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Archive for the ‘Tax Haven’ Category

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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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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Senator Rand Paul is being criticized and condemned by the Washington establishment.

That’s almost certainly a sign that he’s doing the right thing. And given the recent events in Russia and Ukraine, we should say he’s doing a great thing.

Rand PaulThis is because Senator Paul is waging a lonely battle to stop the unthinking and risky move to a world where governments – including corrupt and evil regimes – collect and share our private financial information.

I’ve written about this topic many times and warned about the risks of letting unsavory governments have access to personal information, but the Obama Administration – with the support of some Republicans who think government power is more important than individual rights – is actively pushing this agenda.

The White House has even endorsed the idea of the United States being part of a so-called Convention on Mutual Administrative Assistance in Tax Matters, even though that would require the sharing of large amounts of personal financial data with thuggish and corrupt regimes such as Argentina, Azerbaijan, China, Greece, Mexico, Nigeria, Russia, and Saudi Arabia!

I’m sure Vladimir Putin very much appreciates this insider access so he can monitor dissidents and track political opponents. His government even signed onto a recent G-20 Communique that endorsed automatic information-sharing.

Heck, there’s even a Russian heading up the Financial Action Task Force, which is endlessly pushing to give governments untrammeled access to private information. FATF even wants banks and other financial institutions to spy on customers, regardless of whether there’s the slightest evidence of any wrongdoing.

The general mindset in Washington is that we should all bury our heads in the sand and blithely allow this massive accumulation of power and information by governments. After all, Putin and other thugs would never abuse this system, right?

Senator Paul battles the statists

Fortunately, at least one lawmaker is trying to throw sand in the gears. Like Horatius at the bridge, who single-handedly thwarted an invasion of Rome in 509 BC, Senator Paul is objecting to this massive invasion of privacy.

He has this old-fashioned appreciation for the Constitution and doesn’t think government should have carte blanche to access private financial data. He even – gasp! – thinks that government power should be restrained by the 4th Amendment and that there should be due process legal protections for individuals.

No wonder the DC establishment doesn’t like him.

One example of this phenomenon is that Senator Paul has placed a “hold” on some tax treaties. Here are some excerpts from a recent article in Politico.

Paul for years has single-handedly blocked an obscure U.S.-Swiss tax treaty that lawmakers, prosecutors, diplomats and banks say makes the difference between U.S. law enforcement rooting out the names of a few hundred fat-cat tax evaders — and many thousands more. …International tax experts for years have seethed over Paul’s block on the Swiss and several other tax treaties. These sorts of mundane tax protocols used to get approved by unanimous consent without anyone batting an eyelash — until Paul came to town.

These pacts are “mundane” to officials who think there shouldn’t be any restrictions on the power of governments.

Fortunately, Senator Paul has a different perspective.

Kentucky’s tea party darling says the treaty infringes on privacy rights. …Paul, a libertarian Republican widely believed to be eyeing a 2016 presidential run, says his hold stems from concerns about Fourth Amendment protections against “unreasonable search and seizure.” “These are people that are alleged, not convicted of doing anything wrong,” Paul said a few weeks ago. “I don’t think you should have everybody’s information from their bank. There should be some process: accusations and proof that you’ve committed a crime.”

The article also notes that Senator Paul is one of the few lawmakers to fight back against the egregious FATCA legislation.

Paul’s protest is also linked to his abhorrence of the soon-to-take-effect Foreign Account Tax Compliance Act, which will force foreign banks to disclose U.S. account information to the IRS, and domestic banks to reciprocate to other nations’ revenue departments. …the senator has legislation to repeal FATCA and hesitates to support a treaty that enables a law he views as U.S. government overreach.

I don’t know how long Senator Paul can withstand the pressure in his lonely fight for individual rights, but I’m glad he’s waging the battle.

Even the Swiss government and Swiss banks have thrown in the towel, having decided that they have no choice but to weaken their nation’s human rights laws on financial privacy because of threats of financial protectionism by the United States.

So let’s give three cheers to our modern-day Horatius, a very rare elected official who is doing the right thing for the right reason.

For more information on the importance of financial privacy, here’s my video on the moral case for tax havens.

P.S. I shared some good jokes about Keynesian economics a few weeks ago.

Now, via Cafe Hayek, I have a great cartoon showing the fancy equation that left-wing economists use when they tell us that the economy will grow faster if there’s a bigger burden of government spending.

Keynesian Miracle Cartoon

Now you can see how the Congressional Budget Office puts together its silly estimates.

Indeed, Chuck Asay even produced a cartoon on CBO’s fancy methodology.

The next step is to find the secret equation that CBO uses when it publishes nonsensical analysis implying that growth is maximized when tax rates are 100 percent.

But to be fair, the politicians who pay their salaries want them to justify bigger government, so should we expect anything else?

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One of the many differences between advocates of freedom and supporters of statism is how they view “rights.”

Libertarians, along with many conservatives, believe in the right to be left alone and to not be molested by government. This is sometimes referred to in the literature as “negative liberty,” which is just another way of saying “the absence of coercive constraint on the individual.”

Statists, by contrast, believe in “positive liberty.” This means that you have a “right” to things that the government will give you (as explained here by America’s second-worst President). Which means, of course, that the government has an obligation to take things from somebody else. How else, after all, will the government satisfy your supposed right to a job, education, healthcare, housing, etc.

Sometimes, the statists become very creative in their definition of rights.

You may laugh at these examples, particularly the ones that focus on seemingly trivial issues.

But don’t laugh too hard, because our friends on the left are busy with very grandiose plans for more “positive liberty.”

The EU Observer reports on efforts in Europe to create expanded rights to other people’s money.

Austerity programmes agreed with the troika of international lenders (the European Commission, European Central Bank and International Monetary Fund) are in breach of the EU’s Charter of Fundamental Rights, according to a German legal expert. …under the EU charter of fundamental rights, a legal text which became binding for member states in 2009, several austerity measures enshrined in the MoUs can be fought in courts. …His study highlights that the MoUs “have seriously limited the autonomy of employers and trade unions to negotiate wages.” …Education and health care reforms prescribed in the memorandums are also questionable because they are focusing too much on cutting budgets, he said. …He noted that the concept of “financial stability” was put above all other considerations. “But financial stability cannot be achieved without social stability,” he said.

But it’s not just one oddball academic making these claims.

…the Council of Europe’s social rights committee noted that public policies since 2009 have been unable to stem a generalised increase in poverty on the continent. The committee identified some 180 violations of European Social Charter provisions on access to health and social protection across 38 European countries. In the bailed-out countries, the committee found several breaches – particularly in terms of wages and social benefits. Ireland was found in breach of the social charter for not ensuring the minimum levels of sickness, unemployment, survivor’s, employment injury and invalidity benefits. Greece and Cyprus have “inadequate” minimum unemployment, sickness, maternity and old age benefits, as well as a restrictive social security system. Spain also pays too little to workers on sick leave.

This crazy thinking also exists in the United States. A former Carter Administration official, now a law professor at Georgetown, has written that countries with good policy must change their systems in order to enable more tax revenue in nations with bad policy.

Do states like Switzerland, which provide a tax haven for wealthy citizens of developing countries, violate internationally recognized human rights? …bank secrecy has a significant  human rights impact if governments of developing countries are deprived of resources needed to meet basic economic rights guaranteed by the United Nations Covenant on Economic, Social, and Cultural Rights. …The Covenant explicitly recognizes individual rights to adequate food, clothing, and housing (Article 11); health care, clean water, and sanitation (Article 12); and education (Article 13). The Covenant also imposes obligations on member states to implement these rights.

And the right to redistribution isn’t just part of the U.N. mission.

There’s also a European set of Maastricht Principles which supposedly obligates nations to help each expand the burden of government.

Articles 19 and 20 of The Maastricht Principles call on states to “refrain from conduct which nullifies or impairs the enjoyment and exercise of economic . . . rights of persons outside their territories . . . or which impairs the ability of another State to comply with that State’s . . . obligations as regards economic rights.” …recognizing the fact that secrecy for offshore accounts makes it difficult for developing countries to implement Covenant obligations. It therefore seems indisputable that offshore accounts impede the fulfillment of internationally recognized human rights.

You may be thinking that all this sounds crazy. And you’re right.

You may be thinking that it’s insane to push global schemes for bigger government at the very point when the welfare state is collapsing. And you’re right.

You may be thinking that it’s absurd to trample national sovereignty in pursuit of bad policy. And you’re right.

And you may be thinking this is a complete bastardization of what America’s Founding Fathers had in mind. And you’re right.

But you probably don’t understand that this already is happening. The IRS’s awful FATCA legislation, for instance, is basically designed for exactly the purpose of coercing other nations into enforcing bad American tax policy.

Even more worrisome is the OECD’s Orwellian Multilateral Convention on Mutual Administrative Assistance in Tax Matters, which is best viewed as a poisonous acorn that will grow into a deadly World Tax Organization oak tree.

P.S. And the Obama Administration already is pushing policies to satisfy the OECD’s statist regime. The IRS recently pushed through a regulation that says American banks have to put foreign tax law above U.S. tax law.

P.P.S. Statists may be evil, but they’re not stupid. They understand that tax havens and tax competition are a threat to big government.

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I’m very worried about America’s fiscal future. Simply stated, data from several sources (BIS, OECD, and IMF) indicates that we face a future Greek-style fiscal crisis unless policy makers implement genuine entitlement reform.

Unfortunately, politicians have little incentive to control spending and reform programs if they think that higher taxes are an option.

So how do we control their appetite for more revenue? There’s no silver bullet solution, but part of the answer is that we need tax competition and tax havens. Politicians are less likely to over-tax and over-spend if they’re afraid that the geese that lay the golden eggs can fly across the border.

In other words, tax competition is a necessary but not sufficient condition to promote good policy. And that’s why I’m willing to defend tax havens, even if it requires bringing a message of liberty to traditionally hostile audiences such as readers of the New York Times and viewers of CNN.

That’s also why I share well-written and compelling articles on the topic, such as this editorial by Pierre Bessard from Switzerland’s Liberales Institut and this column by Allister Heath of England’s City AM business newspaper.

I have a new piece to add to this collection. Professor Philip Booth and Dr Richard Wellings of the London-based Institute of Economic Affairs have produced a succinct and powerful case for tax competition and tax havens.

Here are some excerpts from the article they wrote for IFC Review. They start by warning that politicians have done a crummy job in most developed nations.

If we consider the performance of high-tax Western countries in recent years – which includes, amongst others, every EU country, plus the US – it has been pretty grim. These are countries which, despite their high levels of taxation, are building up huge debts. These countries also regulate their financial systems heavily, often through bodies which have huge discretion, and yet they have recently suffered the worst financial crisis since the Second World War. You would think that it would be this model – the corporatist model of high taxes and extensive regulation – that would be coming under scrutiny. However, like small children who wish to shift the blame, the EU is focusing its attention on International Financial Centres (IFCs).

Well said, though I would make one small correction. These nations have “huge debts” in part because of – not “despite” – “high levels of taxation.” More Taxes More Spending EU DataThat’s because of the Laffer Curve causing revenues to be lower than expected when taxes are raised and also because politicians can’t resist spending any revenue that is generated.

Returning to the article, Booth and Wellings make the important observation that these so-called tax havens largely exist because of bad policy in other nations.

Just as offshore centres came into being as a result of incompetent regulatory and tax policy from the US government in the 1960s and 1970s, these centres are just as important today in ensuring the free flow of international capital. The nature of our corporation tax systems is such that investors can be taxed several times over on the same profits. Companies can be taxed when they make profits; investment funds can be taxed on their returns; and investors in funds can be taxed by their home tax authorities. In addition, capital gains tax systems often end up taxing companies when their share price rises as a result of the retention of profits or the anticipation of future profits even though extra tax is levied on those profits when they accrue. If governments reformed their corporation tax systems so that they were coherent and focused on the shareholder rather than on the activities of companies themselves, there would be much less need for IFCs.

Amen. If politicians in high-tax nations really want to hurt tax havens, they should lower tax rates and reform their tax systems.

But I’m not holding my breath waiting for that to happen, so we need some external pressure to encourage good policy.

Booth and Wellings explain how tax competition leads to better policy, which leads to better economic performance.

…competition brings major economic benefits. There are very strong incentives for politicians to increase public spending (and hence taxes) in order to gain the support of powerful special interest groups and raise their chances of re-election. Partly as a result, most Western governments now confiscate around two-fifths of people’s earnings. Such high tax rates mean many wealth-creating economic activities are no longer viable. Indeed, long-term studies suggest that every one per cent added to the level of taxation (as a share of GDP) tends to reduce economic growth by about 0.15 per cent a year. Accordingly, a 10 percentage point increase would decrease average growth rates by around 1.5 per cent a year. High rates of taxation therefore have a very significant and negative long-term impact on living standards.

But I think this passage is the most important part of the article. Tax competition is necessary to protect people from greedy and short-sighted politicians.

This is one reason why IFCs are so important. They act as a deterrent to predatory politicians who wish to raise tax rates to highly damaging levels. Policymakers know that, if they set tax rates too high, business activity will shift to lower tax jurisdictions. The point at which tax increases no longer result in additional revenue to governments is therefore shifted downwards by competition from IFCs. This means tax rates will tend to be closer to the optimal rate for economic growth.

The authors also explain that slower growth has a big impact on government finances.

Lower levels of overall economic output mean fewer resources are available to spend on areas such as health and education. Arguments that high tax rates are necessary to fund essential public services are therefore deeply flawed. High-tax, high-spend policies are entirely counter-productive since their negative effect on economic output inevitably results in lower public spending in the long term. While state spending may absorb a larger share of the economy under the high-tax approach, the overall size of the economy will be very much smaller, limiting the resources available to government.

In other words, if the statists want both prosperity and ample tax revenue, they’re better off supporting modest-sized government and reasonable tax rates.

But this may be the fundamental divide between proponents of economic liberty and supporters of statism. Advocates of big government act as if they are more interested in punishing success than they are in enabling upward mobility for the less fortunate.

That seems perverse, but it’s the explanation that matches their behavior.

But it’s not my job to psychoanalyze statists. Let’s close by sharing my video primer on tax competition.

By the way, Professor Greg Mankiw at Harvard has made very similar points.

P.S. Leftists love to criticize “tax havens,” perhaps because they feel guilty about using them.

P.P.S. While the U.K. government is very misguided on fiscal policy issues (with the exception of Mark Field), there are a couple of Brits in the European Parliament. You’ll enjoy these short speeches by Dan Hannan and Godfrey Bloom.

Costco resultsP.P.P.S. I’m happy to share the news that late-reporting precincts have pushed me into a tie in the Costco poll on whether governments should try to tax outside their borders and persecute low-tax jurisdictions. As I noted last month, I was trailing by a 51-49 margin (though even that was somewhat surprising since I thought the poll used misleading language). Anyhow, here’s the debate and you can still cast a vote by clicking here.

P.P.P.P.S. Perhaps the most persuasive evidence is that the New York Times inadvertently admitted that tax competition is one of the few effective ways of fighting excessive government.

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I like tax havens for the simple reason that we need some ways of restraining the greed of the political class.

Simply stated, if profligate politicians think that we are “captive customers,” they are much more likely to impose (even) higher tax rates (as we’ve seen in the past couple of years in Europe). But if they think that we have escape options, they’ll probably exercise some self control.

That’s why I defend nations such as Switzerland, which often are persecuted by politicians from high-tax nations.

It’s also why I defend the tax system of the United States.

Huh?!? What do I mean by that?

Well, while there are many bad things about the American tax system (including pervasive double taxation and a very uncompetitive corporate tax system), one of few redeeming features of our tax system is that we are a tax haven.

Not for Americans, of course, but it turns out we have some good rules for foreigners.

Here’s some of what was recently published by the Heartland Institute.

Some international tax experts note a big irony…in continued U.S. government pressure to compel overseas banks to give up information on Americans with bank accounts in the belief those people may be hiding money from the taxman. The irony: Much of the world considers the United States to be one of the world’s biggest tax havens. …”it’s very easy for anybody in the world today to set up, let’s say, a Delaware Corporation. You can do it online. You have to give very little information to get it up and running. And Delaware’s not alone. There are other states where you can do it as well,” said Jim Duggan, a tax, wealth and estate planning attorney with the Duggan Bertsch LLC law firm in Chicago.

Other experts agree.

He’d get no argument from Kevin Packman, chairman of the Offshore Tax Compliance Team at the Holland & Knight international law firm. “There are a number of countries that have said the U.S. is the biggest tax haven in the world,” Packman said. “There’s something to be said for that view.” He noted there are many countries where people are rightly concerned about government moves to impose confiscatory taxes or seize assets. They view the United States as more respectful of property rights and therefore look for ways to move investments into the U.S., including by setting up Delaware or other corporations, and parking money in U.S. banks.

I’ve already noted that Delaware is one of the world’s best tax havens because of its attractive incorporation policies, but we also have very attractive federal tax rules.

Dennis Kleinfeld adds his analysis in an article for Money News.

Tax havens serve two vitally important purposes to everyone lucky enough to have private investment capital. First, they are a source by which foreign capital can be routed into the United States or other countries with tax efficiency.  Second, they represent a safe haven where investors’ private capital can flee from overbearing governments of all kinds — democratic, republic, dictatorship, monarchy and just plain thugs and despots — and with a comfortable level of privacy, confidentiality and secrecy. What is the world’s largest tax haven? …the United States can lay claim to that title.  …the United States would not be able to maintain its economy without large inflows of foreign capital. Foreign investors can invest in the United States virtually tax free — in structures that are legally protected from risks and, currently, with secrecy. With fairly simple planning, a foreign investor can avoid tax on interest as well as gains from sale of securities — all protected by the legal system… As for secrecy, Delaware or Nevada are quite accommodating. In these states, a foreign company or individuals can form a limited liability company and open a bank account, but if the investor does its or his business outside the United States, there is no U.S. tax or reporting.

Just as important, Dennis explains that tax havens are not only good for the American economy, but also for individuals seeking to protect themselves from rapacious government.

There are no investors — the people who actually create investment capital — who have any complaint against offshore tax-haven financial centers. …To politicians, your capital is their means to advance their political goals. Notwithstanding their propaganda of serving the American people, the needs of the people are always subservient to the voracious needs of political advancement.  How can private investors protect themselves from becoming the spoils of war from the marauding armies of politicians fighting for power? For that, investors need tax havens.

By the way, leftists also agree that the United States is a tax haven for non-Americans, so that’s not in dispute.

But there is a big argument about whether it’s good for America to have these policies. I’ve argued over and over again in favor of tax havens as a general principle (I recommend my New York Times piece if you want a good short summary), but it’s also worth noting that America’s tax haven policies have helped to attract trillions of dollars to the U.S. economy.

Costco Poll ResultsBy the way, I suppose it’s time to confess that I lost my recent debate on tax havens for the Costco Connection. Though I argued last month that the magazine phrased the question in a very misleading way, so the fact that the margin was only 51-49 could be an indication that I was actually somewhat persuasive.

And maybe some late-reporting precincts could still turn the tide, so feel free to add your opinion if you still haven’t voted.

But I’m digressing. Let’s conclude by assessing where we stand. Tax experts on the right and left agree that the United States is a tax haven for foreigners who need a safe place to invest their money.

There’s also no doubt that foreigners take advantage of these policies in ways that attract huge amounts of money to the American economy – more than $25 trillion according to the Commerce Department!

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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