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Archive for the ‘Tax Competition’ Category

I don’t know whether it’s because I’m a libertarian or because I’m an economist, but I get very frustrated by the issue of corporate inversions.

It galls me to hear demagogic politicians like Obama make absurd statements about “unpatriotic” corporations that re-domicile overseas when the problem is entirely the result of bad policy that penalizes U.S.-domiciled firms trying to compete in global markets.

1. The United States imposes the world’s highest corporate tax rate.

2. The United States is one of the few countries to impose “worldwide tax” on domestic firms.

3. The United States maintains very anti-competitive tax rules.

So when politicians grouse about “Benedict Arnold” companies, my reaction is to be happy that companies are taking steps to protect workers, consumers, and shareholders.

But, given what he’s done on amnesty and Obamacare, you won’t be surprised to learn that the President has unilaterally changed policy to make inversions more difficult.

That’s the bad news. The good news is that the President’s bad policy doesn’t change reality.

An editorial in the Wall Street Journal looks at the latest example of an American company getting a new address.

Ireland-based drug company Actavis on Monday announced a $66 billion agreement to buy California’s Allergan , maker of the Botox anti-wrinkle treatment. …the tax savings…could be hundreds of millions a year beginning in 2015.

The folks at the WSJ make the obvious point about bad American tax laws.

…the deal highlights how desperately U.S. tax policy needs a makeover. …As if a combined state and local corporate tax rate of 40%—the highest in the industrialized world—isn’t harsh enough, the U.S. is also one of the few countries in which the government demands to be paid even on earnings that have already been taxed in foreign jurisdictions. Given this competitive disadvantage for U.S.-based firms, it’s no coincidence that both of the suitors that have been seeking to acquire Allergan are based overseas.

And what’s really remarkable is that both the suitors used to be U.S.-based companies!

Both Actavis and Valeant used to be based in the U.S. but moved their headquarters offshore in so-called inversion transactions in which they adopted the home country of businesses they acquired. Moving offshore allows businesses to invest more in the U.S., as Actavis has already done with its recent purchase of New York’s Forest Laboratories.

But hold on a second, didn’t the Obama Administration enact rules to prevent inversions?

President Obama views such rational decisions as unpatriotic, because he wants to tax both foreign and U.S. operations. So this fall Treasury Secretary Jack Lew reinterpreted longstanding tax regulations to make it more expensive to execute such deals—a punishment for companies that didn’t exit the U.S. when they had the chance. …Mr. Lew has decided the best response to foreign tax competition is to bolt the door to prevent more corporate escapes.

But here’s the catch. The White House and Treasury Department did make it more costly for companies to re-domicile, but the Administration can’t actually prohibit cross-border mergers.

So let’s summarize the net effect.

Before the Obama Administration imposed new rules, American-based companies would acquire foreign-based companies and use that maneuver to technically re-domicile in a nation with less punitive corporate taxation. But there’s very little risk of American jobs being lost.

After the rule changes, American-based companies are the ones being acquired by their overseas competitors. This means the White House can’t argue that the change in domicile isn’t real. And it means that there’s a far higher probability of jobs going overseas.

I guess the White House thinks this is a victory.

Let’s now step back and put this issue in context. This is the educational part of today’s column.

Here are some slides from a presentation by Professor Dick Harvey at Villanova University School of Law. He presents lots of information, but here are the three slides that are probably most interesting to non-tax geeks.

First, here’s the key thing to know about inversions. They’re a do-it-yourself version of territorial taxation.

And since territorial taxation is the right policy, nobody should be upset about inversions.

Second,  here’s a look at how many inversions occur each year. As you can see, we’re in the midst of another wave.

You’ll notice that these waves roughly coincide with periods featuring corporate tax rate reductions in other nations.

So the lesson is that bad American policy is making it more and more difficult for U.S.-domiciled firms to compete in global markets.

Third, here’s a slide showing where companies are re-domiciling.

Some of my favorite places, particularly Cayman, Bermuda, Switzerland, and Hong Kong!

Now let’s zoom out even further and consider the leftist view that multinational corporations are getting away with some sort of scam because of so-called stateless income.

Sinclair Davidson, a professor at Australia’s RMIT University, writes about the issue. Here are a few excerpts from his scholarly paper.

It is commonly argued that the corporate income tax system is ‘broken’. …The latest theoretical argument suggesting that the corporate income tax base is likely to be eroded is the ‘stateless income doctrine’.

But there’s an itsy-bitsy problem with this theory, as Sinclair explains.

…there is no evidence to support the view that the corporate income tax base is being eroded. At best, the concern about the tax base is not so much that it is being eroded, but rather that multinational corporations do not pay tax in every host economy.

He also points out that companies are obeying the law, which is a point I’ve also made on this topic.

…there is little evidence of any wrongdoing by any of the three corporations that are regularly singled out for abuse. It is true that these corporations do not pay as much tax in the UK or the US as those governments would like them to pay, but they pay as much tax as is required by the laws that those governments have passed. …‘None of this required a Senate “investigation” to  discover because Apple is constantly inspected by the IRS and other tax authorities. These tax collectors are well aware of Apple’s corporate structure, which has remained essentially the same since 1980. An Apple executive said Tuesday that the company’s annual US tax return adds up to a stack of paperwork more than two feet high. …These corporations are fully compliant with the tax law in the jurisdictions in which they operate.

So what’s his bottom line?

There is no such thing as ‘stateless income’, rather there is income that the governments of the UK and the US do not tax because under their own legal systems that income is not sourced in their economy. When these governments complain about stateless income, the question rather should be, ‘Why do the owners of intellectual property not locate their property in your economy?’. An implicit assumption of the stateless income doctrine is that multinational corporations maximise their value to society only when they pay tax. Of course, this is not the case. … It is one thing to point out that multinational corporations do not pay tax in some jurisdictions but that says nothing about the actual corporate  income tax base. … So-called ‘stateless income’ is a return on intellectual property.

Amen.

Let’s close with another perspective on the issue. Stewart Dompe and Adam Smith of Johnson and Wales University in North Carolina have a column in The Freeman.

…the United States is unique in that it taxes corporations at 35 percent regardless of where the income is earned, and hence regardless of whether the corporation benefited from any public goods. Payment without benefit is simply bad business. Avoiding particularly high tax rates like those of the United States can yield significant savings for companies—and their shareholders. Charlotte-based Chiquita Brands International, for instance, hopes to save $60 million via its recent acquisition of Ireland-based Fyffes PLC. Burger King’s merger, according to analyst estimates, could cut its overall tax bill by 13 percent. …Populist themes like “economic patriotism” may appeal to voters, but such arguments are nonsensical: Firms are ultimately responsible to their shareholders. As Judge Learned Hand wrote, “Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.” If anything, firms have a moral responsibility to minimize their taxable liabilities. The legal structure of a firm establishes the relationship between shareholders, who own the capital, and managers that make operating decisions. Executives have a fiduciary responsibility to pay the lowest tax possible because they are the stewards of their shareholders’ wealth.

I particularly like their conclusion.

This competition among legal regimes is a powerful constraint on government—and that is a good thing for all of us. America has the second-highest corporate tax rate in the world—the highest when state taxes are included. The solution to this problem lies not in closing loopholes or imitating poor Oliver pleading for more, but in offering a simpler, more competitive tax system.

They hit the nail on the head. As I argued just yesterday, we need to restrain the greed of the political class.

But the fight isn’t limited to national capitals. International bureaucracies such as the Organization for Economic Cooperation and Development also are promoting schemes to squeeze more money out of companies – which, of course, means harming workers, consumers, and shareholders.

The pro-tax crowd can concoct all sorts of theories, such as stateless income, but this assault on companies is happening because government have spent themselves into a fiscal ditch and they want taxpayers to pay the price for this profligacy.

P.S. If you read this far, you deserve a reward. You can enjoy a good Michael Ramirez cartoon about inversions by clicking here, and there are several additional cartoons included in this post.

P.P.S. But if you’re a glutton for punishment, you can watch my video on international corporate taxation instead.

P.P.P.S. One final point worth sharing is that folks who try to complain about “low tax burdens” on the foreign-source income of American multinationals need to remember that they pay a lot of tax to foreign governments.

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Tax competition is a very important tool for constraining the greed of the political class. Simply stated, politicians are less likely to impose bad tax policy if they are afraid that jobs and investment (and accompanying tax revenue) will move to jurisdictions with better tax policy.

This works to limit revenue grabs by politicians at the state level and it works to control the craving for money on the part of politicians at the national level.

But this doesn’t mean all forms of tax competition are equally desirable.

If a country lowers overall tax rates on personal income or corporate income in hopes of attracting business activity, that’s great for prosperity. If a jurisdiction seeks faster growth by reducing double taxation – such as lowering the tax rate on capital gains or abolishing the death tax, that’s also very beneficial.

Some politicians, however, try to entice businesses with special one-off deals, which means one politically well-connected company gets a tax break while the overall fiscal regime for other companies stays the same (or even gets worse).

That’s corrupt cronyism, not proper tax competition.

With this in mind, let’s consider the growing controversy about tax planning by multinational companies. There’s lot of controversy, both in the United States and in Europe, about whether companies are gaming the system.

The most recent kerfuffle deals with Luxembourg, which is accused of having a very friendly regime for business taxation.

Syed Kamall, a Tory member of the European Parliament, has a column in the Wall Street Journal Europe about the right kind of corporate tax competition.

It seems to have come as a great shock to many in the European Parliament that Luxembourg may have encouraged multinational companies to domicile there to pay lower taxes. I’m not sure where these members of parliament have been living for the past 20 years.

What worries Syed is that many European politicians want to use the news from Luxembourg as an excuse to push tax harmonization.

…an agenda of EU-wide tax harmonization…is rapidly gaining popularity in some quarters despite being exactly the wrong prescription for Europe. …tax harmonization…would hang the “Closed for Business” sign at Europe’s border. Tax competition across the single market helps keep tax rates competitive and drives inward investment. The Organization for Economic Co-operation and Development has said that “the ability [of companies] to choose the location of economic activity offsets shortcomings in government budgeting processes, limiting a tendency to spend and tax excessively.”

By the way, the OECD is a big proponent of tax harmonization, so it’s especially noteworthy that even those bureaucrats admitted that tax competition constrains greedy government.

You can click here for further examples of OECD economists admitting that tax competition is necessary and desirable, notwithstanding the anti-market policies being advocated by the political appointees who run the institution.

And since we’re discussing the merits of tax competition, we should point out that Mr. Kamall also mentioned those benefits.

The clearest example of that came with the tax reductions enacted by Margaret Thatcher and Ronald Reagan in the 1980s. Those tax-rate cuts in the U.K. and U.S. forced other industrialized nations to cut their average top marginal rate for personal income to 42% today from more than 67% in 1980 simply to remain competitive, according to the Adam Smith Institute. Tax competition has driven down the average top rate for corporate income in the developed world to less than 27% today from 48% in 1980. Tax competition in Europe encouraged many EU members from the former Soviet bloc to enact flat taxes, which have benefitted them substantially. …it’s important for leaders to keep making the case that tax-policy competition within the single market has been good for Europe.

And he correctly warns that tax harmonization would be a vehicle for higher tax burdens.

Imposing uniform rates under a harmonized system would turn the EU into a convoy that can move only as fast as the slowest ship. Europe’s tax rate would be only as low as the highest-taxing member. …A harmonized tax system would encourage companies and investors to seek new solutions outside the EU in order to avoid paying what would inevitably be higher, French-style levels of European taxation.

And if you don’t believe Mr. Kamall, just look at what’s happened over the past couple of years in Europe.

Last but not least, Syed points out that there is a pro-growth way of improving tax compliance.

The best way to cut down on tax avoidance is to cut tax rates and simplify tax codes. That way people and companies would be willing and able to pay their money to Europe’s exchequers, rather than paying accountants to find loopholes.

But that would require politicians to be responsible, so don’t hold your breath.

So what’s the bottom line? Is there a good way of identifying the desirable forms of tax competition that should be defended.

The simple answer is that it’s always a good idea to compete with lower tax rates that apply to all taxpayers. That’s true for tax rates on companies and households.

The more complex (but equally important) answer is that it’s also good to compete by having a properly designed tax system. On the business side, that means expensing instead of depreciation and territorial taxation rather than worldwide taxation. For households, it means having the proper definition of income so that there’s no longer pernicious discrimination against saving and investment.

Misguided tax competition, by contrast, exists when there are very narrow preferences that apply to a small handful of powerful taxpayers.

For more information on the general topic, here’s my video on the virtues of tax competition.

P.S. My support for tax competition is so intense that I even try to bring the message to unfriendly audiences, such as Capitol Hill and the New York Times.

P.P.S. Heck, my support for tax competition is so intense that I almost got tossed in a third-world jail. That’s true dedication!

P.P.P.S. In you admire hypocrisy, you’ll be very impressed that many rich statists utilize tax havens to protect their money even though they want you to give more of your income to government.

P.P.P.P.S. Speaking of hypocrisy, the main anti-tax competition international organization gives its bureaucrats tax-free salaries.

P.P.P.P.P.S. Since I just mentioned the OECD, I should note that it has a project to curtail business tax competition. They claim that their intention is to go after misguided forms of tax competition, but I’m not surprised that the real goal is to simply extract more money from companies.

P.P.P.P.P.P.S. I’m not sure how to classify this final bit of information, but it’s surely worth mentioning that Bill Clinton defends corporate tax competition. As does Bono.

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I wrote last year about the remarkable acknowledgement by Bono that free markets were the best way to lift people out of poverty. The leader of the U2 band and long-time anti-poverty activist specifically stated that, “capitalism has been the most effective ideology we have known in taking people out of extreme poverty.”

As the old saying goes, I couldn’t have said it better myself. Too many politicians and interest groups want us to believe that foreign aid and bigger government are the answer, but nations that have jumped from poverty to prosperity invariably have followed a path of free markets and small government.

But today’s topic isn’t foreign aid.

Instead, I want to come to Bono’s aid. He recently defended his home country’s favorable corporate tax regime. Here are some excerpts from a report earlier this month in the Irish Times.

U2 singer Bono has said Ireland’s tax regime, used to attract multinational companies such as Apple, Facebook and Google to Irish shores, has brought Ireland “the only prosperity we’ve known”. Speaking in an interview in today’s Observer newspaper, Bono said Ireland’s tax policy had given the country “more hospitals and firemen and teachers”. “We are a tiny country, we don’t have scale, and our version of scale is to be innovative and to be clever, and tax competitiveness has brought our country the only prosperity we’re known,” he said. …“As a person who’s spent nearly 30 years fighting to get people out of poverty, it was somewhat humbling to realise that commerce played a bigger job than development,” said Bono. “I’d say that’s my biggest transformation in 10 years: understanding the power of commerce to make or break lives, and that it cannot be given into as the dominating force in our lives.”

So why does Bono need defending?

Because bosses from the leading Irish labor union apparently think he said something very bad. Here are some excerpts from a story published by the U.K-based Guardian.

Unite, which represents 100,000 workers on the island of Ireland, launched a blistering attack on the U2 singer for remarks…defending the 12.5% tax rate on corporations enjoyed by multinational companies such as Apple, Google, Facebook and Amazon. …Unite pointed out that one in four Irish people have to endure social deprivation, according the state’s own official Central Statistics Office. Mike Taft, Unite’s researcher and an economist, told the Guardian: “The one in four who suffer deprivation as well as the tens of thousands of others having to put up with six years of austerity will regard Bono’s remarks with total derision, it is the only word anyone could use to describe what he has said. “…for six years we have seen public services smashed apart due to austerity cuts, and here we have Bono talking about low corporation tax bringing us prosperity.”

I have three reactions.

First, I wonder whether the union is comprised mostly of private-sector workers or government bureaucrats. This may be relevant because I hope that private-sector union workers at least have a vague understanding that their jobs are tied to the overall prosperity of the economy. But if Unite is dominated by government bureaucrats, then it’s no surprise that it favors class-warfare policies that would cripple the private sector.

Second, the union bosses are right that Ireland has been suffering in the past six years, but they apparently don’t realize that the nation’s economy stumbled because government was getting bigger and intervening too much.

Third, maybe it’s true that “one in four” in Ireland currently suffer from “deprivation,” but that number has to be far smaller than it was thirty years ago. Here’s a chart, based on IMF data, showing per-capita economic output in Ireland. As you can see, per-capita GDP has jumped from $15,000 to more than $37,500. And these numbers are adjusted for inflation!

I gave some details back in 2011 when I had the opportunity to criticize another Irish leftist who was blithely ignorant of Ireland’s big improvements in living standards once it entered into its pro-market reform phase.

I don’t know how the folks at Unite define progress, but I assume it’s good news that the Irish people now have more car, more phones, more doctors, more central heating, and fewer infant deaths.

Last but not least, none of this should be interpreted as approval of Ireland’s current government or overall Irish policy. There’s too much cronyism in Ireland and the overall fiscal burden (other than the corporate income tax) is onerous.

I’m simply saying that Bono is right. Pro-growth corporate tax policy has made a big – and positive – difference for Ireland. The folks at Unite should learn a lesson from the former President of Brazil, who was a leftist but at least understood that you need people in the private sector producing if you want anything to redistribute.

P.S. Bono isn’t the only rock star who understands economics.  Gene Simmons, the lead singer for Kiss, stated that “Capitalism is the best thing that ever happened to human beings. The welfare state sounds wonderful but it doesn’t work.”

P.P.S. Irish politicians may understand the importance of keeping a low corporate tax rate, but they certainly aren’t philosophically consistent when it comes to other taxes.

P.P.P.S. Some statists have tried to blame Ireland’s recent woes on the low corporate tax rate. More sober analysis shows that imprudent spending hikes and misguided bailouts deserve the blame (Ireland’s spending is particularly unfortunate since the nation’s period of prosperity began with spending restraint in the late 1980s).

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I’m not a big fan of international bureaucracies.

Regular readers know that the Organization for Economic Cooperation and Development is the worst institution from my perspective, followed by the International Monetary Fund.

Some folks ask why the United Nations isn’t higher on the list?

My answer is simple. The UN has a very statist orientation and it routinely advocates bad policy, but it is too incompetent to do much damage.

The OECD and IMF, by contrast, have some capacity to undermine global growth by encouraging more statism.

That being said, the UN occasionally does something that is so obnoxious that I can’t resist commenting. Especially since my tax dollars pay a big share of that bureaucracy’s bloated budget.

What has me irked is that the United Nations Conference on Trade and Development just released its annual Trade and Development Report.

You would think an institution that focuses on trade and development would be advocating free markets and small government.

But UNCTAD takes the opposite approach.

Here’s how the bureaucrats frame the issue in the report. Keep in mind that “market liberalism” is their term for free markets (in other words, classical liberalism).

Back in 1964, the international community recognized that “If privilege, extremes of wealth and poverty, and social injustice persist, then the goal of development is lost”. Yet, almost everywhere in recent years, the spread of market liberalism has coincided with highly unequal patterns of income and wealth distribution. A world where its 85 wealthiest citizens own more than its bottom three and a half billion was not the one envisaged 50 years ago. …the past three decades have demonstrated that delivery is unlikely with a one-size-fits-all approach to economic policy that cedes more and more space to the profitable ambitions of global firms and market forces. …the moment is right to propose another international “New Deal” that can realize the promise of “prosperity for all”.

But not only does UNCTAD utilize class-warfare rhetoric, they also try to support their ideological agenda with historical illiteracy.

I’ve pointed out that the western world became rich when government was very small and markets were liberated.

But the statists at the UN want us to think that big government deserves the credit.

None of today’s developed countries depended on market forces for their structural transformation and its attendant higher levels of employment, productivity and per capita incomes. Rather, they adopted country-specific measures to manage those forces, harnessing their creative side to build productive capacities and provide opportunities for dynamic firms and entrepreneurs, while guiding them in a more socially desired direction. They also used different forms of government action to mitigate the destructive tendencies of those same market forces. This approach of managing the market, not idolizing it, was repeated by the most rapidly growing emerging market economies − from the small social democratic economies of Northern Europe to the giant economies of East Asia − in the decades following the end of the Second World War.

Wow. They even want us to think big government deserves the credit for prosperity in Hong Kong and Singapore.

So you know the bureaucrats are either very stupid or very dishonest. I suspect the latter, but it doesn’t matter. All we need to know is that they are willing to make very preposterous claims to advance their agenda.

And what is their agenda? Well, a major theme is that politicians in developing nations need “policy space” to enable bigger government.

For instance, UNCTAD doesn’t like free trade but does like industrial policy (aka, crony capitalism).

Policy space is…reduced by free trade agreements… Along with the proliferation of trade agreements and their expansion into trade-related areas, there has been a global revival of interest in industrial policy.

But a big focus of the report is that tax competition is a threat to the “policy space” of politicians.

Fiscal space goes hand in hand with policy space. …strengthening government revenues is key. …This…allows for higher growth-enhancing public spending… The need for reclaiming and expanding fiscal space faces particular challenges in an increasingly globalizing economy. …A major problem is that globalization has affected the ability of governments to mobilize domestic revenues. …the increased mobility of capital and its greater use of fiscal havens have considerably altered the conditions for taxing income − both personal and corporate − and wealth. The dominant agenda of market liberalism has led to a globalized economy that encourages tax competition among countries, at times pushing them to a “race to the bottom”.

Gasp, how horrible! Politicians don’t have as much “policy space” to impose punitive taxes.

That’s the best advertisement for tax competition I’ve ever read, even if it is unintentional.

So what do the UN bureaucrats want to solve this supposed problem? Simple, just destroy financial privacy and fiscal sovereignty so that politicians have carte blanche to expand taxes.

…a number of developments aimed at improving transparency and exchange of information for tax purposes have taken place. They include a declaration by G20 leaders to promote information sharing… an OECD Action Plan on base erosion and Profit Shifting (BEPS), increased monitoring by several national tax authorities…and numerous bilateral tax treaties (BTTs) and tax information exchange agreements (TIEAs). …these initiatives are steps in the right direction.

With BEPS, indiscriminate information sharing, and more power for national tax police, UNCTAD has put together a trifecta of bad policies.

And to add insult to injury, all the bureaucrats at the UN get tax-free salaries while they concoct schemes to enable higher taxes on the rest of us.

Geesh, no wonder I sometimes have perverse fantasies about them.

And I’m very grateful that Senator Rand Paul is leading the fight against their evil ideas.

P.S. On a more pleasant topic, the “Beltway Bandits” just played in the softball world series in Las Vegas. We competed in the 55+ grouping and finished with three wins and two losses.

Not bad, but not good enough to win any trophies. But we got to play in replica Major League stadiums, which was a fun experience.

I can now say I’ve hit home runs in Dodger Stadium and Wrigley Field, and also doubled off the Green Monster at Fenway. Sounds impressive so long as nobody asks any follow-up questions!

IMAG0135

P.P.S. Here’s something else that I found amusing.

Bill Clinton not only understands the inversion issue, but he’s also willing to publicly explain why Obama is wrong.

During an interview with CNBC on Tuesday, former President Bill Clinton called to cut corporate taxes and give companies a break on money stashed overseas, dinging President Barack Obama’s latest effort to combat corporate tax-dodging. When asked what should be done about corporate inversion transactions, Clinton responded with a host of GOP talking points about the tax burden on big business. “America has to face the fact that we have not reformed our corporate tax laws,” Clinton told CNBC, according to a transcript. “We have the highest overall corporate tax rates in the world. And we are now the only OECD country that also taxes overseas earnings on the difference between what the companies pay overseas and what they pay in America.”

But I guess we shouldn’t be surprised. This isn’t the first time he’s had sensible things to say on the issue of corporate taxation.

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People pay every single penny of tax that politicians impose on corporations.

The investors that own companies obviously pay (more than one time!) when governments tax profits.

The workers employed by companies obviously pay, both directly and indirectly, because of corporate income tax.

And consumers also bear a burden thanks to business taxes that lead to higher prices and reduced output.

Keep these points in mind as we discuss BEPS (“base erosion and profit shifting”), which is a plan to increase business tax  burdens being advanced by the Organization for Economic Cooperation and Development (OECD), a left-leaning international bureaucracy based in Paris.

Working on behalf of the high-tax nations that fund its activities, the OECD wants to rig the rules of international taxation so that companies can’t engage in legal tax planning.

The Wall Street Journal’s editorial page is not impressed by this campaign for higher taxes on employers.

The Organization for Economic Cooperation and Development last week released its latest proposals to combat “base erosion and profit shifting,” or the monster known as BEPS. The OECD and its masters at the G-20 are alarmed that large companies are able to use entirely legal accounting and corporate-organization strategies to shield themselves from the highest tax rates governments try to impose. …The OECD’s solution to this “problem” boils down to suggesting that governments tax the profits arising from operations in their jurisdiction, regardless of where the business unit that earned those profits is legally headquartered. The OECD also proposes that companies be required to report to each government on the geographic breakdown of profits, the better to catch earnings some other country might not have taxed enough.

What’s the bottom line?

This is a recipe for investment-stifling compliance burdens and regulatory uncertainty…the result of implementing the OECD’s recommendations would be lower tax revenues and fewer jobs.

By the way, I particularly appreciate the WSJ’s observation that tax competition and tax planning are good for high-tax nations since they enable economic activity that otherwise wouldn’t tax place (just as I explained in my video on the economics of tax havens).

Existing tax rules have been a counterintuitive boon to high-tax countries because companies can shield themselves from the worst excesses of the tax man while still running R&D centers, corporate offices and the like—and hiring workers to staff them—in places like the U.S. and France.

The editorial also suggests the BEPS campaign against multinational firms may be a boon for low-tax Ireland.

All of which is great news for Ireland, the poster child for a low corporate tax rate.

The Ireland-based Independent, however, reports that the Irish government is worried that the OECD’s anti-tax competition scheme will slash its corporate tax revenue because other governments will get the right to tax income earned in Ireland.

The country’s corporation tax is under scrutiny due to the multinational companies locating here and availing of our low 12.5pc tax rate – or much lower rates in some cases. US politicians have accused Ireland of being a “tax haven”… The OECD, a body made up of 34 western economies, is drawing up plans to restrict the ability of multinationals to move their income around to minimise their tax bill. …a draft Oireachtas Finance Committee report on global taxation, seen by the Irish Independent, contains warnings that Ireland’s corporation tax revenues, which amount to €4bn every year, will be halved under the new system. …Tax expert Brian Keegan is quoted in the report as saying: “Some of the OECD proposals would undoubtedly, result in that €4bn being reduced to €3bn or €2bn. That is the threat.”

So which newspaper is right? After all, Ireland presumably can’t be a winner and a loser.

But both are correct. The Irish Committee report is correct since the BEPS rules, applied to companies as they are currently structured, would be very disadvantageous to Ireland. But the Wall Street Journal thinks that Ireland ultimately would benefit because companies would move more or their operations to the Emerald Isle in order to escape some of the onerous provisions contained in the BEPS proposals.

That being said, I think Ireland and other low-tax jurisdictions ultimately would be losers for the simple reason that the current BEPS plan is just the beginning.

The high-tax nations will move the goal posts every year or two in hopes of grabbing more revenue.

The end goal is to create a system based on “formula apportionment.”

Here’s what I wrote last year about such a scheme.

…the OECD hints at its intended outcome when it says that the effort “will require some ‘out of the box’ thinking” and that business activity could be “identified through elements such as sales, workforce, payroll, and fixed assets.” That language suggests that the OECD intends to push global formula apportionment, which means that governments would have the power to reallocate corporate income regardless of where it is actually earned. Formula apportionment is attractive to governments that have punitive tax regimes, and it would be a blow to nations with more sensible low-tax systems. …business income currently earned in tax-friendly countries, such as Ireland and the Netherlands, would be reclassified as French-source income or German-source income based on arbitrary calculations of company sales and other factors. …nations with high tax rates would likely gain revenue, while jurisdictions with pro-growth systems would be losers, including Ireland, Hong Kong, Switzerland, Estonia, Luxembourg, Singapore, and the Netherlands.

Equally important, I also pointed out that formula apportionment would largely cripple tax competition for companies, which means higher tax rates all over the world.

…formula apportionment would be worse than a zero-sum game because it would create a web of regulations that would undermine tax competition and become increasingly onerous over time. Consider that tax competition has spurred OECD governments to cut their corporate tax rates from an average of 48 percent in the early 1980s to 24 percent today. If a formula apportionment system had been in place, the world would have been left with much higher tax rates, and thus less investment and economic growth. …If governments gain the power to define global taxable income, they will have incentives to rig the rules to unfairly gain more revenue. For example, governments could move toward less favorable, anti-investment depreciation schedules, which would harm global growth.

Some people have argued that I’m too pessimistic and paranoid. BEPS, they say, is simply a mechanism for tweaking international rules to stop companies from egregious tax planning.

But I think I’m being realistic.Why? Because I know the ideology of the left and I understand that politicians are always hungry for more tax revenue.

For example, from the moment the OECD first launched its campaign against so-called tax havens, I kept warning that the goal was global information sharing.

The OECD and its lackeys said I was being demagogic and that they simply wanted “upon request” information sharing.

So who was right? Click here to find out.

Not that I deserve any special award for insight. It doesn’t (or shouldn’t) take a genius, after all, to understand the nature of government.

Let’s close with some economic analysis of why the greed of politicians should be constrained by national borders.

P.S. The OECD, with the support of the Obama Administration, wants something akin to a World Tax Organization that would have the power to disallow free-market tax policy.

P.P.S. And the OECD also allied itself with the nutjobs in the Occupy movement in order to push class-warfare taxation.

P.P.P.S. Your tax dollars subsidize the OECD’s left-wing activism.

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I’ve complained over and over again that America’s tax code is a nightmare that undermines competitiveness and retards growth.

Our aggregate fiscal burden may not be as high as it is for many of our foreign competitors, but high tax rates and poor design mean the system is very punitive on a per-dollar-raised basis.

For more information, the Tax Foundation has put together an excellent report measuring international tax competitiveness.

Here’s the methodology.

The Tax Foundation’s International Tax Competitiveness Index (ITCI) measures the degree to which the 34 OECD countries’ tax systems promote competitiveness through low tax burdens on business investment and neutrality through a well-structured tax code. …No longer can a country tax business investment and activity at a high rate without adversely affecting its economic performance. In recent years, many countries have recognized this fact and have moved to reform their tax codes to be more competitive. However, others have failed to do so and are falling behind the global movement. …The competitiveness of a tax code is determined by several factors. The structure and rate of corporate taxes, property taxes, income taxes, cost recovery of business investment, and whether a country has a territorial system are some of the factors that determine whether a country’s tax code is competitive.

And here’s how the United States ranks.

The United States provides a good example of an uncompetitive tax code. …the United States now has the highest corporate income tax rate in the industrialized world. …The United States places 32nd out of the 34 OECD countries on the ITCI. There are three main drivers behind the U.S.’s low score. First, it has the highest corporate income tax rate in the OECD at 39.1 percent. Second, it is one of the only countries in the OECD that does not have a territorial tax system, which would exempt foreign profits earned by domestic corporations from domestic taxation. Finally, the United States loses points for having a relatively high, progressive individual income tax (combined top rate of 46.3 percent) that taxes both dividends and capital gains, albeit at a reduced rate.

Here are the rankings, including scores for the various components.

You have to scroll to the bottom to find the United States. It’s embarrassing that we’re below even Spain and Italy, though I guess it’s good that we managed to edge out Portugal and France.

Looking at the component data, all I can say is that we should be very thankful that politicians haven’t yet figured out how to impose a value-added tax.

I’m also wondering whether it’s better to be ranked 32 out of 34 nations or ranked 94 out of 100 nations?

But rather than focus too much on America’s bad score, let’s look at what some nations are doing right.

Estonia – I’m not surprised that this Baltic nations scores well. Any country that rejects Paul Krugman must be doing something right.

New Zealand – The Kiwis can maintain a decent tax system because they control government spending and limit government coercion.

Switzerland – Fiscal decentralization and sensible citizens are key factors in restraining bad tax policy in Switzerland.

Sweden – The individual income tax is onerous, but Sweden’s penchant for pro-market reform has helped generate good scores in other categories.

Australia – I’m worried the Aussies are drifting in the wrong direction, but any nations that abolishes its death tax deserves a high score.

To close, here’s some of what the editors at the Wall Street Journal opined this morning.

…the inaugural ranking puts the U.S. at 32nd out of 34 industrialized countries in the Organization for Economic Co-operation and Development (OECD). With the developed world’s highest corporate tax rate at over 39% including state levies, plus a rare demand that money earned overseas should be taxed as if it were earned domestically, the U.S. is almost in a class by itself. It ranks just behind Spain and Italy, of all economic humiliations. America did beat Portugal and France, which is currently run by an avowed socialist. …the U.S. would do even worse if it were measured against the world’s roughly 190 countries. The accounting firm KPMG maintains a corporate tax table that includes more than 130 countries and only one has a higher overall corporate tax rate than the U.S. The United Arab Emirates’ 55% rate is an exception, however, because it usually applies only to foreign oil companies.

The WSJ adds a very important point about the liberalizing impact of tax competition.

Liberals argue that U.S. tax rates don’t need to come down because they are already well below the level when Ronald Reagan came into office. But unlike the U.S., the world hasn’t stood still. Reagan’s tax-cutting example ignited a worldwide revolution that has seen waves of corporate tax-rate reductions. The U.S. last reduced the top marginal corporate income tax rate in 1986. But the Tax Foundation reports that other countries have reduced “the OECD average corporate tax rate from 47.5 percent in the early 1980s to around 25 percent today.”

This final excerpt should help explain why I spend a lot of time defending and promoting tax competition.

As bad as the tax system is now, just imagine how bad it would be if politicians didn’t have to worry about jobs and investment escaping.

P.S. If there was a way of measuring tax policies for foreign investors, I suspect the United States would jump a few spots in the rankings.

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Since I spend considerable time defending tax competition, fiscal sovereignty, and financial privacy, people sometimes think I can give competent advice on how best to protect one’s income from the IRS.

Hardly. Like most people in Washington, I’m all theory and no practice.

Besides, when people ask me about the ideal tax haven for an American citizen, I generally don’t have good news.

I explain that they are already living in a very successful tax haven, but then given them the bad news that only nonresident foreigners can take advantage of America’s tax haven policies. Though we should still be happy about being a haven since the favorable tax rules for foreigners have attracted lots of investment.

With the erosion of financial privacy, the IRS has considerable ability to track your money around the world, so moving your money to an overseas tax haven may not work. Even Switzerland, for example, has been bullied into weakening its human rights laws so that they no longer protect the privacy of nonresident investors.

Physically moving (your body and your money) to a foreign fiscal paradise such as Bermuda, Monaco, or the Cayman Islands doesn’t provide much value since the United States has the world’s most aggressive and punitive worldwide tax system. You’re basically treated by the IRS like you’re living stateside.

You can join thousands of other people and give up your American passport. But even that step has big downsides since the IRS imposes very nasty exit taxes, notwithstanding the fact that the United States is a signatory to international agreements that supposedly protect the right to emigrate without undue hassle.

But there is still one legal and effective way of dramatically reducing your federal tax burden.

Here are some details from a Bloomberg report on the relatively unknown tax haven of Puerto Rico.

Struggling to emerge from an almost decade-long economic slump, the Puerto Rican government signed a law in early 2012 that creates a tax haven for U.S. citizens. If they live on the island for at least 183 days a year, they pay minimal or no taxes, and unlike Singapore or Bermuda, Americans don’t have to turn in their passports. ……Under Puerto Rico’s new rules, an individual who moves to the island pays no local or federal capital-gains tax — capital gains are charged based on your tax home rather than where you earn them — and no local taxes on dividend or interest income for 20 years. …Moving to the island won’t kill all taxes: U.S. citizens still have to pay federal taxes on dividend or interest income from stateside companies.

And there are even some tax benefits for companies.

The government gives a tax break for businesses that move to Puerto Rico and provide services outside the country, perfect for a hedge fund with clients in New York and London. These firms pay only a 4 percent corporate tax, compared with 35 percent on the mainland. About 270 companies have applied for this incentive, according to officials.

Here are some real-world examples of rich people engaging in fiscal self defense.

About 200 traders, private-equity moguls and entrepreneurs have already moved or committed to moving, according to Puerto Rico’s Department of Economic Development and Commerce, and billionaire John Paulson is spearheading a drive to entice others to join them. …Schiff, who runs Westport, Connecticut-based brokerage Euro Pacific Capital Inc., relocated his $900 million asset management arm from Newport Beach, California, to San Juan in 2013. He plans to move to the island within the next several years. But the savings can be extraordinary, especially given the effects of compounding, says Alex Daley, chief technology investment strategist at Casey Research, a firm that publishes reports for investors. Late last year, Daley moved from Stowe, Vermont, to Palmas del Mar, about 45 minutes from San Juan. …Robb Rill, 43, managing director of private-equity firm Strategic Group PR, relocated with his wife to Puerto Rico from Florida in February 2013. He started the 20/22 Act Society, named for the tax laws designed to encourage people and businesses to set up shop here, to help educate fellow expatriates and serve as a networking group.

So what’s the catch? Well, it depends on your lifestyle preferences. Some people are willing to pay extra so they can live in a big metropolis like New York City. Others are willing to cough up a lot of their money to enjoy California’s climate.

But the folks in Puerto Rico say they have a lot to offer besides big reductions in federal taxation.

The real challenge, she says, is convincing people they can replicate their life. Will they have well-traveled, well-educated friends? Are there decent schools for their kids? Are there charities that wives can join? Is crime an issue? She takes her clients to dinner at outdoor cafes to show them it’s safe at night, and she organizes luncheons to introduce newcomers to native Puerto Ricans. …Puerto Rico isn’t just about low taxes. It has white-sand beaches and temperatures in the 80s year-round. There’s an art museum with a world-renowned pre-Raphaelite collection. It has luxury apartment buildings, over-the-top resorts such as Dorado Beach, and a handful of private international schools that send their graduates to Ivy League colleges. It has restaurants with award-winning chefs. It’s a four-hour flight to New York. And the island operates under U.S. law.

I don’t have money, so it’s not an issue for me. But if I did, my first questions would be about the prevalence of fast food and softball leagues.

But I admit that I’m a bit of a rube.

Anyhow, the New York Times also has figured out that rich people can escape class-warfare taxes by moving to Puerto Rico.

After a slow start, Puerto Rico’s status as a tax haven is beginning to catch on, and some are betting big bucks that the trickle of buyers moving there will soon become a stream. …“I take at least five calls a day from new people considering moving here,” said Gabriel Hernandez, a tax partner with the San Juan office of BDO Puerto Rico. When the law was first passed, Mr. Hernandez advised two people who relocated to Puerto Rico from the mainland United States; last year that number rose to about 15, and so far this year, he has helped more than 80 people make the move and is advising another 60 who are considering it. …As of July, 115 people — nearly all of them United States citizens — have applied and been granted the tax exemption, with another 135 forecast to make the move before the end of the year, according to Puerto Rico’s Department of Economic Development and Commerce. Last year, 151 people were granted the tax-exempt status.

The real reason to share the NYT story, though, is a particularly laughable excerpt.

The reporter wants us to believe that escaping high taxes is “distasteful.”

While there is much to recommend Puerto Rico as a tax haven — it has better beaches than Switzerland, no immigration hassles like Ireland and is a lot closer than Singapore — there are the undeniably distasteful politics of fleeing New York to save on taxes.

If escaping high taxes in New York is “distasteful,” then lots of people with lots of money already have decided to be distasteful.

P.S. If you’re a rich person, but you don’t want to move to Puerto Rico, there are some relatively simple and fully legal steps you can take to deprive the politicians of tax revenue.

P.P.S. In other words, politicians can impose high tax rates, but that doesn’t necessarily mean high tax revenue. Which is why I’m still hoping President Obama reads what I wrote for him on the Laffer Curve.

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