Feeds:
Posts
Comments

What do cigarettes and capital gains have in common?

Well, they both start with the same letter, so maybe the Cookie Monster could incorporate them into his favorite song, but I’m thinking about something else. Specifically, both cigarettes and capital gains tell us something important about tax policy, the Laffer Curve, and the limits of political bullying.

In both cases, there are folks on the left who disapprove of these two “c” words and want to penalize them with high tax rates.

But it turns out that both cigarettes and capital gains are moving targets, so the politicians are grossly mistaken if they think that punitive taxation will generate a windfall of revenue.

I’ve already discussed why it’s senseless to impose high tax rates on capital gains. Simply stated, people can avoid the tax by not selling assets.

This might not be an ideal way of managing one’s investments, and it certainly isn’t good for the economy if it discourages new investment and prevents people from shifting existing investments into more productive uses, but it’s very effective as a strategy for individuals to protect against excessive taxation.

We see something quite similar with cigarettes. People can simply choose to buy fewer smokes.

Michel Kelly-Gagnon of Canada’s Montreal Economic Institute explains why higher tobacco taxes are not a guaranteed source of revenue for the political class.

Tax increases do not in each and every case lead to increases in government revenues. …When taxes on the consumption of a good are too high, you can get to a point where taxable consumption decreases and government revenues diminish rather than increase. Or at any rate, they don’t increase as much as what would be expected given the tax increase. This phenomenon constrains government’s ability to levy taxes. …There have been numerous examples in Canada of excessive taxes having a negative impact on government revenues. As shown by my colleagues Jean-François Minardi and Francis Pouliot in a study published last January ., there’s been three “Laffer moments” when it comes to tobacco tax revenues in Quebec since 1976. Whenever the level of taxation exceeded $15 per carton, the proceeds of the tobacco taxes eventually diminished. These are no isolated incidents. Laffer shows that the theory is confirmed by the experience of Cyprus, Denmark, Germany, Great Britain, Greece, Ireland, Latvia, Portugal, and Sweden.

Here’s a chart from his column showing how tax revenue has dropped in Quebec when the tax burden became too onerous.

Michel then acknowledges that some people will be happy about falling revenue because it presumably means fewer smokers.

But that’s not necessarily true.

While it is true that some people are deterred from smoking by tax increases, this is not the case of all smokers. Some avoid taxes by buying contraband cigarettes. Tax increases have no effect on the health of these smokers.

And because the tax burden is so severe, the underground economy for cigarettes is booming.

The folks at Michigan’s Mackinac Center have some remarkable and thorough estimates.

Since 2008, Mackinac Center for Public Policy analysts have periodically published estimates of cigarette smuggling in 47 of the 48 contiguous states. The numbers are quite shocking. In 2012, more than 27 percent of all Michigan in-state consumption was smuggled. In New York, almost 57 percent of all cigarettes consumed in the state were also illicit. This has profound effects on the revenue generated by state (and sometimes local) government. …We estimate nationwide revenue losses due to cigarette smuggling at $5.5 billion, a statistic consistent with the Bureau of Alcohol, Tobacco, Firearms and Explosives’ $5 billion estimate for 2009.

Here are the numbers for each state.

If all this evidence isn’t enough for you, I also encourage a look at the impact of higher tobacco taxes in Ireland, the United States, and Bulgaria and Romania.

Heck, even the city of Washington, DC, serves as a perverse role model on the foolishness of over-taxation.

P.S. Since this column focuses on the Laffer Curve and tobacco taxation, I would be remiss if I didn’t point out that Art Laffer recently put together a Handbook of Tobacco Taxation – Theory and Practice.

P.P.S. Art implies, at least indirectly, that policy makers should set the tax rate on tobacco at the revenue-maximizing level. That is far better than having the rate above the revenue-maximizing level, to be sure, but it rubs me the wrong way. I will repeat to my final day on earth that the growth-maximizing tax rate is far superior to the revenue-maximizing tax rate.

P.P.P.S. I’m currently in Australia for a series of speeches on fiscal policy. But as you can see from this photo, the PotL and I managed to find time to act like shameless tourists.

Tourists in Oz

P.P.P.P.S. Since I’m imitating Crocodile Dundee in the photo, I should close by noting that Paul Hogan (the actor who played Crocodile Dundee) has been harassed by the Australian tax police.

I shared a chart back in February that shows how long it takes to double GDP based on different growth rates.

For instance, if the economy grows only 1 percent per year, it takes 70 years before the economy doubles. Think Italy or some other decrepit European welfare state.

But if the economy grows 4 percent annually, the economy doubles in less than 20 years. I’d point to Hong Kong and Singapore as examples, but they grow even faster.

The key point is that long-run growth is the key to a more prosperous society.

And that’s why the relatively weak growth of the Bush-Obama years is so troubling. Moreover, CNBC reports that some policy makers fret that the economy could be facing a period of prolonged stagnation.

Is there something seriously wrong with the economy? It’s a scary prospect, and a concern that’s gotten louder and louder over the past year. In economic circles, it goes by the alliterative name of “secular stagnation.” And it’s a phrase that Fed watchers are likely to hear more and more in the months ahead. Recent comments by the vice chairman of the Federal Reserve, Stanley Fischer, indicate questions within the central bank about whether the slow growth that has followed the recent recession could reflect, or at least could potentially morph into, longer-term issues within the economy. …The theory of secular stagnation was first developed by Alvin Hansen, who wondered in the midst of the Great Depression whether diminishing investment opportunities in a maturing economy would stunt economic growth and permanently prevent full employment—at least in the absence of robust government intervention… These theories have found a new life in the aftermath of the so-called Great Recession, as the U.S. is experiencing (albeit to a much less dramatic degree) slow growth over a relatively long time period.

I agree and disagree.

I agree that something is wrong with the economy.

But I disagree with the Keynesian interpretation that the economy’s weakness is because of some mysterious malady that requires government intervention.

Indeed, the problems exist because politicians are doing too much. If we want faster growth and more jobs, we need government to get out of the way.

This Michael Ramirez cartoon is one way of thinking about the issue.

But if you want more substance, Larry Kudlow and Steve Moore have some very sound analysis, which has been reprinted at Townhall.com.

They start by looking at the present-day Keynesian view.

…today many leading economists are throwing up their arms in frustration and assuring us that 2 percent growth is really the best we can do. Barack Obama’s former chief economist Larry Summers began this chant of “secular stagnation.” It’s a pessimistic message, and it’s now being echoed by Federal Reserve vice chair, Stanley Fischer. He agrees with Summers that slow growth in “labor supply, capital investment, and productivity” is the new normal that’s “holding down growth.” …Americans seem to be buying into this dreary assessment. A new Wall Street Journal poll finds that three out of four Americans think the next generation will be worse off than this generation. So long, American Dream.

But the problem isn’t the economy. Or it wouldn’t be if it wasn’t for all the meddling.

Larry and Steve explain that the crowd in Washington deserves blame for the economy’s sub-par performance.

…secular stagnation is all wrong. It’s a cover up for mistaken economic policies that began in the Bush years and intensified during the Obama administration. It would be hard to conceive of a worse set of policy prescriptions than the ones Larry Summers and his Keynesian collaborators have conjured up. We’ve had bailouts, massive spending-stimulus plans, tax increases on “the rich,” Obamacare, rudderless monetary policy that has collapsed the dollar, the Dodd-Frank bill, anti-carbon policies, a vast expansion of the welfare state, and on and on. …The blame falls on the White House and the Fed, and the discredited Keynesian model that government spending, debt, and cheap money are the way to restore growth. …the architects of this colossal policy failure are the same people who promised they would rebuild the U.S. economy “for the long term,” as Barack Obama put it in 2009. But they’re now blaming the stagnant economy on structural problems beyond their control.

Amen.

Just look at the data from the Minneapolis Fed to see how weak the economy is today compared to previous business cycles.

Fortunately, it’s not that difficult to restore growth.

We learned in the 1960s and 1980s how fast the economy can get back on its feet when policy mistakes are reversed. …The secular-stagnation argument is just an excuse for liberal policy failures. Keynesianism should now be recognized as snake oil.

By the way, I’d add the 1990s to that list.

There were some good reasons to dislike President Clinton, but America enjoyed more economic freedom as a result of the policies implemented during his presidency.

As a fiscal policy wonk, I’m especially happy about the spending restraint of the Clinton years.

P.S. Here are some good cartoons about Obamanomics.

I like to think that very few people despise Obamacare more than me.

I don’t like Obamacare because it’s a fiscal boondoggle.

I don’t like Obamacare because it’s bad healthcare policy.

I don’t like Obamacare because it generated an embarrassingly bad decision by the Supreme Court.

I don’t like Obamacare because it is driving people out of the labor force and into government dependency.

I don’t like Obamacare because it has increased corruption in Washington.

And I don’t like Obamacare because it further enriches and empowers Washington’s political class.

But I also like being honest and that means I’m willing to acknowledge that there’s one small part of Obamacare that will have a positive impact.

More specifically, the so-called Cadillac tax on expensive employer-provided health plans will slightly reduce the distortion in the tax code that encourages over-insurance and exacerbates the healthcare system’s pervasive third-party payer problem.

Indeed, we’re seeing some signs of this already, even though the tax preference isn’t capped until 2018. Here are some excerpts from a story published by Fox News, starting with a description of the law.

…companies desperate to avoid a 40 percent ObamaCare “Cadillac tax” are finding ways to shift the costs to workers. The so-called “Cadillac tax,” now four years away, will affect health plans that spend more than $10,200 per worker. “The excise tax, when it hits in 2018, will affect both employers and employees,”said Brian Marcotte, president of the National Business Group on Health.

Allow me to make an important correction before sharing other parts of the story.

Companies aren’t shifting costs to workers. The money currently spent on health insurance policies is part of total employee compensation.

Think of it this way. If a company hires you for a salary of $50,000 and also includes a $10,000 health insurance policy, what’s your total compensation?

If you give an answer other than $60,000, you’re either very bad at math or you have the logic skills of a politician.

So the story should have stated that the Cadillac tax is merely making workers more aware of costs that already exist.

Thanks for letting me vent. Now back to our main point, which is that the Cadillac tax discourages overinsurance, and this is already leading to some positive changes in the marketplace.

Employees will get incentives to reduce costs through such arrangements as wellness programs, including losing weight or stopping smoking. Meanwhile, employers are shifting workers into plans with higher deductibles, just as ObamaCare does in the health care exchanges, and using health savings accounts to help defray the costs.

I’m particularly happy that employers and employees are shifting to plans with higher deductibles. As I’ve explained before, health insurance should cover large, unanticipated costs, such as the onset of cancer or getting injured in a car wreck.

But it shouldn’t cover annual checkups, elective surgery, and other routine and/or predictable expenses.

And we have one other bit of good news. The tax isn’t going to raise nearly as much money as the politicians wanted!

The “Cadillac tax” was originally intended to take effect sooner, but unions and other groups convinced officials to delay it until 2018, reducing the anticipated income from $137 billion to $80 billion over ten years. But many analysts predict it will be far less than that. Henry Aaron of the Brookings Institution said, before then, it’s expected that most of the businesses that offer that form of insurance will back off and make the insurance less generous, so the tax won’t bite.” …if employers are able to avoid it and less than expected is collected, ObamaCare could fall tens of billions short in paying for itself as promised.

I should hasten to add, by the way, that I’m glad that Obamacare isn’t paying for itself since that simply means lots of taxes to accompany all the additional spending.

I’d be even happier, of course, if we could figure out how to get rid of all the spending as well.

Just in case folks are thinking I’ve gone soft, let’s close today’s post with some humor directed at the rest of Obamacare.

Since the IRS is a big part of Obamacare, here’s a particularly good bumper sticker that shares a line with the above poster.

Here’s a poster mocking the delightful fiscal impact of the law.

Though whoever put this together should have been careful of using The Joker.

I like this next poster since it highlights how politicians have exempted themselves from the law.

Last but not least, here’s Dr. Obama making a cameo appearance.

Ah, the IRS shows up again. Do you sense a theme?

And don’t forget the IRS bureaucrats want to be exempt from the law as well.

P.S. If you’re a glass-one-tenth-full person, here’s some other good news about Obamacare.

The polling data I shared last month about confused young people was a bit of a downer, so let’s look at three different polls that are a bit more encouraging.

First, I’m glad to see that many Americans feel that government and politicians are their leading cause of daily stress.

Here’s some of what the Washington Post reported on this poll.

…much of that emotional response is completely justified. As if it weren’t enough that our politicians are actively working to harm the global economy and otherwise failing to do their jobs or even show up for work in general, they’re also stressing everyone out with the astonishing breadth and depth of their incompetence. And since high stress is linked to shorter life expectancy, they are also literally killing us with their incompetence. In other words, thanks, Obama (and everyone in Congress too).

My job is to connect the dots so that people understand that the only way to reduce stress is to make government smaller.

And, for what it’s worth, that’s the best way to make government at least semi-competent.

Our second batch of polling numbers come from Rasmussen. I’ve shared research and data on the negative impact of redistribution spending (as illustrated by this powerful chart), but I figured most Americans didn’t understand that such programs trap people in dependency.

I’m glad to read that I’m wrong. In an article entitled, “49% Believe Government Programs Increase Poverty in America,” Rasmussen reports the following.

Most Americans still believe current government anti-poverty programs have no impact on poverty in this country or actually increase it. A new Rasmussen Reports national telephone survey finds that a plurality (44%) of American Adults still think the government spends too much on poverty programs.

The Rasmussen folks also have this encouraging bit of public opinion research.

A new Rasmussen Reports national telephone survey finds that 67% of American Adults think there are too many in this country who are dependent on the government for financial aid, up slightly from 64% in September of last year.

Our third set of polling numbers come from the periodic Reason-Rupe poll.

I’ll share several pieces of data, but here are the numbers I find most encouraging. Apparently most people realize that pro-growth policy is the right approach, not class warfare and redistribution.

In terms of economic policies, 74 percent of Americans would like Congress to focus on policies to promote economic growth, while 20 percent favor policies to reduce income inequality.

I guess I’m also happy about these results, though I can’t help but think that there are some very confused folks in the Tea Party.

Fifty-five percent of Americans tell Reason-Rupe they have a favorable opinion of capitalism. Meanwhile, 36 percent of those surveyed, including 33 percent of independents and 26 percent of self-described Tea Party supporters, have a favorable opinion of socialism.

I don’t even think Obama’s a socialist, so these ostensibly anti-Obama folks apparently favor even more government than our statist President. Go figure.

Last but not least, I should like this result, but I’m actually disturbed since the margin is much smaller than it should be.

When asked about the size of government, 54 percent of Americans favor a smaller government providing fewer services. Forty-two percent favor a larger government providing more services.

P.S. Remember when I warned that the one downside to personal retirement accounts is that future politicians might steal the money?

Well, it’s happened again according to Reuters, this time in Russia.

Russia’s government has approved a plan to use contributions to employees’ privately-managed pension funds to plug budget holes for a second year running. The move was confirmed by Labour Minister Maxim Topilin on Tuesday in comments published on the ministry’s website. It has been heavily criticised by some officials and analysts, who say it will hurt the pensions industry and financial markets.

P.P.S. I was beginning to feel a bit more positive about the Tory-led government in the United Kingdom, particularly after reading about some well-designed welfare reform, significant corporate tax cuts, and postal service privatization.

Then I read something awful. And what could be worse than imposing a death tax on people who are still alive.

Savers could be forced to pay inheritance tax while they are still alive, under a new drive against tax avoidance planned by the Government. …Under plans put out for consultation, HM Revenue & Customs would have powers to subject people minimising inheritance tax to “accelerated payment” laws, meaning they would be forced to pay up front if officials suspect them of using new schemes to avoid tax. Experts have warned that under the rules, taxpayers will be treated as “guilty until proven innocent”. …there will be concerns that innocent people could be investigated and made to pay large sums before they are able to defend themselves. …Economists, tax experts and Tory MPs have called for reform of the tax, warning that it predominantly hits middle-class families.

Shame on David Cameron for allowing this to happen. But I’m not surprised given the government’s track record.

And what else would you expect from a government that brainwashes children to rat out their parents and also puts despicable Orwellian ads on subways and trains?

I don’t like international bureaucracies because they generally push for policies that expand the burden of government and undermine economic growth.

But I recognize that there are some good people who work at these institutions and I’m always willing to acknowledge when they publish good research.

The IMF said that Greece had reached the tipping point where taxes were too high.

The World Bank put together a report showing how anti-money laundering regulations hurt the poor.

The United Nations acknowledged the Laffer-Curve insight that taxes can be too high.

The OECD admitted that income taxes undermine growth and that tax competition restrains the greed of the political class.

The European Central Bank found excessive government spending undermines economic performance.

We can now add some new research to that list. The World Bank has just published a new study highlighting the link between tax complexity and tax corruption.

You can peruse the entire report if you’re so inclined, but here are the key details from the abstract.

This paper seeks to find empirical evidence of a link between tax simplification and corruption in tax administration. …The study includes 104 countries from different income groups and regions of the world. The time period is 2002–12. The empirical findings support the existence of a significant link between the measure of tax corruption and tax simplicity, so a less complex tax system is shown to be associated with lower corruption in tax administration. It is predicted that the combined effect of a 10 percent reduction in both the number of payments and the time to comply with tax requirements can lower tax corruption by 9.64 percent….The positive link between tax simplicity and lower tax corruption has useful policy implications.

There are a few caveats. While people have a greater incentive to rig the system when tax rates are high, the report only addresses this issue tangentially. This is a very unfortunate oversight.

Also, the data show that corruption is higher in developing nations, which is not terribly surprising. Though I think this might be unfair because corruption is narrowly defined so that it’s simply a measure of lawbreaking.

I suspect there are similar amounts of corruption in developed nations, but it takes the form of influence peddling and legislative favors. That’s definitely the mother’s milk of Washington’s sleazy insiders.

And if you look at this chart, this chart, or this chart, there’s no doubt that the internal revenue code is riddled with loopholes.

This video elaborates on the connection between bloated government and legal corruption.

And this video shows how our corrupt tax code could be fixed.

P.S. Just so you don’t think I’m getting soft-hearted about the World Bank, just remember that this is the bureaucracy that put together a tax “report card” that gave nations higher grades for having more punitive fiscal policy.

P.P.S. In the interests of fairness, I am a fan of the World Bank’s Doing Business Index.

P.P.P.S. I’ve written several times about overpaid bureaucrats and fat-cat lobbyists.

Well, here’s a look at per capita personal income in Washington, DC, compared to the rest of America.

You’ll notice that Washington got substantially richer during both Bush Administrations.

But it’s not just the District of Columbia. If you click on this map, you’ll see that a majority of America’s richest communities are the suburbs of Washington.

A lot of fat and happy people living directly or indirectly off your tax dollars.

I work at the libertarian Cato Institute (aka, America’s most effective think tank), and I think libertarianism is the philosophy that best reflects human decency.

But I sometimes wonder why libertarians aren’t more persuasive and why there aren’t any libertarian societies.

However, maybe there’s a light at the end of the tunnel. I’ve been asked by several readers to comment on the debate about whether America is enjoying a libertarian phase, particularly among the so-called millenials. This discussion was triggered by a feature article in the New York Times magazine.

You won’t be surprised to learn that I hope the answer is yes. So it goes without saying (but I’ll say it anyhow) that my fingers are crossed that Nick Gillespie of Reason is correct is his reaction to the NYT article.

Though I worry that the social capital of the American people (of all ages) has been sufficiently eroded that they won’t permit the entitlement reforms and program restructurings that are necessary to control – and hopefully reduce – the burden of government spending. So perhaps David Frum’s take in The Atlantic is more accurate, even if I hope he’s wrong.

For what it’s worth, I’m a bit more optimistic after reading Ben Domenech’s analysis for The Federalist.

I’m a fiscal policy wonk rather than a big-picture libertarian, so I’m not particularly qualified to assess who is right. That being said, you can sense a bit of my hopefulness in the post-post-postscript below.

P.S. Since we’re on the topic of libertarianism, let’s talk about Harry Reid’s favorite people, Charles Koch and David Koch.

If you get your news from the establishment media, you doubtlessly think these supposedly evil billionaire brothers are dictating political outcomes with their ostensibly lavish spending on campaigns.

Yet if you look at a list of the top 100 individual donors to political races, David Koch is #90 and Charles Koch isn’t even on the list.

Some of you may be thinking that they funnel their largesse through other vehicles, but even when you look at organizational giving, Koch Industries is only #36 on the list.

Paul Bedard of the Washington Examiner slices and dices the data.

…only two of the nation’s top 20 donors to federal campaigns favor the GOP, and a stunning 11 are labor unions including the AFL-CIO, and both teachers unions, according to a new report. The highly respected Center for Responsive Politics put the pro-Democratic fundraising group ActBlue at the top of the organization donor list, coughing up over $30 million, with 99 percent going to Democrats. Way down at No. 36 is Koch Industries, the conservatively run company Democrats claim control the GOP. …Among individuals, former New York Mayor Michael Bloomberg ranked second in donations, with $8,710,678 of his $9,495,798 going to Democrats and Democratic causes. …Among individual donors, the top three are also Democrats. The rest of the list is evenly split in who they give money to.

P.P.S. Since we’re talking about the Kochs, I find it laughable that conspiracy mongers on the left somehow thought I was worth including in this flowchart.

The other people are all donors, directors, or executives. I’m just a policy wonk. Heck, they didn’t even make the one connection that does exist, which is the fact that I used to be married to Nancy.

P.P.P.S. On the other hand, I feel honored but unworthy to have been subject of a profile by the folks at United Liberty.

According to the title, I’m the “guardian angel” of American taxpayers. Needless to say, I wish I had the power to protect folks from rapacious government. Here’s what the article actually says about my angelic qualities.

World renowned tax expert and Cato Institute scholar Dan Mitchell thinks of politicians as characters in old cartoons that, when faced with a decision, suddenly find they’ve an angel on one shoulder and a devil on the other, both handing out advice as to the right move. He sees himself, flashing a grin that signals you shouldn’t take him too seriously, as the angel. “My job is to convince [politicians] to do what’s right for the country, not what’s right for their own political aspirations,” he says.

The article also explains what got me involved in the fight for liberty.

Mitchell has both a bachelor’s and master’s degree in economics from UGA, as well as a PhD in economics from George Mason University. But he got his start as a limited government conservative as a high school student who, like many others, found himself struck by the wisdom of Ronald Reagan. “I was drawn to his message that government was the problem, not the solution,” he says. “One thing that was definitely part of Regan’s philosophy that I got right away was that you shouldn’t punish success and you shouldn’t reward bad behavior.” Reagan, he says, accomplished more on spending than people give him credit for, and succeeded largely due to his policy of tax rate reductions, the taming of inflation, the slight reduction in all federal spending, and the massive shift away from domestic spending toward defense spending.

But regular readers already know I have a man-crush on The Gipper.

The final excerpt explains why I’m slightly optimistic, though I certainly don’t expect to put myself out of a job.

…he is a patriot who cares about the future of America.“What matters most is that somehow, in the next couple of years, Congress needs to approve, enact, and implement [Paul] Ryan’s entitlement reforms — block-granting medicaid and turning medicare into a premium support system,” he says. “It’s the only way to save the country.”Otherwise, we become “France at best, Greece at worst.”  …he notes that “if you want to be optimistic, progress comes rather quickly” once proper reforms are in place, and the transition is not terribly painful. But what happens if he gets his wish? Isn’t he working to put himself out of a job?“I’m sure there will be enough bad government policy to keep me occupied for the rest of my life,” he laughs. “As much as I would like to put myself out of a job, I have so far not demonstrated that level of competence.”

Simply stated, even if we get genuine entitlement reform and put the brakes on wasteful discretionary spending, it will still be a full-time job to keep the politicians from backsliding.

Anyhow, read the entire profile if you have a few minutes to kill.

P.P.P.P.S. Building on the superb image of bread, capitalism, and socialism, let’s close with something for our collection of pro-libertarian humor

…as well as something for our collection of anti-libertarian humor.

Reminds me of the libertarian lifeguard cartoon, at least in the sense that we supposedly are indifferent to children.

Though obviously an absurd caricature. After all, libertarians want school choice to help poor kids while the statists are the ones standing in the schoolhouse door.

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.

Follow

Get every new post delivered to your Inbox.

Join 2,414 other followers

%d bloggers like this: