The Senate is holding a Kangaroo Court designed to smear Apple for not voluntarily coughing up more tax revenue than the company actually owes.
Here are four things you need to know.
Apple is fully complying with the tax law. There is no suggestion that Apple has done anything illegal. The company is being berated by politicians for simply obeying the law that politicians have enacted. What’s really happening, of course, is that the politicians are conducting a show trial in hopes of creating an environment more conducive to tax increases on multinational companies (this is in addition to the OECD effort to impose higher tax burdens on multinational firms).
Left-wing whining
It is better for Apple to retain its profits than it is for politicians to grab the money. If Harry Reid, Barack Obama, and the rest of the crowd in Washington are able to use this fake issue as an excuse to raise taxes, the only things that changes is that the tax system becomes more onerous and politicians have more money to spend. Neither of those results are good for growth, particularly compared to the potential benefits of leaving the money in the productive sector of the economy.
Apple shouldn’t pay any tax to the IRS on any of its foreign-source income. A few years ago, Google was criticized for paying “only” 2.4 percent tax on its foreign-source income, but I explained that was 2.4 percentage points too high. Likewise, when Apple earns money overseas, that should not trigger any tax liability to the IRS since the income already is subject to all applicable foreign taxes (much as, say, Toyota pays tax to the IRS on its US-source income). Good tax policy is based on the common-sense notion of “territorial taxation,” which means governments only tax income and activity within their national borders. Unfortunately, the American tax system is partially based on the anti-competitive policy of “worldwide taxation,” which means the IRS gets to tax income that is earned – and already subject to tax – in other nations. Fortunately, we have a policy called “deferral,” which allows companies to postpone this second layer of tax.
If Apple is trying to characterize US-source income into foreign-source income, that’s because the US corporate tax system is anti-competitive. Multinational companies often are accused of “abusing” transfer-pricing rules on intra-company transactions to inappropriately turn US-source income into foreign-source income. To the extent this happens (and always with IRS approval), it is because the American corporate tax rate is now the highest in the developed world (and the second highest in the entire world), so companies naturally would prefer to reduce their tax burdens by declaring income elsewhere. So the only pro-growth solution is lowering the corporate tax rate.
It’s worth noting, by the way, that the Tax Foundation recently estimated that the revenue-maximizing corporate tax rate is 14 percent.
So if the anti-Apple lynch mob actually wants more revenue, they should learn a Laffer Curve lesson and slash the corporate tax rate.*
Given this track record, I don’t think anybody could accuse me of being an anti-big-business activist.
But I do get very irritated when politically connected corporations use cronyism to guard their interests at the expense of other taxpayers and the overall economy.
That’s why, in this interview with Larry Kudlow on CNBC, I spend most of the time advocating for pro-growth policies, but near the end I slam corporate CEOs from the Business Roundtable for endorsing higher tax rates for small businesses.
For those who don’t follow the intricacies of business taxation, most small companies – such as sole proprietorships, partnerships, and S-corps – are taxed through the personal income tax.
So it’s a bit outrageous when corporate CEOs endorse higher personal income tax rates, knowing that their smaller competitors will get reamed.
I don’t think they’re doing it just for that purpose. As I say in the interview, it’s more a case of feeding somebody else to the sharks out of a narrow, short-term sense of self preservation.
But this also explains why I am such a strong believer in the no-tax-hike pledge. Once “revenue enhancement” is part of the discussion, taxpayers lose their sense of unity and begin to throw each other overboard.
And this isn’t just something that happens among Washington insiders. I’ve previously explained that ordinary Americans get very tempted to support class-warfare tax hikes once they realize someone is going to be raped and pillaged by Washington.
This is why, to discourage talk of tax hikes (especially by crony capitalists), I am willing to make a special exception and support an excise tax on CEO salaries. Anybody who endorses higher taxes should be first in line for the guillotine.
P.S. I apologize for the poor quality of the video. The guy at Cato who does these things is out for the holidays, and you see the suboptimal results when I dabble in technical things. And since I’m acknowledging my shortcomings, I should have said “obediently” instead of “appropriately” at the 3:44 mark.
Today, we’re going to look at the issue of tax reform. The focus will be the flat tax, but this analysis applies equally to national sales tax systems such as the Fair Tax.
There are three equally important features of tax reform.
A low tax rate – This is the best-known feature of tax reform. A low tax rate is designed to minimize the penalty of work, entrepreneurship, and productive behavior.
No double taxation of saving and investment – All major tax reform plans, such as the flat tax and national sales tax, get rid of the tax bias against income that is saved and invested. The capital gains tax, double tax on dividends, and death tax are all abolished. Shifting to a system that taxes economic activity only one time will boost capital formation, thus facilitating an increase in productivity and wages.
No distorting loopholes – With the exception of a family-based allowance designed to protect lower-income people, the main tax reform plans get rid of all deductions, exemptions, shelters, preference, exclusions, and credits. By creating a neutral tax system, this ensures that decisions are made on the basis of economic fundamentals, not tax distortions.
All three features are equally important, sort of akin to the legs of a stool. Using the flat tax as a model, this video provides additional details.
One thing I don’t mention in the video is that a flat tax is “territorial,” meaning that only income earned in the United States is taxed. This common-sense rule is the good-fences-make-good-neighbors approach. If income is earned by an American in, say, Canada, then the Canadian government gets to decide how it’s taxed. And if income is earned by a Canadian in America, then the U.S. government gets a slice.
It’s also worth emphasizing that the flat tax protects low-income Americans from the IRS. All flat tax plans include a fairly generous “zero-bracket amount,” which means that a family of four can earn (depending on the specific proposal) about $25,000-$35,000 before the flat tax takes effect.
Proponents of tax reform explain that there are many reasons to junk the internal revenue code and adopt something like a flat tax.
Improve growth – The low marginal tax rate, the absence of double taxation, and the elimination of distortions combine to create a system that minimizes the penalties on productive behavior.
Boost competitiveness – In a competitive global economy, it is easy for jobs and investment to cross national borders. The right kind of tax reform can make America a magnet for money from all over the world.
Reduce corruption – Tax preferences and penalties are bad for growth, but they are also one of the main sources of political corruption in Washington. Tax reform takes away the dumpster, which means fewer rats and cockroaches.
Promote simplicity – Good policy has a very nice side effect in that the tax system becomes incredibly simple. Instead of the hundreds of forms required by the current system, both households and businesses would need only a single postcard-sized form.
Increase privacy – By getting rid of double taxation and taxing saving, investment, and profit at the business level, there no longer is any need for people to tell the government what assets they own and how much they’re worth.
Protect civil liberties – A simple and fair tax system eliminates almost all sources of conflict between taxpayers and the IRS.
All of these benefits also accrue if the internal revenue code is abolished and replaced with some form of national sales tax. That’s because the flat tax and sales tax are basically different sides of the same coin. Under a flat tax, income is taxed one time at one low rate when it is earned. Under a sales tax, income is taxed one time at one low rate when it is spent.
Neither system has double taxation. Neither system has corrupt loopholes. And neither system requires the nightmarish internal revenue service that exists to enforce the current system.
Last but not least, let’s deal with the silly accusation that the flat tax is a risky and untested idea. This video is a bit dated (some new nations are in the flat tax club and a few have dropped out), but is shows that there are more than two dozen jurisdictions with this simple and fair tax system.
P.S. Fundamental tax reform is also the best way to improve the healthcare system. Under current law, compensation in the form of fringe benefits such as health insurance is tax free. Not only is it deductible to employers and non-taxable to employees, it also isn’t hit by the payroll tax. This creates a huge incentive for gold-plated health insurance policies that cover routine costs and have very low deductibles. This is a principal cause (along with failed entitlement programs such as Medicare and Medicaid) of the third-party payer crisis. Shifting to a flat tax means that all forms of employee compensation are taxed at the same low rate, a reform that presumably over time will encourage both employers and employees to migrate away from the inefficient over-use of insurance that characterizes the current system. For all intents and purposes, the health insurance market presumably would begin to resemble the vastly more efficient and consumer-friendly auto insurance and homeowner’s insurance markets.
P.P.S. If you want short and sweet descriptions of the major tax reform plans, here are four highly condensed descriptions of the flat tax, national sales tax, value-added tax, and current system.
In this clever document, they reveal that athletes could face a tax bill – to those wonderful folks at the IRS – of nearly $9,000 thanks to America’s unfriendly worldwide tax system.
US medal-winning athletes at the Olympics have to pay tax on their prize money – something which is proving controversial in the US. But why are athletes from the US taxed when others are not? The US is right up there in the medals table, and has produced some of the finest displays in the Olympics so far. … But not everyone is happy to hear that their Olympic medal-winning athletes are being taxed on their medal prize money. Athletes are effectively being punished for their success, argues Florida Senator Marco Rubio, a Republican, who introduced a bill earlier this week that would eliminate tax on Olympic medals and prize money. …This, he said, is an example of the “madness” of the US tax system, which he called a “complicated and burdensome mess”.
It’s important to understand, though, that this isn’t a feel-good effort to create a special tax break. Instead, Senator Rubio is seeking to take a small step in the direction of better tax policy.
More specifically, he wants to move away from the current system of “worldwide” taxation and instead shift to “territorial” taxation, which is simply the common-sense notion of sovereignty applied to taxation. If income is earned inside a nation’s borders, that nation gets to decided how and when it is taxed.
In other words, if U.S. athletes earn income competing in the United Kingdom, it’s a matter for inland revenue, not the IRS.
Incidentally, both the flat tax and national sales tax are based on territorial taxation, and most other countries actually are ahead of the United States and use this approach. The BBC report has further details.
The Olympic example highlights what they regard as the underlying problem of the US’ so-called “worldwide” tax model. Under this system, earnings made by a US citizen abroad are liable for both local tax and US tax. Most countries in the world have a “territorial” system of tax and apply that tax just once – in the country where it is earned. With the Olympics taking place in London, the UK would, in theory, be entitled to claim tax on prize money paid to visiting athletes. But, as is standard practice for many international sporting events, it put in place a number of tax exemptions for competitors in the Olympics – including on any prize money. That means that only athletes from countries with a worldwide tax system on individual income are liable for tax on their medals. And there are only a handful of them in the world, says Daniel Mitchell, an expert on tax reform at the Cato Institute, a libertarian think tank – citing the Philippines and Eritrea as other examples. But with tax codes so notoriously complicated, unravelling which countries would apply this in the context of Olympic prize money is a tricky task, he says. Mitchell is a critic of the worldwide system, saying it effectively amounts to “double taxation” and leaves the US both at a competitive disadvantage, and as a bullyboy, on the world stage. “We are the 800lb (360kg) gorilla in the world economy, and we can bully other nations into helping enforce our bad tax law.”
To close out this discussion, statists prefer worldwide taxation because it undermines tax competition. This is because, under worldwide taxation, individuals and companies have no ability to escape high taxes by shifting activity to jurisdictions with better tax policy.
Indeed, this is why politicians from high-tax nations are so fixated on trying to shut down so-called tax havens. It’s difficult to enforce bad tax policy, after all, if some nations have strong human rights policies on privacy.
For all intents and purposes, a worldwide tax regime means the government gets a permanent and global claim on your income. And without having to worry about tax competition, that “claim” will get more onerous over time.
P.S. Just because a nation has a right to tax foreigners who earn income inside its borders, that doesn’t mean it’s a good idea to go overboard. The United Kingdom shows what happens if politicians get too greedy and Spain shows what happens if marginal tax rates are reasonable.
Mitt Romney is being criticized for supporting “territorial taxation,” which is the common-sense notion that each nation gets to control the taxation of economic activity inside its borders.
President Obama raised…his proposals for tax credits for manufacturers in the United States to encourage the creation of new jobs. He said this was greatly preferable to Mitt Romney’s support for a so-called territorial tax system, in which the overseas profits of American corporations would escape United States taxation altogether. It’s not surprising that large multinational corporations strongly support a territorial tax system, which, they say, would make them more competitive with foreign rivals. What they don’t say, and what Mr. Obama stressed, is that eliminating federal taxes on foreign profits would create a powerful incentive for companies to shift even more jobs and investment overseas — the opposite of what the economy needs.
Since even left-leaning economists generally agree that tax credits for manufacturers are ineffective gimmicks proposed for political purposes, let’s set that topic aside and focus on the issue of territorial taxation.
Or, to be more specific, let’s compare the proposed system of territorial taxation to the current system of “worldwide taxation.”
Worldwide taxation means that a company is taxed not only on it’s domestic earnings, but also on its foreign earnings. Yet the “foreign-source income” of U.S. companies is “domestic-source income” in the nations where those earnings are generated, so that income already is subject to tax by those other governments.
The U.S. system seeks to mitigate this bad effect by allowing American-based companies a “credit” for some of the taxes they pay to foreign governments, but that system is very incomplete.
And even if it worked perfectly, America’s high corporate tax rate still puts U.S. companies in a very disadvantageous position. If an American firm, Dutch firm, and Irish firm are competing for business in Ireland, the latter two only pay the 12.5 percent Irish corporate tax on any profits they earn. The U.S. company also pays that tax, but then also pays an additional 22.5 percent to the IRS (the 35 percent U.S. tax rate minus a credit for the 12.5 percent Irish tax).
In an attempt to deal with this self-imposed disadvantage, the U.S. tax system also has something called “deferral,” which allows American companies to delay the extra tax (though the Obama Administration has proposed to eliminate that provision!).
Romney is proposing to put American companies on a level playing field by going in the other direction. Instead of immediate worldwide taxation, as Obama wants, he wants to implement territorial taxation.
But what about the accusation from the New York Times that territorial taxation “would create a powerful incentive for companies to shift even more jobs and investment overseas”?
Well, they’re somewhat right…and they’re totally wrong. Here’s what I’ve said about that issue.
If a company can save money by building widgets in Ireland and selling them to the US market, then we shouldn’t be surprised that some of them will consider that option. So does this mean the President’s proposal might save some American jobs? Definitely not. If deferral is curtailed, that may prevent an American company from taking advantage of a profitable opportunity to build a factory in some place like Ireland. But U.S. tax law does not constrain foreign companies operating in foreign countries. So there would be nothing to prevent a Dutch company from taking advantage of that profitable Irish opportunity. And since a foreign-based company can ship goods into the U.S. market under the same rules as a U.S. company’s foreign subsidiary, worldwide taxation does not insulate America from overseas competition. It simply means that foreign companies get the business and earn the profits.
Getting rid of deferral doesn’t solve any problems, as I explain in this video. Indeed, Obama’s policy would make a bad system even worse.
But, it’s also important to admit that shifting to territorial taxation isn’t a complete solution. Yes, it will help American-based companies compete for market share abroad by creating a level playing field. But if policy makers want to make the United States a more attractive location for jobs and investment, then a big cut in the corporate tax rate should be the next step.
I went through the trouble of a point-by-point response because her article was quite reasonable and focused on some key moral and philosophical issues (rather than the demagoguery I normally have to deal with when people on the left reflexively condemn low-tax jurisdictions).
She responded to my response, and she raised additional points that deserve to be answered.
So here we go again. Let’s go through Ann’s article and see where we agree and disagree.
A couple of weeks ago, I wrote a blog post criticizing the philosophies of Dan Mitchell, a libertarian scholar from the Cato Institute. I asked for a “thoughtful discussion” and I got it—both from the comments section of our blog and from Dan himself. On his own blog, Dan replied with a thought-provoking point-by-point critique of my piece.
It has been a polite discussion, which is good because readers get to see that we don’t really disagree on facts. Our differences are a matter of philosophy, as Ann also acknowledges.
Dan made several interesting points in his rebuttal. As much as I’d like to take on the whole post right now, my reply would be far too long and I don’t think our readers would appreciate a blog post that approaches a novella. Rather I’ll focus on a couple of his comments that I find interesting on a philosophical level (there were many) and which demand a continued conversation because, I believe, they are the basis of our differences. We’ll start with a rather offhand remark in which Dan indirectly refers to financial privacy as a human right. This is an argument we’ve heard before. And it is worth some exploration.Unless I am very much mistaken, Dan’s belief that financial privacy is a human right arises out of his fundamental value of freedom. My disagreement with Dan, therefore, does not arise from a difference in the desire to promote human rights (I believe we both do), but rather in the different relative weights we each place on the value of privacy, which Dan (I’m supposing) would call an extension of freedom.
I wouldn’t argue with her outline, though I think it is incomplete. I’m a big fan of privacy as a principle of a civil and just society, but I also specifically support financial privacy as a means to an end of encouraging better tax policy. Simply stated, politicians are much more likely to reduce or eliminate double taxation if they feel such taxes can’t be enforced and simply put a country in a much less competitive position.
Okay, so on to [my] answer of the subject of this post. Privacy—and financial privacy by extension—is important. But is it a human right? That’s a big phrase; one which humanity has no business throwing around, lest it go the way of “[fill in blank]-gate” or “war on [whatever].” And as Dan himself points out, governments have a way of fabricating human rights—apparently some European courts have ruled that free soccer broadcasts and owning a satellite dish are a human rights—so it’s important that we get back to [philosophical] basics and define the term properly. The nearly universally accepted definition of “human rights” was established by the Universal Declaration of Human Rights, which the United Nations adopted in 1948. According to the UN, “human rights” are those “rights inherent to all human beings,” regardless of “nationality, place of residence, sex, national or ethnic origin, colour, religion, language, or any other status.” The Declaration includes 30 Articles which describe each of those rights in detail. “Financial privacy” per se is not explicitly a human right in this document, but “privacy” is, and I think it’s reasonable to include financial privacy by extension. But privacy is defined as a fundamental, not an absolute, human right. Absolute rights are those that there is never any justification for violating. Fundamental freedoms, including privacy and freedom from detention, can be ethically breached by the government, as long as they authorized by law and not arbitrary in practice. The government therefore has the right to regulate fundamental freedoms when necessary.
I’m not sure how to react. There are plenty of admirable provisions in the U.N.’s Universal Declaration of Human Rights, but there are also some nonsensical passages – some of which completely contradict others.
Everyone hopefully agrees with the provisions against slavery and in favor of equality under law, but Article 25 of the U.N. Declaration also includes “the right to a standard of living adequate for the health and well-being of himself and of his family, including food, clothing, housing and medical care and necessary social services.”
That sounds like a blank check for redistributionism, similar to the statism that I experienced when I spoke at the U.N. last month, and it definitely seems inconsistent with the right of property in Article 17.
I guess what I’m trying to say is that I don’t care that the U.N. Universal Declaration of Human Rights includes a “right to privacy” because I don’t view that document as having any legal or moral validity. I don’t know whether it’s as bad as the European Union’s pseudo-constitution, but I do know that my support for privacy is not based on or dependent on a document from the United Nations.
Getting back to Ann’s column, she confirms my point that you can’t protect property rights for some people while simultaneously giving other people a claim on their output.
That’s important because it means, that when it comes to freedom and privacy, we need to make choices. We can’t always have them all at once. To use a hideously crude example that gets back to the issue of tax evasion, in a developing country, a rich person’s right to financial privacy might be at odds with a poor person’s right to “a standard of living adequate for the health and well-being of himself and of his family.”
For those who are not familiar with the type of discussion, it is the difference between “negative rights” promoted by classical liberals, which are designed to protect life, liberty, and property from aggression, and the “positive rights” promoted by the left, which are designed to legitimize the redistributionist state.
Tom Palmer has a good discussion of the topic here, and he notes that “positive rights” create conflict, writing that, “…classical liberal ‘negative’ rights do not conflict with each other, whereas ‘positive’ rights to be provided with things produce many conflicts. If my ‘right to health care’ conflicts with a doctor’s ‘right to liberty,’ which one wins out?”
Continuing with Ann’s article, she says values conflict with one another, though that’s only if true if one believes in positive rights.
I started this post with a discussion of values, because at the core that’s what we’re talking about. Values are relative, individual, and often in conflict with one another. And they define how we rank our choices between human rights. Dan values freedom, perhaps above most else. He might argue that economic freedom would lead to an enrichment of human rights at all levels, but he probably wouldn’t disagree that that thesis remains untested. My views are a little more complicated because I don’t get to enjoy the (albeit appealing and consistent) simplicity of libertarianism.
I’m tempted to say, “C’mon in, Ann, the water’s fine. Libertarianism is lots of fun.” To be a bit more serious, libertarianism is simple, but it’s not simplistic. You get to promote freedom and there’s no pressure to harass, oppress, or pester other people.
As my colleague David Boaz has stated, “You could say that you learn the essence of libertarianism — which is also the essence of civilization – in kindergarten: don’t hit other people, don’t take their stuff, keep your promises.”
The world would be a lot better if more people rallied to this non-coercive system.
One more point. Dan mentioned he does “fully comply” with the “onerous demands imposed on [him] by the government.” But as Dan insinuates, irrespective of an individual’s personal values, those demands are not optional. In the United States, we have the luxury of electing a group of individuals to represent our collective values. Together those people make a vision for the country that reflects our ideals. And then, we all accept it. If our country got together and decided to value freedom above all else, we would live in a world that looks a lot like Dan’s utopia. But, frankly, it hasn’t. So we respect our tax code out of a respect for the vision of our country. Dan has the right to try to shape that vision, as do I. Neither of us has the right to violate it.
We like what our Founding Fathers devised, a constitutional republic where certain rights were inalienable and protected by the judicial system, regardless of whether 90 percent of voters want to curtail our freedoms.
Ann, as you can see from her final passage, does not agree.
That, at is heart, is my problem with both tax evasion and tax avoidance. Neither lines up with the spirit of our collective compact; although the latter is not necessarily reflected in the official laws on the books. I’m not saying tax avoiders should be thrown in jail; they’ve done nothing illegal. I’m saying the regulations that confine us should line up with the vision we’ve created and the values we’ve agreed upon. If that vision is Dan’s, I’ll accept it. But I’m glad he’ll (begrudgingly) accept ours too.
I’m not automatically against having a “collective compact.” After all, that’s one way of describing the American Constitution. But I will return to my point about America’s founders setting up that system precisely because they rejected majoritarianism.
So what does all this mean? Probably nothing, other than the less-than-remarkable revelation that Ann and I have different views on the legitimate role(s) of the federal government.
Since I want to restrain the size and scope of government (not only in America, but elsewhere in the world) and avert future Greek-style fiscal nightmares, that means I want tax competition. And, to be truly effective, that means tax havens.
Last year, I came up with a saying that “Bad Government Policy Begets More Bad Government Policy” and labeled it “Mitchell’s Law” during a bout of narcissism.
The latest example of this process involves the Foreign Account Tax Compliance Act, a piece of legislation that was imposed in 2010 because politicians assumed they could collect lots of tax revenue every single year by getting money from so-called tax havens.
This FATCA law basically imposes a huge regulatory burden on all companies that have international transactions involving the United States, and all foreign financial institutions that want to invest in the United States. It is such a disaster that even the New York Times has taken notice, recently reporting that:
…the Foreign Account Tax Compliance Act, or Fatca, as it is known, is now causing alarm among businesses outside the United States that fear they will have to spend billions of dollars a year to meet the greatly increased reporting burdens, starting in 2013. American expatriates also say the new filing demands are daunting and overblown. …The law demands that virtually every financial firm outside the United States and any foreign company in which Americans are beneficial owners must register with the Internal Revenue Service, check existing accounts in search of Americans and annually declare their compliance. Noncompliance would be punished with a withholding charge of up to 30 percent on any income and capital payments the company gets from the United States. …The I.R.S., under pressure from angry and confused financial officials abroad, has extended the deadline for registration until June 30, 2013, and is struggling to provide more detailed guidance by the end of this year. But beginning in 2012, many American expatriates — already the only developed-nation citizens subject to double taxation from their home government — must furnish the I.R.S. with detailed personal information on their overseas assets. …He said his sense was that Fatca required companies “to prove your innocence.” …Then there is a question of reciprocity: Would the United States accept the same demands for information from the tax authorities in other countries — say Russia or China?
It’s worth noting at this point that FATCA only exists because of bad tax law. If the United States had a simple and fair flat tax, there would be no double taxation of income that is saved and invested. As such, the IRS wouldn’t have any reason to care whether Americans had bank accounts and/or investments in places such as London, Hong Kong, and Panama.
But as is so often the case with politicians, they choose not to fix bad policy and instead decide to impose one bad policy on top of another. Hence, the crowd in Washington enacting FATCA and sending the IRS on a jihad.
By the way, the New York Times was late to the party. Many other news outlets already have noticed that the United States is about to suffer a big self-inflicted economic wound.
Indeed, what’s remarkable about Obama’s FATCA policy is that the world is now united. But it’s not united for something big and noble, such as peace, commerce, prosperity, or human rights. Instead, it’s united in opposition to intrusive, misguided, and foolish American tax law.
Let’s look at some examples.
o From the United Kingdom, a Financial Times column warns that, “This summer, the senior management of one of Asia’s largest financial groups is quietly mulling a potentially explosive question: could it organise some of its subsidiaries so that they could stop handling all US Treasury bonds? …what is worrying this particular Asian financial group is…a new law called the Foreign Account Tax Compliance Act…the new rules leave some financial officials fuming in places such as Australia, Canada, Germany, Hong Kong and Singapore. Little wonder. Never mind the fact that implementing these measures is likely to be costly. …Hence the fact that some non-US asset managers and banking groups are debating whether they could simply ignore Fatca by creating subsidiaries that never touch US assets at all. “This is complete madness for the US – America needs global investors to buy its bonds,” fumes one bank manager. “But not holding US assets might turn out to be the easiest thing for us to do.”
o From India, the Economic Times reports that, “FATCA, or the Foreign Account Tax Compliance Act, will require overseas banks to report U.S. clients to the Internal Revenue Service, but its loose definition of who is a U.S. citizen will create a huge administrative burden and could push non-residents to slash their U.S. exposure, some bankers say. …Bankers say the scheme will be extremely costly to implement, and some say that as the legislation stands, any bank with a client judged to be a U.S. citizen will be also obliged to supply documentation on all other clients. “FATCA will cost 10 times to the banks than it will generate for the IRS. It is going to be extremely complicated,” said Yves Mirabaud, managing partner at Mirabaud & Cie and Swiss Bankers Association board member.”
o Discussing the impact in Canada, Reuters notes, “The new regulation has drawn criticism from the world’s banks and business people about its reach and costs. ..”Hundreds of millions of dollars spent on developing compliance processes to target Canadian citizens would not be a useful exercise, and they are, for the most part, people who actually have no tax liabilities because they do not earn income in the United States,” [Canadian Finance Minister] Flaherty said.”
o A Taiwan news outlet said, “Taiwan’s domestic banks will reportedly reduce holdings of American bonds worth an estimated NT$100 billion (US$3.33 billion) due to the U.S. government’s recent decision to impose 30% tax on foreign-investment income in U.S. securities as bonds. Taiwan’s eight government-linked banks reportedly hold U.S. financial products worth over US$2 billion… On April 8, 2011, the U.S. government issued a notice advising foreign financial institutions to meet certain obligations under the Foreign Account Tax Compliance Act (FATCA), under which foreign financial institutions are subject to complex reporting rules related to their U.S. accounts.”
o From the Persian Gulf, the Bahrain Daily News noted, “A US law…has drawn the criticism of the world’s banks and business people, who dismiss it as imperialist and “the neutron bomb of the global financial system.” The unusually broad regulation, known as FATCA, or the Foreign Account Tax Compliance Act, makes the world’s financial institutions something of an extension of the tax-collecting Internal Revenue Service – something no other country does for its tax regime. …Even the European Commission has objected, and experts say other countries may create their own FATCA-style regimes for US banks or withdraw from US capital markets. In a barrage of letters to the Treasury, IRS and Congress, opponents from Australia to Switzerland to Hong Kong assail FATCA’s application to a broad swath of institutions and entities.”
o A story from Singapore finds, “For many years, thousands of foreign investors have put their money into American shares or other investments. Now, however, a somewhat obscure law called the Foreign Account Tax Compliance Act (FATCA) may make investments in the United States for everyone, from billionaires to the man on the street, here in Singapore far less attractive. …some banks or investment managers may advise customers not to invest in the US. … “private bankers are publicly advising their clients to clear their portfolios of all US securities”. A fund manager here told me his company is also advising clients to avoid US investments, and other companies may similarly start telling large clients as well as smaller ones the same story. Investors could then see recommendations not to invest in the US, and they may put their money elsewhere. …As consulting firm PwC said, “some institutions could decide that complying with the due diligence and verification provisions may not be cost effective” so they may stop making investments in the US. Banks or other asset managers may similarly decide it is easier not to offer US investments than to try and comply with the FATCA.”
o From Switzerland, a story “about the backlash from United States expats and the financial sector to the Foreign Account Tax Compliance Act (FATCA)” reports that, “Growing numbers of American expatriates are renouncing their US citizenship over a controversial new tax law and ever more burdensome fiscal and reporting obligations. …banks and business people who are supposed to enforce it on behalf of the US tax man are worried about its costly administrative burden… it’s just too expensive. The consequence will be that they cut out US clients and stop investing in the US. …Three or four years ago no one talked about renouncing nationality – now it’s an open discussion. That’s a major shift in mentality.
o Writing about the reaction from Europe, one columnist noted, “FATCA encourages foreign financial institutions to limit their exposure to U.S. assets. In a joint letter to the Treasury and the IRS, the European Banking Federation and the Institute of International Bankers, which together represent most of the non-U.S. banks and securities firms that would be affected by FATCA, warned that “many [foreign financial institutions], particularly smaller ones or those with minimal U.S. investments or U.S. customers, will opt out of U.S. securities rather than enter into a direct contractual agreement with a foreign tax authority (the IRS) that imposes substantial new obligations and the significant reputational, regulatory, and financial risks of potentially failing those obligations.” A widespread divestment of U.S. securities by institutions seeking to avoid the burdens of FATCA could have real and harmful effects on the U.S. economy.”
These press excerpts help demonstrate the costs of FATCA, but what about the benefits? After all, maybe the law will lead to lots of good results that offset the high regulatory costs and lost investment for the American economy.
Well, the only “benefit” anybody had identified is that FATCA will transfer more money from the productive sector of the economy to the government. Indeed, Obama argued during the 2008 campaign that cracking down on “tax havens” with proposals such as FATCA would give politicians lots of additional money to spend.
But when the legislation was approved in 2010, the Joint Committee on Taxation estimated that the new law would raise only $8.7 billion over 10 years, not the $100 billion that Obama claimed could be collected every single year. This video has some of the damning details.
One final point demands attention.
While it appears that the rest of the world is against FATCA, that’s not completely true. Some international bureaucrats in Paris, funded by American tax dollars, actually want the rest of the world to adopt the same Orwellian system. Here’s a blurb from the New York Times story.
Jeffrey Owens, a tax expert at the Organization for Economic Cooperation and Development, said catching tax evaders was “a concern that many member countries share.” If countries could agree to new global reporting standards for exchanging information, he said, then “maybe there’s a way forward.”
In other words, the pinhead bureaucrats at the OECD think FATCA’s such a swell idea that they want to create a global network of tax police. So not only would America erode the sovereignty of other nations because of our bad tax law, but those other nations would be able to impose their bad tax law on income earned in America!
And just in case you think that’s just irresponsible demagoguery, it’s already beginning to happen. Check out this IRS regulation, proposed by the Obama Administration, that would require American banks to put foreign law above American law.
I don’t often have reason to praise the White House. But the Administration occasionally winds up fighting on the right side when dealing with the statists on the other side of the Atlantic Ocean.
And now it’s time to praise the White House again. In this case, they are fighting against a proposal by the European Union to impose an emissions tax on airliners. And even though the proposed tax is similar to the cap-and-trade scheme supported by Obama, the Administration is on the right side, as noted in this AP story.
The House voted Monday to exclude U.S. airlines from an emissions cap-and-trade program that the European Union plans to impose on all airlines flying to and from the continent beginning next year. With the legislation, which passed by voice vote, lawmakers joined the airline industry and the Obama administration in opposing the EU Emissions Trading Scheme scheduled to go into effect on Jan. 1. The bill now goes to the Senate, where there is currently no companion legislation. The measure directs the transportation secretary to prohibit U.S. carriers from participating in the program if it is unilaterally imposed. It also tells other federal agencies to take steps necessary to ensure that U.S. carriers are not penalized by the emissions control scheme. …The U.S. aviation industry says the cost between 2012 and 2020 could hit $3.1 billion. It says it is unfair that a flight from the United States, for example from Los Angeles, would have to pay for emissions for all parts of flights to Europe, including time spent over the United States and the Atlantic. “It’s a tax grab by the European Union,” Transportation Committee Chairman John Mica, R-Fla., said. “The meter starts running the minute the plane departs from any point in the U.S. until it reaches Europe.” …That drew fire from Krishna R. Urs, the U.S. deputy assistant secretary of State for transportation affairs, who repeated the U.S.’s “strong legal and policy objections to the inclusion of flights by non-EU carriers” in the EU program.
Individual nations have the right, of course, to impose tax on activities that take place inside national borders. And a group of nations, such as the European Union, has the right to impose taxes on things that take place within their combined borders.
In this case, however, the EU wants to levy the tax based on miles flown inside the United Stats and over international waters. This type of extraterritorial tax grab should be strongly resisted.
There’s been considerable attention to the news that the IRS has only managed to grab 2.4 percent of Google’s overseas income. As this Bloomberg article indicates, many statists act as if this is a scandal (including a morally bankrupt quote from a Baruch College professor who thinks a company’s lawful efforts to lower its tax liability is “evil” and akin to robbing citizens).
Google Inc. cut its taxes by $3.1 billion in the last three years using a technique that moves most of its foreign profits through Ireland and the Netherlands to Bermuda. Google’s income shifting — involving strategies known to lawyers as the “Double Irish” and the “Dutch Sandwich” — helped reduce its overseas tax rate to 2.4 percent, the lowest of the top five U.S. technology companies by market capitalization, according to regulatory filings in six countries. …Google, the owner of the world’s most popular search engine, uses a strategy that…takes advantage of Irish tax law to legally shuttle profits into and out of subsidiaries there, largely escaping the country’s 12.5 percent income tax. The earnings wind up in island havens that levy no corporate income taxes at all. Companies that use the Double Irish arrangement avoid taxes at home and abroad as the U.S. government struggles to close a projected $1.4 trillion budget gap and European Union countries face a collective projected deficit of 868 billion euros. …U.S. Representative Dave Camp of Michigan, the ranking Republican on the House Ways and Means Committee, and other politicians say the 35 percent U.S. statutory rate is too high relative to foreign countries. …Google is “flying a banner of doing no evil, and then they’re perpetrating evil under our noses,” said Abraham J. Briloff, a professor emeritus of accounting at Baruch College in New York who has examined Google’s tax disclosures. “Who is it that paid for the underlying concept on which they built these billions of dollars of revenues?” Briloff said. “It was paid for by the United States citizenry.”
Congressman Dave Camp, the ranking Republican (and presumably soon-to-be Chairman) of the House tax-writing committee sort of understands the problem. The article mentions that he wants to investigate whether America’s corportate tax rate is too high. The answer is yes, of course, as explained in this video, but the bigger issue is that the IRS should not be taxing economic activity that occurs outside U.S. borders. This is a matter of sovereignty and good tax policy. From a sovereignty persepective, if income is earned in Ireland, the Irish government should decide how and when that income is taxed. The same is true for income in Bermuda and the Netherlands.
From a tax policy perspective, the right approach is “territorial” taxation, which is the common-sense notion of only taxing activity inside national borders. It’s no coincidence that all pro-growth tax reform plans, such as the flat tax and national sales tax, use this approach. Unfortunately, America is one of the world’s few nations to utilize the opposite approach of “worldwide” taxation, which means that U.S. companies face the competitive disadvantage of having two nations tax the same income. Fortunately, the damaging impact of worldwide taxation is mitigated by a policy known as deferral, which allows multinationals to postpone the second layer of tax.
Perversely, the Obama Administration wants to undermine deferral, thus putting American multinationals at an even greater disadvantage when competing in global markets. As this video explains, that would be a major step in the wrong direction. Instead, policy makers should junk America’s misguided worldwide system and replace it with territorial taxation.
The overall fiscal burden in the United States may be lower than it is in Europe, but there are some features of the internal revenue code that are far worse than what can be found on the other side of the Atlantic. America has a “worldwide” tax system, for instance, which means that our government interferes with the sovereignty of other nations by taxing income earned by Americans inside their borders. Good tax policy, by contrast, relies on the “territorial” principle of only taxing income earned inside national borders – and every other developed nation uses this system. Not surprisingly, both the flat tax and national sales tax are based on this common-sense approach. If an American earns income in Hong Kong, it should be up to Hong Kong to decide how that money gets taxed. Likewise, if a German earns money in the United States, then he is fair game for the IRS. There’s an old saying that good fences make good neighbors, and territorial taxation is the fiscal policy equivalent of this sound rule. Not surprisingly, however, other nations want to mimic this horrible feature of the American tax code. The Financial Times is even urging European nations to jointly make that misguided choice. Fortunately, it is almost certain that some nations will refuse to join in such a statist cartel:
The US is unique in using citizenship in determining whether a person’s worldwide income is subject to taxation. Most countries do not impose tax on their citizens who are not resident within their borders – apart from any income that is sourced in that country. But the US system has much to commend it. After all, any citizen of a country enjoys the implicit legal and physical protection it affords. …provision is made to avoid double taxation. Moreover, there is an exit for individuals who do not accept it as they can renounce their citizenship and move elsewhere. But perhaps the best thing about it is that a worldwide system linked to citizenship is simple and easy to understand. Most American citizens do accept it, although more have handed back their passports recently. It would be hard for, say, the UK or Germany to introduce such a system unilaterally. There would be the risk of citizens jurisdiction-hopping by swapping one passport for another within a common economic area. But all European Union states could introduce the same rule. That would not be impossible. After all, EU countries already co-ordinate their policies on savings taxes and their tax authorities exchange information.
