its state contract expires. …The camera program was instituted by Brewer’s predecessor, Janet Napolitano, now the Homeland Security secretary. Cameras were introduced in September 2008 and were added until all 76 were up and running by January 2009. …Napolitano estimated that the program would bring in $90 million revenue in its first year, but actual revenue fell far short as many motorists ignored notices received in the mail. …The end of the state program does not affect local governments’ use of cameras for speed enforcement, but the proposed ballot measure would prohibit state and local governments from using cameras for both speed violations and red-light running.
In a previous blog post, I showed a cartoon joking about Obamacare as a Trojan Horse for the IRS, but with each passing day we are learning new – and always unpleasant – details about the mammoth legislation that was imposed by the left. The excerpt below from the Boston Globe reveals that businesses will face costly new reporting requirements to the internal revenue service because of government-run healthcare:
Tucked away in just 23 lines of Section 9006 of the Healthcare reform bill be a dramatic change in the 1099 reporting requirements. No longer will corporations or payments for merchandise be exempt 1099 reporting. This new law is effective January 1, 2012. A large majority of payments made by a business will now be reported on a 1099. …There is no doubt this will be an administrative nightmare for many businesses in the first year or two. Taxpayer identification numbers need to be collected for all vendors. Have a large business related meal at a restaurant, this will need to be reported on a 1099. Spend a week in a hotel in Waco Texas, you will need to send a 1099.
Here’s an excellent idea for all American readers. One of the guys who posts on National Review Online is urging everyone to identify themselves as “some other race” on the census form. And writing “American” next to that box would be an added bonus. The goal, he explains, is to undermine the government’s racial bean-counting intrusiveness. Forward this to every American resident you know.
Fully one-quarter of the space on this year’s form is taken up with questions of race and ethnicity, which are clearly illegitimate and none of the government’s business… My initial impulse was simply to misidentify my race so as to throw a monkey wrench into the statistics; I had fun doing this on the personal-information form my college required every semester, where I was a Puerto Rican Muslim one semester, and a Samoan Buddhist the next. …Instead, we should answer Question 9 by checking the last option — “Some other race” — and writing in “American.” It’s a truthful answer but at the same time is a way for ordinary citizens to express their rejection of unconstitutional racial classification schemes. In fact, “American” was the plurality ancestry selection for respondents to the 2000 census in four states and several hundred counties.
There’s a principled Fourth Amendment argument against anti-money laundering laws. In this video, however, I mostly focus on the cost-benefit issue, explaining that the fight against crime will be more effective if law enforcement is not forced to look for a needle in a haystack.
In a rational world, Switzerland would be a role model for other nations. It is quite prosperous thanks largely to a modest burden of government. There is remarkable ethnic and religoius diversity, but virtually no tension because power is decentralized (sort of what America’s Founders envisioned for the United States). Yet despite these – and many other – attractive features, Switzerland is being persecuted because of strong human rights laws that protect financial privacy. Money-hungry politicians from other nations resent Swtizerland’s attractive policies, and they would rather trample Swiss sovereignty rather than fix their own oppressive tax laws. An official from the Swiss Bankers Association provides some background in a New York Times column:
In Switzerland, this tradition of treating a client’s financial affairs in confidence became law in 1934 when it was codified in Article 47 of the country’s first-ever federal banking act as a contemporary reaction to the economic crisis, various domestic political considerations and well-publicized cases of espionage involving France and Germany. …Banking secrecy, therefore, is not some gimmick the Swiss devised to attract foreign clients to their banks. It reflects the very high degree of trust that exists between the Swiss state and its citizens and it has strong democratic foundations. …The Swiss are proud of their system and they reward it with a high level of taxpayer honesty. It works because the Swiss vote their own taxes, they have a high degree of control over the way tax revenues are spent and over all they believe their tax system to be reasonable, comprehensible, transparent and fair. The principle of self-declaration backed up with withholding taxes and, if necessary, stiff fines supports this “honesty box” system. …Doesn’t Switzerland hear the snapping jaws and cracking whips of foreign finance ministers, tax collectors, O.E.C.D. bureaucrats, cash-dispensing government agents and other denizens of the encroaching real world as they circle round Mother Helvetia intent on biting huge chunks out of her banking secrecy, if not swallowing it whole? …In March last year the Swiss announced they would give up the evasion-fraud distinction for foreign bank clients and adopt the O.E.C.D. standards on information exchange in tax matters. …However, requests for assistance must be made with regard to a specific individual, and “fishing expeditions” — any indiscriminate trawling through bank accounts in the hope of finding something interesting — remain ruled out. …Switzerland demonstrates to the world that it is possible for a state to collect taxes with a high degree of taxpayer honesty and without the authorities being corroded with suspicion about the financial activities of their citizens. Citizens in a democracy would never allow their police force to have an automatic right of forced entry into their homes just on the off-chance of finding some stolen goods, so why on earth should the state have an automatic right of forced entry into citizens’ banks accounts just on the off-chance of discovering some tax evasion? There must be a limit to the extent to which respect for an individual’s privacy is sacrificed on the altar of international cooperation in tax matters.
Sadly, the United States is part of the effort to create a global tax cartel. An “OPEC for politicians” would be terrible news for taxpayers, though, much as a cartel of gas stations would be bad for driviers. So-called tax havens play a valuable role in curtailing the greed of the political class. Ask yourself a simple question: Would politicians be more likely or less likely to raise tax rates if they knew taxpayers had no escape options?
A Swiss court just threw a wrench in the gears of an IRS effort to impose bad US tax law on an extraterritorial basis, ruling that UBS does not have to hand over data to the American tax authorities. This ruling nullifies an agreement that the Swiss government was coerced into making with the US government last year. In typical arrogant fashion, the IRS already has indicated that it still expects acquiescence, notwithstanding Switzerland’s strong human rights policy on personal privacy. The Bloomberg story excerpted below has the details, but it’s worth noting that this entire fight exists solely because the internal revenue code imposes double taxation on income that is saved and invested and imposes that bad policy on economic activity outside America’s border. But just as other governments should not have the right to impose their laws on things that happen in America, the United States should not have the right to trample the sovereignty of other nations:
A UBS AG account holder won a Swiss court case preventing data from being disclosed in a ruling that may impede a U.S. crackdown on overseas tax evasion. The failure by U.S. citizens to complete certain tax forms or declare income doesn’t constitute “tax fraud” that would require Switzerland to disclose account data, the country’s Federal Administrative Court ruled in a judgment released today. …“The prosecutors at the Justice Department are not going to be happy with this opinion,” Namorato said in an interview in Washington. “It guts the settlement that they negotiated with the Swiss authorities.” …The Swiss government said in a statement that it will decide Jan. 27 how the Swiss-U.S. agreement can be implemented in light of the ruling. U.S. Justice Department spokesman Charles Miller declined to comment. …The Internal Revenue Service said in a statement that while the agency hadn’t reviewed the ruling it “had every expectation that the Swiss government will continue to honor the terms of the agreement.” …Today’s ruling involved a single test case, and the court said there were 25 more involving similar claims that it will ask the Swiss tax authority to review. “It’s a landmark decision,” said Bernhard Loetscher a partner at Zurich-based law firm CMS von Erlach Henrici AG. “The court considers the case so crystal clear that it invited the SFTA to withdraw the 25 other claims.” …Under the 1996 double taxation treaty, “tax fraud and the like” means fraudulent behavior that causes or attempts an illegal and important reduction in tax owed. Examples included keeping separate accounts of incorrect profit, losses and orders, as well as a scheme of lies. Switzerland distinguishes between tax fraud, which is a crime, and tax evasion, which is a civil offense. “The U.S. will soon start to renegotiate the double taxation treaty, to give up the distinction between tax evasion and tax fraud,” said Zurich lawyer Wolfram Kuoni. “The key battle will be if it will apply retrospectively.”
This battle is part of a broader effort by uncompetitive nations to persecute “tax havens.” Creating a tax cartel for the benefit of greedy politicians in France, Germany, and the United States would be a mistake. An “OPEC for politicians” would pave the way for higher taxes, as explained here, here, and here. But this also is a human rights issue. Look at what happened recently in the thugocracy known as Venezuela, where Chavez began a new wave of expropriation. The Venezuelans with money in Cayman, Miami, and Switzerland were safe, but the people with assets inside the country have been ripped off by a criminal government. Or what about people subjected to persecution, such as political dissidents in Russia? Or Jews in North Africa? Or ethnic Chinese in Indonesia? Or homosexuals in Iran? And how about people in places such as Mexico where kidnappings are common and successful people are targeted, often on the basis of information leaked from tax departments. This world needs safe havens, jurisdictions such as Switzerland and the Cayman Islands that offer oppressed people the protection of honest courts, financial privacy, and the rule of law. Heck, even the bureaucrat in charge of the OECD’s anti-tax competition campaign admitted to a British paper that “tax havens are essential for individuals who live in unstable regimes.” With politicians making America less stable with each passing day, let’s hope this essential freedom is available in the future.
Lot’s of people on the left try to denigrate the “Laffer Curve,” but it’s worth noting that even left-wing economists now admit that you don’t maximize revenue with a 100 percent tax rate.*
Heck, just look at what’s happened in Hong Kong and Singapore and you’ll agree.
