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Archive for the ‘Tax Competition’ Category

Last month, I put together a list of six jaw-dropping examples of left-wing hypocrisy, one of which featured Treasury Secretary Jacob Lew.

He made the list for having the chutzpah to criticize corporate inversions on the basis of supposed economic patriotism, even though he invested lots of money via the Cayman Islands when he was a crony capitalist at Citigroup.

But it turns out that Lew’s hypocrisy is just the tip of the iceberg.

It seems the entire Obama Administration was in favor of inversions just a couple of years ago. Check out these excerpts from a Bloomberg story.

President Barack Obama says U.S. corporations that adopt foreign addresses to avoid taxes are unpatriotic. His own administration helped one $20 billion American company do just that. As part of the bailout of the auto industry in 2009, Obama’s Treasury Department authorized spending $1.7 billion of government funds to get a bankrupt Michigan parts-maker back on its feet — as a British company. While executives continue to run Delphi Automotive Plc (DLPH) from a Detroit suburb, the paper headquarters in England potentially reduces the company’s U.S. tax bill by as much as $110 million a year. The Obama administration’s role in aiding Delphi’s escape from the U.S. tax system may complicate the president’s new campaign against corporate expatriation.

But that’s only part of the story.

…his administration continues to award more than $1 billion annually in government business to more than a dozen corporate expats.

And since we’re on the subject of hypocrisy, there’s another Bloomberg report worth citing.

President Barack Obama has been bashing companies that pursue offshore mergers to reduce taxes. He hasn’t talked about the people behind the deals — some of whom are his biggest donors. Executives, advisers and directors involved in some of the tax-cutting transactions include Blair Effron, an investment banker who hosted Obama for a May fundraiser at his two-level, 9,000-square-foot apartment on Manhattan’s Upper East Side. Others are Jim Rogers, co-chairman of the host committee for the 2012 Democratic National Convention; Roger Altman, a former senior Treasury Department official who raised at least $200,000 for Obama’s re-election campaign; and Shantanu Narayen, who sits on the president’s management advisory board. The administration’s connections to more than 20 donors associated with the transactions are causing tensions for the president.

Gee, I’m just heartbroken when politicians have tensions.

But I’m a policy wonk rather than a political pundit, so let’s now remind ourselves why inversions are taking place so that the real solution becomes apparent.

The Wall Street Journal opines, explaining that companies are being driven to invert by the combination of worldwide taxation and a punitive tax rate.

…the U.S. has the highest corporate income tax rate in the developed world, and that’s an incentive for all companies, wherever they are based, to invest outside the U.S. But the current appetite for inversions—in which a U.S. firm buys a foreign company and adopts its legal address while keeping operational headquarters in the U.S.—results from the combination of this punitive rate with a separate problem created by Washington. The U.S. is one of only six OECD countries that imposes on its businesses the world-wide taxation of corporate profits. Every company pays taxes to the country in which profits are earned. But U.S. companies have the extra burden of also paying the IRS whenever those profits come back from the foreign country into the U.S. The tax bill is the difference between whatever the companies paid overseas and the 35% U.S. rate. The perverse result is that a foreign company can choose to invest in the U.S. without penalty, but U.S.-based Medtronic would pay hundreds of millions and perhaps billions in additional taxes if it wanted to bring overseas profits back to its home country. …Keep in mind that the money invested in corporations was once earned by someone who paid taxes on it. And it will be taxed again as dividends or capital gains.

Amen. And kudos to the WSJ for pointing out there the internal revenue code imposes multiple layers of taxation on income that is saved and invested.

That’s very bad news for workers since it means less capital formation.

Let’s close with this great cartoon from Michael Ramirez…

…and also a couple of videos on international taxation.

First we have this video on “deferral,” which is very relevant since it explains why worldwide taxation is so destructive.

And we also have this video about Obama’s anti-tax haven demagoguery.

I particularly like the reference to Ugland House since that’s where Obama’s Treasury Secretary parked money.

But it’s all okay, at least if you’re part of the political class. Just repeat over and over again that rules are for the peasants in the private sector, not the elite in Washington and their crony donors.

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Last August, I shared a list of companies that “re-domiciled” in other nations so they could escape America’s punitive “worldwide” tax system.

This past April, I augmented that list with some commentary about whether Walgreen’s might become a Swiss-based company.

And in May, I pontificated about Pfizer’s effort to re-domicile in the United Kingdom.

Well, to paraphrase what Ronald Reagan said to Jimmy Carter in the 1980 presidential debate, here we go again.

Here’s the opening few sentences from a report in the Wall Street Journal.

Medtronic Inc.’s agreement on Sunday to buy rival medical-device maker Covidien COV PLC for $42.9 billion is the latest in a wave of recent moves designed—at least in part—to sidestep U.S. corporate taxes. Covidien’s U.S. headquarters are in Mansfield, Mass., where many of its executives are based. But officially it is domiciled in Ireland, which is known for having a relatively low tax rate: The main corporate rate in Ireland is 12.5%. In the U.S., home to Medtronic, the 35% tax rate is among the world’s highest. Such so-called “tax inversion” deals have become increasingly popular, especially among health-care companies, many of which have ample cash abroad that would be taxed should they bring it back to the U.S.

It’s not just Medtronic. Here are some passages from a story by Tax Analysts.

Teva Pharmaceuticals Inc. agreed to buy U.S. pharmaceutical company Labrys Biologics Inc. Teva, an Israeli-headquartered company, had an effective tax rate of 4 percent in 2013. In yet another pharma deal, Swiss company Roche has agreed to acquire U.S. company Genia Technologies Inc. Corporations are also taking other steps to shift valuable assets and businesses out of the U.S. On Tuesday the U.K. company Vodafone announced plans to move its center for product innovation and development from Silicon Valley to the U.K. The move likely means that revenue from intangibles developed in the future by the research and development center would be taxable primarily in the U.K., and not the U.S.

So how should we interpret these moves?

From a logical and ethical perspective, we should applaud companies for protecting shareholders, workers and consumers. If a government is imposing destructive tax laws (and the United States arguably has the world’s worst corporate tax system), then firms have a moral obligation to minimize the damage.

Writing in the Wall Street Journal, an accounting professor from MIT has some wise words on the issue.

Even worse, legislators have responded with proposals that seek to prevent companies from escaping the U.S. tax system. The U.S. corporate statutory tax rate is one of the highest in the world at 35%. In addition, the U.S. has a world-wide tax system under which profits earned abroad face U.S. taxation when brought back to America. The other G-7 countries, however, all have some form of a territorial tax system that imposes little or no tax on repatriated earnings. To compete with foreign-based companies that have lower tax burdens, U.S. corporations have developed do-it-yourself territorial tax strategies. …Some firms have taken the next logical step to stay competitive with foreign-based companies: reincorporating as foreign companies through cross-border mergers.

Unsurprisingly, some politicians are responding with punitive policies. Instead of fixing the flaws in the internal revenue code, they want various forms of financial protectionism in order the stop companies from inversions.

Professor Hanlon is unimpressed.

Threatening corporations with stricter rules and retroactive tax punishments will not attract business and investment to the U.S. The responses by the federal government and U.S. corporations are creating what in managerial accounting we call a death spiral. The government is trying to generate revenue through high corporate taxes, but corporations cannot compete when they have such high tax costs. …The real solution is a tax system that attracts businesses to our shores, and keeps them here. …The U.K. may be a good example: In 2010, after realizing that too many companies were leaving for the greener tax pastures of Ireland, the government’s economic and finance ministry wrote in a report that it wanted to “send out the signal loud and clear, Britain is open for business.” The country made substantive tax-policy changes such as reducing the corporate tax rate and implementing a territorial tax system. Congress and President Obama should make tax reform a priority.

Here’s some info, by the way, about the United Kingdom’s smart moves on corporate taxation.

For more information on territorial taxation, here’s a video I narrated for the Center for Freedom and Prosperity.

And here’s my futile effort to educate the New York Times on the issue.

And if you want some info on the importance of lower corporate taxation, here’s another CF&P video.

P.S. Last February, I shared a hilarious video spoof about some action figures called the “Kronies.” These fake toys symbolize the sleazy insiders that have made DC a racket for well-connected insiders.

Well, the Kronies are back with a new video about the Export Import Bank, which exists to subsidize companies that give lots of contributions to politicians.

I’ve written before about the Export-Import Bank being a perfect (in a bad way) example of corruption in Washington, but if you want to know the details about this crony institution, Veronique de Rugy of the Mercatus Center is a walking encyclopedia on the topic.

By the way, the recently defeated House Majority Leader has been a big supporter of Ex-Im Bank subsidies, and it’s very revealing that Boeing’s share price fell after his defeat. Investors obviously think those handouts are very valuable, and they’re worried that the gravy train may come to an end with Cantor on his way out the door.

Addendum: Some readers have already asked whether it would have been better to say that America’s corporate tax is “sadistic” rather than “masochistic.”

From the perspective of companies (and their shareholders, workers, and consumers), the answer is yes.

But I chose “masochistic” because politicians presumably want to extract the maximum amount of revenue from companies, yet that’s not happening because they’ve set the rate so high and made the system so unfriendly. In other words, they’re hurting themselves. I guess they hate the Laffer Curve even more than they like having more money with which to buy votes.

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Perhaps there is an occasional exception, but when someone in a public policy debate mentions a “race to the bottom,” they always seem to favor bigger government and punitive taxation.

Here are a few examples:

The Organization for Economic Cooperation and Development, a bureaucracy based in Paris, wants to rewrite international tax norms for business income because “failure to collaborate … could be damaging in terms of … a race to the bottom with respect to corporate income taxes.”

The International Monetary Fund also prefers cartels over competition. As the UK-based Guardian reported, “Instead of a race to the bottom where countries compete with each other to offer the lowest rate of corporate tax, it urges co-operation.”

Whether the issue is welfare reform of Medicaid block grants, opponents of federalism complain about decentralization “creating a ‘race to the bottom’ as states slashed funding on services for the poor.”

One of the cranks from the Occupy movement was given a platform by the OECD to complain that, “Tax havens and secrecy jurisdictions bring governments into a harmful race to the bottom.”

And Jeffrey Sachs, writing for the Financial Times, hyperventilated about “a runaway social crisis in many high-income countries. …governments are now in a race to the bottom with regard to corporate taxation”

As you can see, “race to the bottom” is a term that statists use when advocating policies to increase the size, scope, and power of government.

They certainly have the right choose their rhetoric, even though I wish (in the case of the OECD and IMF) that they weren’t being subsidized with my money to push their destructive agenda.

And it makes sense for statists to use this strategy. After all, a “race to the bottom” sounds like a bad thing.

So you can understand that I get irked when the establishment press, which is supposed to be neutral, adopts the left’s rhetoric. Consider this headline from a report in the Financial Times.

FT Race to Bottom Headline(1)

The article itself is not nearly as bad as the headline, so this may be the bias of an editor rather than the bias of a reporter.

Regardless, it sets the tone and obviously would lead an unwitting reader to think it is a good thing that nations aren’t lowering tax rates as much as they did in previous years.

My main point of today’s column is to complain about media bias, but since our example is about the supposed “race to the bottom,” this is also an opportunity to cite the work of the great Nobel Prize-winning economist, Gary Becker, who just passed away.

…competition among nations tends to produce a race to the top rather than to the bottom by limiting the ability of powerful and voracious groups and politicians in each nation to impose their will at the expense of the interests of the vast majority of their populations.

Amen. Tax competition encourages better policy by reducing the power of government.

With regards to bad policy, I want a race to the bottom. That’s what creates a race to the top for prosperity.

P.S. Since we’re on the topic of tax and whether people should pay more or pay less, remember the “Buffett Rule” from the 2012 campaign?

President Obama said every rich person should cough up at least 30 percent of their income to the IRS.

And Warren Buffett volunteered to be Obama’s prop, even distorting his own tax data to facilitate the President’s class-warfare agenda.

Well, it seems that Mr. Buffett is a bit of a hypocrite. Read some of what the Wall Street Journal opined this morning.

…the Berkshire Hathaway CEO seems to have adapted his famous Buffett Rule of taxation when it applies to his own company. …it was fascinating to hear Mr. Buffett explain that his real tax rule is to pay as little as possible, both personally and at the corporate level. “I will not pay a dime more of individual taxes than I owe, and I won’t pay a dime more of corporate taxes than we owe. And that’s very simple,” Mr. Buffett told Fortune magazine in an interview last week. …The billionaire was even more explicit about his goal of reducing his company’s tax payments. “I will do anything that is basically covered by the law to reduce Berkshire’s tax rate,” he said. …Too bad Mr. Buffett didn’t share this rule with voters in 2012.

Tax minimization is both the legal right and the moral responsibility of every citizen.

Unless, of course, you think – ignoring both theory and evidence – that the crowd in Washington spends money more wisely than the private sector.

P.S. Mr. Buffett should be happy he’s an American rather than a Brit. If he lived in London, the supposedly conservative-led government would probably condemn him for legally keeping his taxes as low as possible.

P.P.S. As shown in this clever video, lots of other rich leftists share Mr. Buffett’s hypocrisy.

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If you’re a regular reader, you already know I’m a big supporter of tax competition and tax havens.

Here’s the premise: Politicians almost always are focused on their next election and this encourages them to pursue policies that are designed to maximize votes and power within that short time horizon. Unfortunately, this often results in very short-sighted and misguided fiscal policies that burden the economy, such as class-warfare tax policy and counterproductive government spending.

So we need some sort of countervailing force that will make such policies less attractive to the political class. We don’t have anything that inhibits wasteful spending,* but we do have something that discourages politicians from class-warfare tax policy. Tax competition and tax havens give taxpayers some ability to escape extortionate tax policies.

Now we have a couple of new – and very high-profile – examples of this process.

First, a big American drug company is seeking to redomicile in the United Kingdom.

The New York Times has a thorough (and fair) analysis of the issues.

Pfizer proposed a $99 billion acquisition of its British rival AstraZeneca that would allow it to reincorporate in Britain. Doing so would allow Pfizer to escape the United States corporate tax rate and tap into a mountain of cash trapped overseas, saving it billions of dollars each year and making the company more competitive with other global drug makers. …the company wishes to effectively renounce its United States citizenship. …a deal would allow it to follow dozens of other large American companies that have already reincorporated abroad through acquiring foreign businesses. They have been drawn to countries like Ireland and the Netherlands that have lower corporate rates, as well as by the ability to spend their overseas cash without being highly taxed. At least 50 American companies have completed mergers that allowed them to reincorporate in another country, and nearly half of those deals have taken place in the last two years. …American businesses have long complained about the corporate tax rate, arguing that in today’s global marketplace, they are left at a competitive disadvantage.

You can click here if you want some of those additional examples.

To get an idea of why companies want to redomicile, here’s another excerpt from the story.

…the British corporate tax rate is currently 21 percent and will soon fall to 20 percent. Analysts at Barclays estimated that for each percentage point less Pfizer paid in taxes, it would save about $200 million a year by reincorporating. People briefed on Pfizer’s discussions said that figure could be substantially higher. That means that Pfizer would be saving at least $1 billion a year in taxes alone. And moving to a lower-tax jurisdiction would allow Pfizer to tap cash that it holds overseas without paying a steep tax to bring it back to the United States. Of the company’s $49 billion in cash, some 70 to 90 percent of that is estimated to be held overseas.

I’m encouraged, by the way, that reporters for the New York Times are smart enough to figure out the destructive impact of worldwide taxation. Too bad the editors at the paper don’t have the same aptitude.

By the way, it’s worth pointing out that Pfizer’s expatriation doesn’t have any negative impact on America.

Pfizer points out that it would retain its corporate headquarters here and remain listed on the New York Stock Exchange. …Pfizer’s chief executive, Ian C. Read, a Briton, said Pfizer found it was hard to compete with other acquirers while saddled with “an uncompetitive tax rate.” Still, he added that even as a reincorporated British company, “we will continue to pay tax bills” in the United States.

The only meaningful change is that the redomiciled company no longer would pay tax to the IRS on foreign-source income, but that’s income that shouldn’t be taxed anyhow!

The Wall Street Journal opined on this issue and made what should be very obvious points about why this is happening.

…because the combined state-federal corporate income tax rate in the U.S. is nearly 40%, compared to the 21% rate in the U.K.

Amen. America’s punitive corporate tax rate is a self-inflicted wound.

But it’s not the just the statutory tax rate. The WSJ also points out that the United States also wants companies to pay tax to the IRS on foreign-source income even though that income already has been subject to tax by foreign governments!

The U.S., almost alone among the world’s governments, demands to be paid on a company’s world-wide profits whenever those profits are brought back to the U.S.

It’s for reasons like this that America’s corporate tax system came in 94th place (out of 100!) in a ranking of the degree to which national tax systems impacted competitiveness.

Now let’s look at the second example of a high-profile tax-motivated corporate migration.

Toyota is moving the heart of its American operation from high-tax California to zero-income tax Texas.

And the Wall Street Journal correctly explains the lesson we should learn. Or, to be more accurate, the lesson that politicians should learn.

In addition to its sales headquarters, Toyota says it plans to move 3,000 professional jobs to the Dallas suburb… Toyota’s chief executive for North America Jim Lentz…listed the friendly Texas business climate…as well as such lifestyle benefits as affordable housing and zero income tax.

This isn’t the first time this has happened.

In 2006, Nissan moved its headquarters from Gardena—north of Torrance—to Franklin, Tennessee. CEO Carlos Ghosn cited Tennessee’s lower business costs.

The bottom line is that greedy California politicians are trying to seize too much money and are driving away the geese that lay the golden eggs.

According to the Tax Foundation, the state-local tax burden is more than 50% higher in California than in Tennessee and Texas, which don’t levy a personal income tax. California’s top 13.3% marginal rate is the highest in the country. …Since 2011 more than two dozen California companies including Titan Laboratories, Xeris Pharmaceuticals, Superconductor Technologies, Pacific Union Financial and Med-Logics have relocated in Texas. Dozens of others such as Roku, Pandora and Oracle have expanded there.

No wonder, as I wrote a few years ago, Texas is thumping California.

The real puzzle is why most high-tax governments don’t learn the right lessons. Are the politicians really so short-sighted that they’ll drive away their most productive people?

But notice I wrote most, not all. Because we do have some very recent examples of very left-wing states doing the right thing because of tax competition.

Here are some excerpts from a column in Forbes.

Maryland is the latest state to make its estate tax less onerous, and it’s significant because it’s a staunchly Democratic state indicating that easing the pain of the death tax isn’t just a Republican issue. Today the Maryland Senate passed the measure, already passed by the House, gradually raising the amount exempt from the state’s estate tax to match the generous federal estate tax exemption.

And other blue jurisdictions seem to be learning the same lesson.

In New York, Gov. Andrew Cuomo’s budget calls for increasing the state’s estate tax exemption from $1 million to match the federal exemption, and lowering the top rate from 16% down to 10% by fiscal 2017.  …A commission on tax reform in the District of Columbia recently recommended raising D.C.’s estate tax exemption from $1 million to the federal level. …In Minnesota, Democratic Governor Mark Dayton has proposed doubling the state estate tax exemption from $1 million to $2 million as part of a bigger tax package.

This is why tax competition is such a wonderful thing. There’s no question that politicians in states such as New York don’t want to lower the burden of the death tax.

But they’re doing it anyhow because they know that successful taxpayers will move to states without this awful form of double taxation.

Just like European politicians reduced corporate tax rates even though they would have preferred to keep high tax rates.

Tax competition isn’t a sufficient condition for good policy, but it sure is a necessary condition!

*There are spending caps that restrain wasteful government spending, such as the debt brake in Switzerland and TABOR in Colorado, but those are policies rather than processes.

P.S. Here’s a joke about California, Texas, and a coyote.

P.P.S. And supporters of the Second Amendment will appreciate this Texas vs. California joke.

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To put it mildly, I’m not a fan of the so-called Tax Justice Network. In a moment of typical understatement, I referred to the U.K.-based group as “…a bunch of crazy Euro-socialists.”

And to give you an idea of why I don’t like them, here’s some of what I wrote about them two years ago.

…the Tax Justice Network [is] closely allied with governments in left-wing nations such as France, and they share the same goals as statist international bureaucracies such as the Paris-based Organization for Economic Cooperation and Development. If they succeed in crippling tax competition and setting up some sort of global network of tax police, more politicians will raise tax rates, causing more misery, and bringing more nations one step closer to Greek-style fiscal collapse.

With this bit of background, it goes without saying that I very rarely agree with TJN.

But just as a stopped clock is right twice daily, the Tax Justice Network on rare occasions will produce some worthwhile research. For example, here are some passages from my article in the latest issue of the Cayman Financial Review (where I’m a member of the Editorial Board).

…would anybody, if asked to list the world’s 10 biggest tax havens, put together a list that includes Germany, Japan and the United States? Sounds absurd, but that’s precisely what the ideologues at the Tax Justice Network (TJN) asserted in the Financial Secrecy Index (FSI) released last November. …To be fair, though, the methodological approach used in the FSI report is not wholly objectionable. The TJN is seeking to come up with a measure that combines both the degree to which a jurisdiction has “secrecy” laws and the extent to which that jurisdiction attracts global capital. In other words, the TJN’s philosophical leanings are extreme and the organization obviously is motivated by a desire to hinder tax competition and fiscal sovereignty, but the FSI report provides an interesting way of seeing which so-called tax havens play the biggest role in the world economy.

And one of the biggest tax havens – number 6 according to TJN – is the United States.

TJN FSI 2013I have no objection to their choice.

It makes sense to include the United States because there are several attractive policies for global investors, including the non-taxation and non-reporting of certain types of capital income. Moreover, several states have very friendly incorporation laws.

When I’m talking about “friendly incorporation laws,” I’m referring to the fact that states such as Delaware, Nevada, Wyoming, and others make it easy for everyone – particularly foreigners – to set up companies. This is a good thing for business and investment, but it irks statists because many American states don’t require the collection and sharing of information that foreign governments want for purposes of enforcing bad tax law.

So the United States is a de facto tax haven.

But that’s just part of the story. When I discuss the “non-taxation and non-reporting of certain types of capital income,” I’m referring to the fact that the internal revenue code generally does not impose tax on interest and capital gains paid to  foreigners (specifically nonresident aliens). And because we don’t tax those payments, there’s no requirement to report that information to any government. As you can imagine, this irks the left because it means there’s no information to share with foreign governments that want to track – and tax – flight capital.

To reiterate, this makes the United States is a de facto tax haven.

These laws are extremely beneficial to the American economy. To get an idea of why the United States is a big winner from being a “tax haven,” look at this chart showing historical data on the amount of money foreigners have invested in stocks, bonds, and other forms of indirect (sometimes called passive) investment in America.

By any standard, $13 trillion is a lot of money. Those funds boost our financial markets, enable job creation, and increase economic performance. We don’t know how much of that money is invested in the United States because we have a friendly and confidential tax system for nonresident aliens, but it surely helps to explain why there’s so much foreign investment in America.

Let’s be thankful that the United States is a so-called tax haven. Those pro-growth policies help to offset Obama’s bad policies. Indeed, two Canadian economists found that tax havens actually are economically beneficial for high-tax nations.

But that’s not the moral of the story. Yes, I like that America is a tax haven for foreigners, but the real moral of the story is that we should apply the same good policies to Americans.

Let’s get rid of the corrupt internal revenue code and adopt a simple and fair flat tax. That means a low tax rate, of course, but it also means no double taxation of income that is saved and invested.

Which means Americans would get the same pro-growth treatment now reserved for foreigners.

For more information, here’s my video on the economic argument for tax havens.

P.S. You won’t be surprised to learn that hypocritical leftists love using tax havens to protect their money even though they want to deny that freedom to the rest of us.

P.P.S. I’m such an avid defender of tax havens that I almost wound up in a Mexican jail. That’s dedication!

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Back in the 1980s and 1990s, there was a widespread consensus that high tax rates were economically misguided. Many Democrats, for instance, supported the 1986 Tax Reform Act that lowered the top tax rate from 50 percent to 28 percent (albeit offset by increased double taxation and more punitive depreciation rules).

And even in the 1990s, many on the left at least paid lip service to the notion that lower tax rates were better for prosperity than higher tax rates. Perhaps that’s because the overwhelming evidence of lower tax rates on the rich leading to higher revenue was fresh in their minds.

The modern left, however, seems completely fixated on class-warfare tax policy. Some of them want higher tax rates even if the government doesn’t collect more revenue!

I’ve already shared a bunch of data and evidence on the importance of low tax rates.

A review of the academic evidence by the Tax Foundation found overwhelming support for the notion that lower tax rates are good for growth.

An economist from Cornell found lower tax rates boost GDP.

Other economists found lower tax rates boost job creation, savings, and output.

Even economists at the Paris-based OECD have determined that high tax rates undermine economic performance.

Today, we’re going to augment this list with some fresh and powerful evidence.

Lots of new evidence. So grab a cup of coffee.

The New York Times, for instance, is noticing that high taxes drive away productive people. At least in France.

Here are some excerpts from a remarkable story.

A year earlier, Mr. Santacruz, who has two degrees in finance, was living in Paris near the Place de la Madeleine, working in a boutique finance firm. He had taken that job after his attempt to start a business in Marseille foundered under a pile of government regulations and a seemingly endless parade of taxes. The episode left him wary of starting any new projects in France. Yet he still hungered to be his own boss. He decided that he would try again. Just not in his own country.

What pushed him over the edge? Taxes, taxes, and more taxes.

…he returned to France to work with a friend’s father to open dental clinics in Marseille. “But the French administration turned it into a herculean effort,” he said. A one-month wait for a license turned into three months, then six. They tried simplifying the corporate structure but were stymied by regulatory hurdles. Hiring was delayed, partly because of social taxes that companies pay on salaries. In France, the share of nonwage costs for employers to fund unemployment benefits, education, health care and pensions is more than 33 percent. In Britain, it is around 20 percent. “Every week, more tax letters would come,” Mr. Santacruz recalled.

Monsieur Santacruz has lots of company.

…France has been losing talented citizens to other countries for decades, but the current exodus of entrepreneurs and young people is happening at a moment when France can ill afford it. The nation has had low-to-stagnant economic growth for the last five years and a generally climbing unemployment rate — now about 11 percent — and analysts warn that it risks sliding into economic sclerosis. …This month, the Chamber of Commerce and Industry of Paris, which represents 800,000 businesses, published a report saying that French executives were more worried than ever that “unemployment and moroseness are pushing young people to leave” the country, bleeding France of energetic workers. As the Pew Research Center put it last year, “no European country is becoming more dispirited and disillusioned faster than France.”

But it’s not just young entrepreneurs. It’s also those who already have achieved some level of success.

Some wealthy businesspeople have also been packing their bags. While entrepreneurs fret about the difficulties of getting a business off the ground, those who have succeeded in doing so say that society stigmatizes financial success. …Hand-wringing articles in French newspapers — including a three-page spread in Le Monde, have examined the implications of “les exilés.” …around 1.6 million of France’s 63 million citizens live outside the country. That is not a huge share, but it is up 60 percent from 2000, according to the Ministry of Foreign Affairs. Thousands are heading to Hong Kong, Mexico City, New York, Shanghai and other cities. About 50,000 French nationals live in Silicon Valley alone. But for the most part, they have fled across the English Channel, just a two-hour Eurostar ride from Paris. Around 350,000 French nationals are now rooted in Britain, about the same population as Nice, France’s fifth-largest city. …Diane Segalen, an executive recruiter for many of France’s biggest companies who recently moved most of her practice, Segalen & Associés, to London from Paris, says the competitiveness gap is easy to see just by reading the newspapers. “In Britain, you read about all the deals going on here,” Ms. Segalen said. “In the French papers, you read about taxes, more taxes, economic problems and the state’s involvement in everything.”

Let’s now check out another story, this time from the pages of the UK-based Daily Mail. We have some more news from France, where another successful French entrepreneur is escaping Monsieur Hollande’s 75 percent tax rate.

François-Henri Pinault, France’s third richest man, is relocating his family to London.  Pinault, the chief executive of Kering, a luxury goods group, has an estimated fortune of £9 billion.  The capital has recently become a popular destination for wealthy French, who are seeking to avoid a 75 per cent supertax introduced by increasingly unpopular Socialist President François Hollande. …It has been claimed that London has become the sixth largest ‘French city’ in the world, with more than 300,000 French people living there.

But it’s not just England. Other high-income French citizens, such as Gerard Depardieu and Bernard Arnault, are escaping to Belgium (which is an absurdly statist nation, but at least doesn’t impose a capital gains tax).

But let’s get back to the story. The billionaire’s actress wife, perhaps having learned from all the opprobrium heaped on Phil Mickelson when he said he might leave California after voters foolishly voted for a class-warfare tax hike, is pretending that taxes are not a motivating factor.

But despite the recent exodus of millionaires from France, Ms Hayek insisted that her family were moving to London for career reasons and not for tax purposes.  …Speaking about the move in an interview with The Times Magazine, the actress said: ‘I want to clarify, it’s not for tax purposes. We are still paying taxes here in France.  ‘We think that London has a lot more to offer than just a better tax situation.

And if you believe that, I have a bridge in Brooklyn that I’m willing to sell for a very good price.

Speaking of New York bridges, let’s go to the other side of Manhattan and cross into New Jersey.

It seems that class-warfare tax policy isn’t working any better in the Garden State than it is in France.

Here are some passages from a story in the Washington Free Beacon.

New Jersey’s high taxes may be costing the state billions of dollars a year in lost revenue as high-earning residents flee, according to a recent study. The study, Exodus on the Parkway, was completed by Regent Atlantic last year… The study shows the state has been steadily losing high-net-worth residents since 2004, when Democratic Gov. Jim McGreevey signed the millionaire’s tax into law. The law raised the state income tax 41 percent on those earning $500,000 or more a year. “The inception of this tax, coupled with New Jersey’s already high property and estate taxes, leaves no mystery about why the term ‘tax migration’ has become a buzzword among state residents and financial, legal, and political professionals,” the study, conducted by Regent states. …tax hikes are driving residents to states with lower tax rates: In 2010 alone, New Jersey lost taxable income of $5.5 billion because residents changed their state of domicile.

No wonder people are moving. New Jersey is one of the most over-taxed jurisdictions in America – and it has a dismal long-run outlook.

And when they move, they take lots of money with them.

“The sad reality is our residents are suffering because politicians talk a good game, but no one is willing to step up to the plate,” Americans for Prosperity New Jersey state director Daryn Iwicki said. The “oppressive tax climate is driving people out.” …One certified public accountant quoted in the study said he lost 95 percent of his high net worth clients. Other tax attorneys report similar results. …Michael Grohman, a tax attorney with Duane Morris, LLP, claimed his wealthy clients are “leaving [New Jersey] as fast as they can.” …If the current trend is not reversed, the consequences could be dire. “Essentially, we’ll find ourselves much like the city of Detroit, broke and without jobs,” Iwicki said.

By the way, make sure you don’t die in New Jersey.

The one bit of good news, for what it’s worth, is that Governor Christie is trying to keep matters from moving further in the wrong direction.

Here’s another interesting bit of evidence. The Wall Street Journal asked the folks at Allied Van Lines where wealthy people are moving. Here’s some of the report on that research.

Spread Sheet asked Allied to determine where wealthy households were moving, based on heavy-weight, high-value moves. According to the data, Texas saw the largest influx of well-heeled households moving into the state last year, consistent with move trends overall. South Carolina and Florida also posted net gains. On the flip side, Illinois and Pennsylvania saw more high-value households move out of state than in, according to the data. California saw the biggest net loss of heavy-weight moves. Last year, California had a net loss of 49,259 people to other states, according to the U.S. Census. …Texas had the highest net gain in terms of domestic migration—113,528 more people moved into the state than out last year, census data show. Job opportunities are home-buyers’ top reason for relocating to Texas, according to a Redfin survey last month of 1,909 customers and website users.

The upshot is that Texas has thumped California, which echoes what I’ve been saying for years.

One can only imagine what will happen over the next few years given the punitive impact of the higher tax rate imposed on the “rich” by spiteful California voters.

If I haven’t totally exhausted your interest in this topic, let’s close by reviewing some of the research included in John Hood’s recent article in Reason.

Over the past three decades, America’s state and local governments have experienced a large and underappreciated divergence. …Some political scientists call it the Big Sort. …Think of it as a vast natural experiment in economic policy. Because states have a lot otherwise in common-cultural values, economic integration, the institutions and actions of the federal government-testing the effects of different economic policies within America can be easier than testing them across countries. …And scholars have been studying the results. …t present our database contains 528 articles published between 1992 and 2013. On balance, their findings offer strong empirical support for the idea that limited government is good for economic progress.

And what do these studies say?

Of the 112 academic studies we found on overall state or local tax burdens, for example, 72 of them-64 percent-showed a negative association with economic performance. Only two studies linked higher overall tax burdens with stronger growth, while the rest yielded mixed or statistically insignificant findings. …There was a negative association between economic growth and higher personal income taxes in 67 percent of the studies. The proportion rose to 74 percent for higher marginal tax rates or tax code progressivity, and 69 percent for higher business or corporate taxes.

Here are some of the specific findings in the academic research.

James Hines of the University of Michigan found that “state taxes significantly influence the pattern of foreign direct investment in the U.S.” A 1 percent change in the tax rate was associated with an 8 percent change in the share of manufacturing investment from taxed investors. Another study, published in Public Finance Review in 2004, zeroed in on counties that lie along state borders. …Studying 30 years of data, the authors concluded that states that raised their income tax rates more than their neighbors had significantly slower growth rates in per-capita income. …economists Brian Goff, Alex Lebedinsky, and Stephen Lile of Western Kentucky University grouped pairs of states together based on common characteristics of geography and culture. …Writing in the April 2011 issue of Contemporary Economic Policy, the authors found “strong support for the idea that lower tax burdens tend to lead to higher levels of economic growth.”

By the way, even though this post is about tax policy, I can’t resist sharing some of Hood’s analysis of the impact of government spending.

Of the 43 studies testing the relationship between total state or local spending and economic growth, only five concluded that it was positive. Sixteen studies found that higher state spending was associated with weaker economic growth; the other 22 were inconclusive. …a few Keynesian bitter-enders insist that transfer programs such as Medicaid boost the economy via multiplier effects… Nearly three-quarters of the relevant studies found that welfare, health care subsidies, and other transfer spending are bad for economic growth.

And as I’ve repeatedly noted, it’s important to have good policy in all regards. And Hood shares some important data showing that laissez-faire states out-perform their neighbors.

…economists Lauren Heller and Frank Stephenson of Berry College used the Fraser Institute’s Economic Freedom of North America index to explore state economic growth from 1981 to 2009. They found that if a state adopted fiscal and regulatory policies sufficient to improve its economic freedom score by one point, it could expect unemployment to drop by 1.3 percentage points and labor-force participation to rise by 1.9 percentage points by the end of the period studied.

If you’ve made it this far, you deserve a reward. We have some amusing cartoons on class-warfare tax policy here, here, here, here, here, here, and here.

And here’s a funny bit from Penn and Teller on class warfare.

P.S. Higher tax rates also encourage corruption.

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