At the European Resource Bank conference earlier this month, Pierre Bessard from Switzerland’s Institut Liberal spoke on a panel investigating “The Link between the Weight of the State and Economic prosperity.”
His presentation included two slides that definitely are worth sharing.
The first slide, which is based on research from the Boston Consulting Group, looks at which jurisdictions have the most households with more than $1 million of wealth.
Switzerland is the easy winner, and you probably won’t be surprised to see Hong Kong and Singapore also do very well.
Gee, I wonder if the fact that Switzerland (#4), Hong Kong (#1), and Singapore (#2) score highly on the Economic Freedom of the World index has any connection with their comparative prosperity?
That’s a rhetorical question, of course.
Most sensible people already understand that countries with free markets and small government out-perform nations with big welfare states and lots of intervention.
Speaking of which, let’s look at Pierre’s slide that compares Swiss public finances with the dismal numbers from Eurozone nations.
The most impressive part of this data is the way Switzerland has maintained a much smaller burden of government spending.
One reason for this superior outcome is the Swiss “Debt Brake,” a voter-imposed spending cap that basically prevents politicians from increasing spending faster than inflation plus population.
Now let’s compare Switzerland and France, which is what I did last Saturday at the Free Market Road Show conference in Paris.
As part of my remarks, I asked the audience whether they thought that their government, which consumes 57 percent of GDP, gives them better services than Germany’s government, which consumes 45 percent of GDP.
They said no.
I then asked if they got better government than citizens of Canada, where government consumes 41 percent of GDP.
They said no.
And I concluded by asking them whether they got better government than the people of Switzerland, where government is only 34 percent of economic output (I used OECD data for my comparisons, which is why my numbers are not identical to Pierre’s numbers).
Once again, they said no.
The fundamental question, then, is why French politicians impose such a heavy burden of government spending – with a very high cost to the economy – when citizens don’t get better services?
Or maybe the real question is why French voters elect politicians that pursue such senseless policies?
But to be fair, we should ask why American voters elected Bush and Obama, both of whom have made America more like France?
OECD bureaucrats get tax-free salaries but urge higher taxes for everyone else
I’m not a fan of the Paris-based Organization for Economic Cooperation and Development. The international bureaucracy is infamous for using American tax dollars to promote a statist economic agenda.
The OECD, in an effort to promote redistributionism, has concocted absurdly misleading statistics claiming that there is more poverty in the US than in Greece, Hungary, Portugal, or Turkey.
The OECD is pushing a “Multilateral Convention” that is designed to become something akin to a World Tax Organization, with the power to persecute nations with free-market tax policy.
The OECD supports Obama’s class-warfare agenda, publishing documents endorsing “higher marginal tax rates” so that the so-called rich “contribute their fair share.”
The OECD advocates the value-added tax based on the absurd notion that increasing the burden of government is good for growth and employment.
Now that there’s no ambiguity about my overall position, I can admit that the OECD isn’t always on the wrong side. Much of the bad policy comes from its committee system, which brings together bureaucrats from member nations.
The OECD also has an economics department, and they sometimes produce good work. Most recently, they produced a report on the Swiss tax system that contains some very sound analysis – including a rejection of Obama-style class warfare and a call to lower income tax burdens.
Shifting the taxation of income to the taxation of consumption may be beneficial for boosting economic activity (Johansson et al., 2008 provide evidence across OECD economies). These benefits may be bigger if personal income taxes are lowered rather than social security contributions, because personal income tax also discourages entrepreneurial activity and investment more broadly.
I somewhat disagree with the assertion that payroll taxes do more damage than VAT taxes. They both drive a wedge between pre-tax income and post-tax consumption.
But the point about income taxes is right on the mark.
Evidence also suggests that tax autonomy may lead to a smaller and more efficient public sector, helping to limit the tax burden and improve tax compliance… Efficiency-raising effects of tax autonomy and tax competition on the public sector have also been reported in empirical research with Norwegian and German data… Tax autonomy generates opportunities to choose the level of public service provision and taxation, although in practice such “voting with your feet” seems mostly limited to young, highly educated and high-income households. Decentralised tax setting also fosters benchmarking of the performance of jurisdictions belonging to the same government level by voters, even in the absence of “voting with your feet”.
The report also notes that tax competition has reduced corporate tax rates.
Tax competition is likely to have contributed significantly to lowering corporate tax rates in Switzerland over the past 25 years. Indeed, empirical evidence shows that the responsiveness of sub-national governments to tax changes of other subnational governments (“tax mimicking”) is the strongest in the case of corporate taxation (Blöchliger and Pinero Campos, 2011). …Progressive corporate income taxes harm incentives for businesses to grow. Since growing businesses are likely to be high performers in terms of productivity, such disincentives are likely to hit high-performing businesses the most, with losses to aggregate productivity performance, which has been modest in Switzerland relative to best-performing high-income countries.
P.S. This isn’t the first time the economists at the OECD have broken ranks with the political hacks that generally control the bureaucracy. In a 1998 Economic Outlook (see page 166), they wrote that “the ability to choose the location of economic activity offsets shortcomings in government budgeting processes, limiting a tendency to spend and tax excessively.”
And in another publication (see page 1), the economists noted that “legal tax avoidance can be reduced by closing loopholes and illegal tax evasion can be contained by better enforcement of tax codes. But the root of the problem appears in many cases to be high tax rates.”
In other words, what if things go really wrong and America suffers a Greek-style fiscal collapse? And imagine how bad that might be since there wouldn’t be an IMF or European Central Bank capable of providing bailouts to the United States.
Perhaps because of an irrational form of patriotism, I’m fairly certain that I will always live in the United States and I will be fighting to preserve (or restore) liberty until my last breath.
But I probably would want my children someplace safe and stable, so I’ll answer the question from that perspective.
But I’m not sure about the long-run outlook for the Cayman Islands, in part because the politicians there have flirted with an income tax and in part because the jurisdiction inevitably would suffer if the United States was falling apart.
So what’s a place that is stable and not overly tied to the American economy.
But while Switzerland is not dependent on the U.S. economy, it is surrounded by European welfare states. And I’m fairly certain that nations such as France, Italy, and (perhaps) Germany will collapse before America.
And even though most Swiss households have machine guns and the nation presumably can defend itself from barbarian hordes in search of a new welfare check, Switzerland’s probably not the ideal location.
Estonia is one of my favorite countries, and they’ve implemented some good reforms such as the flat tax. But I worry about demographic decline. Plus, I’m a weather wimp and it’s too chilly most of the year.
Another option is a stable nation in Latin America, perhaps Chile, Panama, or Costa Rica. I haven’t been to Chile, but I’m very impressed by the nation’s incredible progress in recent decades. I have been to Panama many times and it is one of my favorite nations. I’ve only been to Costa Rica two times, but it also seems like a nice country.
The bad news is that I don’t speak Spanish (and my kids don’t speak the language, either). The good news is that Hispanics appear to be the world’s happiest people, so that should count for something.
“G’day mate, we’ve privatized our social security system!”
This brings me to Australia, the country that probably would be at the top of my list. The burden of government spending in Australia is less than it is in the United States.
Politicians are not allowed to increase spending faster than average revenue growth over a multi-year period, which basically means spending can only grow at the rate of inflation plus population.
Theoretically, taxes could be hiked to allow more spending, but that hasn’t happened. The Swiss are very good about voting against tax increases, so the politicians don’t have much ability to boost the revenue trendline.
Since the debt brake first took effect in 2003, the burden of government spending has dropped from 36 percent of GDP to 34 percent of economic output – a rather remarkable achievement since most other European nations have moved in the wrong direction.
As part of my self-serving efforts to promote Mitchell’s Golden Rule, I’ve been advocating for spending caps in the United States, and I’ve favorably cited legislation proposed by Congressman Brady of Texas and Senator Corker of Tennessee.
Now I have some new evidence on my side. David Hogberg of Investor’s Business Daily looks at the current fiscal mess in America and discovers – gee, what a surprise – that spending has grown very rapidly since the late 1990s.
President Obama says he wants a “balanced” approach to the fiscal cliff. But critics argue the real problem is spending, which has far outstripped rising tax revenue as well as economic growth. Federal government revenue rose from $1.7 trillion to $2.4 trillion from fiscal 1998 to 2012, slightly exceeding inflation. Revenue growth averaged 2.9% annually, despite two recessions, bear markets — and tax cuts. But federal spending rose nearly twice as fast — 5.7% per year — surging from $1.6 trillion to $3.5 trillion over that same span. The spending spike also exceeds growth in the population.
What’s the solution to this mess? I make the argument for a spending cap.
Dan Mitchell, senior fellow at the libertarian Cato Institute, says the U.S. government needs a spending cap. “It’s an issue of trendlines and that’s everything in fiscal policy,” Mitchell said. “If you are on a path where government spending grows faster than the private sector of the economy, which is your tax base, then in theory there is no level of taxation that will be enough to stabilize the system. … If we had kept government spending down to just increases for inflation and population growth, we wouldn’t be in the trouble we’re in now.” Limiting spending to increases in inflation and population growth over 1998-2012 (an annual average of about 3.3%) would have given dramatically different results. The U.S. would have spent $2.6 trillion in FY 12, about $900 billion less than what it actually did. The latest deficit would be $157 billion, a fraction of the actual $1.089 trillion.
David did the same thing, but looking backwards instead of forward. Here’s the chart included with his article. As you can see, the budget mess would be very manageable today if the Bush-Obama spending binge hadn’t occurred.
But politicians don’t like spending caps for the same reasons that burglars don’t like armed homeowners. As Veronique de Rugy notes, if we imposed a spending cap, they would be forced to reform entitlements.
While a spending cap would help, some analysts contend that it would need to be coupled with entitlement reform. “If you don’t reform Social Security, Medicare and Medicaid, you’ll have a hard time staying within the cap,” said Veronique de Rugy, senior research fellow at the libertarian Mercatus Center. …”To make it feasible and enforceable you’d have to do a constitutional amendment,” said Mitchell. “But even short of that, at least if you start talking about it and set it as your goal it would get people focusing on the real problem … which is government spending growing faster than the private sector.”
This brings us to the real challenge. How do we get politicians to impose reforms when they benefit from the current system. Barring a miracle, they’re not going to tie their own hands.
But I think our chances of success will be much higher if advocates of good fiscal policy kept reminding the crowd in Washington that the real problem is too much spending and that red ink is just a symptom of the underlying disease.
The Baltic nations of Estonia, Lithuania, and Latvia also deserve some credit. They allowed spending to rise far too rapidly in the middle of last decade – an average of nearly 17 percent per year between 2002 and 2008! But they have since moved in the right direction, with genuine spending cuts (unlikely the fake cuts that characterize fiscal policy in nations like the United States and United Kingdom). Yes, the Baltic countries did raise some taxes, which undermined the positive effects of spending reductions, but at least they focused primarily on spending and preserved their attractive flat tax systems. No wonder growth has rebounded in these nations.
The situation in the rest of Europe is more bleak, particularly for the so-called PIIGS. To varying degrees, Portugal, Italy, Ireland, Greece, and Spain have lost the ability to borrow, received bailouts, and been mired in recession.
The silver lining is that the fiscal crisis has forced them to finally cut spending. All of those nations implemented real spending cuts in 2011 according to European Commission data, bringing spending below 2010 levels. Final figures for 2012 aren’t available, of course, but the International Monetary Fund estimates that spending will drop in every nation other than Italy (where it will climb by less than 1 percent).
That’s the good news. The public sector finally is being subjected to some long-overdue fiscal discipline.
The bad news is that politicians also imposed very significant tax increases on the private sector. Income tax rates have been increased. Value-added taxes have been hiked, and other taxes have climbed as well. These penalties on productive activity undermine potential growth.
The Portuguese government is seeking to cut its corporate tax rate for new businesses to one of the lowest in Europe as part of a plan to attract investment and revitalize ailing industries, the minister of economy said. The government is in talks with the European Commission’s competition agency in Brussels to get approval to cut the tax on corporate income for new investors to 10% from the current 25%, the minister, Alvaro Santos Pereira, said in an interview. …”We want to make Portugal one of the most attractive countries in Europe for new investment,” Mr. Santos Pereira said. “We believe that by providing very strong fiscal incentives to new investments we will safeguard the budget side and at the same time become a lot more competitive,” he added. …While wealthy euro-zone countries and the IMF are beginning to recognize the need for measures to boost growth in austerity-hit countries, they have been reluctant to endorse tax cuts in countries under bailout programs. If implemented, the proposed tax cut would be a departure from a series of tax increases that countries including Portugal, Greece and Spain were forced to take as part their bailout conditions.
Before getting too excited, it’s important to note that the Portuguese proposal is a bit gimmicky. It’s not a corporate tax rate of 10 percent, it’s a special rate of 10 percent for new investment, however that’s defined.
To be fair, though, this chart shows that government spending in Portugal did decline last year. And the IMF is projecting that it will fall again this year and next year.
But the key to good fiscal policy is reducing government spending as a share of economic output. And if tax increases keep the private economy in the dumps, then the actual burden of government spending doesn’t change much even when nominal outlays decline.
A pro-growth policy is needed to boost economic performance. Portugal’s corporate tax rate proposal, by itself, won’t make much of a difference. But if it’s the start of a trend, that could be significant.
By the way, it’s amusing to see that one of the bureaucrats from the European Commission is pouring cold water on the plan, implying that a decision to take less money from a company somehow is akin to government assistance.
“We would want to be sure that anything proposed would help the competitiveness of the economy,” said spokesman Simon O’Connor, “but at the same time it would have to be in line with state aid rules,” referring to EU regulations that limit the assistance governments can give to the private sector. “There really isn’t any scope for them to reduce revenue,” he added.
What is our business, by contrast, is what politicians are doing with the money they confiscate from us. This Lisa Benson cartoon helps to make that point, though it would be even better if she had written “Romney’s Stash for His Own Money” and “Obama’s Stash for Our Money.”
Obama, needless to say, is an expert at squandering other people’s money, as illustrated by money pits such as the faux stimulus and the green energy scam.
P.S. Lest anyone think I’m being partisan, the headline of this would be just as accurate if I added “How Bush Spent My Money” or “How Romney Would Spend My Money.” Bush, after all, followed the same fiscal agenda as Obama, and Romney’s track record suggests he will be similarly profligate.
P.P.S. Which makes me miss Bill Clinton, who was frugal by comparison. Or Ronald Reagan, who actually did the right things for the right reason.
Americans looking for a way to tame government profligacy should look to Switzerland. In 2001, 85% of its voters approved an initiative that effectively requires its central government spending to grow no faster than trendline revenue. The reform, called a “debt brake” in Switzerland, has been very successful. Before the law went into effect in 2003, government spending was expanding by an average of 4.3% per year. Since then it’s increased by only 2.6% annually.
So how does this system work?
Switzerland’s debt brake limits spending growth to average revenue increases over a multiyear period (as calculated by the Swiss Federal Department of Finance). This feature appeals to Keynesians, who like deficit spending when the economy stumbles and tax revenues dip. But it appeals to proponents of good fiscal policy, because politicians aren’t able to boost spending when the economy is doing well and the Treasury is flush with cash. Equally important, it is very difficult for politicians to increase the spending cap by raising taxes. Maximum rates for most national taxes in Switzerland are constitutionally set (such as by an 11.5% income tax, an 8% value-added tax and an 8.5% corporate tax). The rates can only be changed by a double-majority referendum, which means a majority of voters in a majority of cantons would have to agree.
In other words, the debt brake isn’t a de jure spending cap, but it is a de facto spending cap. And capping the growth of spending (which is the underlying disease) is the best way of controlling red ink (the symptom of excessive government).
Switzerland’s spending cap has helped the country avoid the fiscal crisis affecting so many other European nations. Annual central government spending today is less than 20% of gross domestic product, and total spending by all levels of government is about 34% of GDP. That’s a decline from 36% when the debt brake took effect. This may not sound impressive, but it’s remarkable considering how the burden of government has jumped in most other developed nations. In the U.S., total government spending has jumped to 41% of GDP from 36% during the same time period.
Switzerland is moving in the right direction and the United States is going in the wrong direction. The obvious lesson (to normal people) is that America should copy the Swiss. Congressman Kevin Brady has a proposal to do something similar to the debt brake.
Rep. Kevin Brady (R., Texas), vice chairman of the Joint Economic Committee, has introduced legislation that is akin to the Swiss debt brake. Called the Maximizing America’s Prosperity Act, his bill would impose direct spending caps, but tied to “potential GDP.” …Since potential GDP is a reasonably stable variable (like average revenue growth in the Swiss system), this approach creates a sustainable glide path for spending restraint.
In some sense, Brady’s MAP Act is akin to Sen. Corker’s CAP Act, but the use of “potential GDP” makes the reform more sustainable because economic fluctuations don’t enable big deviations in the amount of allowable spending.
To conclude, we know the right policy. It is spending restraint. We also know a policy that will achieve spending restraint. A binding spending cap. The problem, as I note in my oped, is that “politicians don’t want any type of constraint on their ability to buy votes with other people’s money.”
Overcoming that obstacle is the real challenge.
P.S. A special thanks to Pierre Bessard, the President of Switzerland’s Liberales Institut. He is a superb public intellectual and his willingness to share his knowledge of the Swiss debt brake was invaluable in helping me write my column.
A few other bizarre episodes occurred in Barbados, back when I was first getting involved in the issue. Here’s a summary of that adventure.
As part of its “harmful tax competition” project, the OECD had called a meeting in 2001 and invited officials from the so-called tax havens to attend in hopes of getting them to surrender their fiscal sovereignty and agree to become deputy tax collectors for uncompetitive welfare states.
One of the low-tax nations asked me to provide technical assistance, so they made me part of their delegation. But when I got to the OECD conference, the bureaucrats refused to let me participate. That initial obstacle was overcome, though, when representatives from the low-tax country arrived and they created a stink.
So I got my credentials and went into the conference. But this obviously caused some consternation. Bureaucrats from the OECD and representatives from the Clinton Treasury Department (this was before Bush’s inauguration) began whispering to each other, followed by some OECD flunky coming over to demand my credentials. I showed my badge, which temporarily stymied the bad guys.
But then a break was called and the OECD announced that the conference couldn’t continue if I was in the room. The fact that the OECD and some of the high-tax nations had technical consultants of their own was immaterial. The conference was supposed to be rigged to generate a certain outcome, and my presence was viewed as a threat.
Given the way things were going, with the OECD on the defensive and low-tax jurisdictions unwilling to capitulate, we decided to let the bureaucrats have a symbolic victory – especially since all that really happened is that I sat outside the conference room and representatives from the low-tax jurisdictions would come out every few minutes and brief me on what was happening. And everything ended well, with the high-tax nations failing in their goal of getting low-tax jurisdictions to surrender by signing “commitment letters” drafted by the OECD.
While the controversy over my participation in the meeting was indicative of the OECD’s unethical and biased behavior, the weirdest part of the Barbados trip occurred at the post-conference reception at the Prime Minister’s residence.
I was feeling rather happy about the OECD’s failure, so I was enjoying the evening. But not everybody was pleased with the outcome. One of the Clinton Treasury Department officials came up and basically accused me of being disloyal to the United States because I opposed the Administration’s policy while on foreign soil.
As you can probably imagine, that was not an effective argument. As this t-shirt indicates, my patriotism is to the ideals of the Founding Fathers, not to the statist actions of the U.S. government. And I also thought it was rather silly for the Treasury Department bureaucrat to make that argument when there was only a week or so left before Clinton was leaving office.
I’m reminded of this bit of personal history because of some recent developments in the area of international taxation.
The federal government recently declared that a Swiss bank is a “fugitive” because it refuses to acquiesce to American tax law and instead is obeying Switzerland’s admirable human rights policy of protecting financial privacy. Here are some details from a report by Reuters.
Wegelin & Co, the oldest Swiss private bank, was declared a fugitive after failing to show up in a U.S. court to answer a criminal charge that it conspired to help wealthy Americans evade taxes. …The indictment of Wegelin, which was founded in 1741, was the first in which the United States accused a foreign bank, rather than individuals, of helping Americans commit tax fraud. …Wegelin issued a statement from Switzerland saying it has not been served with a criminal summons and therefore was not required to appear in court. “The circumstances create a clear dilemma for Wegelin & Co,” it said. “If it were to adhere to current U.S. legal practice aimed at Swiss banks, it would have to breach Swiss law.” …Wegelin has no branches outside Switzerland.
It’s time for me to again be unpatriotic because I’m on the side of the “fugitive.” To be blunt, a Swiss bank operating on Swiss soil has no obligation to enforce bad U.S. tax law.
To understand the principles at stake, let’s turn the tables. What if the Iranian government demanded that the American government extradite Iranian exiles who write articles critical of that country’s nutjob leadership? Would the Justice Department agree that the Iranian government had the right to persecute and prosecute people who didn’t break U.S. law. Of course not (at least I hope not!).
Or what if the Chinese government requested the extradition of Tiananmen Square protesters who fled to the United States? Again, I would hope the federal government would say to go jump in a lake because it’s not a crime in America to believe in free speech.
I could provide dozens of additional examples, but I assume you get the point. Nations only cooperate with each other when they share the same laws (and the same values, including due process legal protections).
This is why Wegelin is not cooperating with the United States government, and this is why genuine patriots who believe in the rule of law should be on the side of the “fugitive.”
For further information, here’s a video I narrated on tax competition.
About a year ago, I spoke at a conference in Europe that attracted a lot of very rich people from all over the continent, as well as a lot of people who manage money for high-net-worth individuals.
What made this conference remarkable was not the presentations, though they were generally quite interesting. The stunning part of the conference was learning – as part of casual conversation during breaks, meals, and other socializing time – how many rich people are planning for the eventual collapse of European society.
Not stagnation. Not gradual decline. Collapse.
As in riots, social disarray, plundering, and chaos. A non-trivial number of these people think the rioting in places such as Greece and England is just the tip of the iceberg, and they have plans – if bad things begin to happen – to escape to jurisdictions ranging from Australia to Costa Rica (several of them remarked that they no longer see the U.S. as a good long-run refuge).
This was rather sobering. I’ve never been an optimist about Europe’s future, as I explain here and here, but is the situation really this bad?
British ministers privately warned that the break-up of the euro, once almost unthinkable, is now increasingly plausible. Diplomats are preparing to help Britons abroad through a banking collapse and even riots arising from the debt crisis. The Treasury confirmed earlier this month that contingency planning for a collapse is now under way. …Recent Foreign and Commonwealth Office instructions to embassies and consulates request contingency planning for extreme scenarios including rioting and social unrest. …Diplomats have also been told to prepare to help tens of thousands of British citizens in eurozone countries with the consequences of a financial collapse that would leave them unable to access bank accounts or even withdraw cash. …Analysts at UBS, an investment bank earlier this year warned that the most extreme consequences of a break-up include risks to basic property rights and the threat of civil disorder. “When the unemployment consequences are factored in, it is virtually impossible to consider a break-up scenario without some serious social consequences,” UBS said.
Let’s think about what this means, and we’ll start with an assumption that European politicians won’t follow my sage advice and that they’ll instead continue to kick the can down the road – thus making the debt bubble even bigger and creating the conditions for a nasty collapse.
I’ve learned over the years that things are usually never as bad as they seem (or as good as they seem), so I don’t expect that a nightmare situation will materialize, but I certainly can understand why wealthy people have contingency plans to escape.
But what about the rest of us? We don’t have property overseas and we don’t have private jets, so what’s our insurance policy?
Part of the answer is to have the ability to protect ourselves and our families. As explained here, firearms are the ultimate guarantor of civilization.
In my discussions and debates about this issue, I’ve traditionally relied on these four arguments:
2. The presumption of liberty. It’s sometimes said that everything that isn’t expressly forbidden is allowed in the United States, whereas in Europe it’s the other way around, with everything forbidden unless explicitly permitted. This certainly seems to be the case for guns, with most European governments prohibiting firearms ownership for the vast majority of people.
3. Personal protection against crime. As the first image in this post powerfully illustrates, it doesn’t really matter if cops are only a few minutes away when a person only has a few seconds to protect against danger. And since the evidence is overwhelming that gun ownership reduces crime, this is a powerful argument for the Second Amendment.
4. Ability to resist government oppression. Totalitarian governments invariably seek to disarm people, as this poster indicates. And with the majority of the world still living in nations that are not free, private gun ownership is at least a potential limit on thuggish governments.
But perhaps we now need to add a fifth reason:
5. Personal protection against social breakdown. If politicians destroy the economic system with too much debt and too much dependency, firearms will be the first and last line of defense against those who would plunder and pillage.
Here’s a thought experiment to drive the point home. If Europe does collapse, which people do you think will be in better shape to preserve civilization, the well-armed Swiss or the disarmed Brits?
I hope we never have to find out, but I know which society has a better chance of surviving.
The bureaucrats at the Organization for Economic Cooperation and Development threatened to have me thrown in a Mexican jail for the horrible crime of standing in the public lobby of a hotel and giving advice to low-tax jurisdictions.
But if that makes it seem as if the battle is full of drama and (exaggerated) glory, that would be a gross exaggeration. More than 99 percent of my time on this issue is consumed by the difficult task of trying to convince policy makers that tax competition, fiscal sovereignty, and financial privacy should be celebrated rather than persecuted.
Sort of like convincing thieves that it’s a good idea for houses to have alarm systems.
And it means I’m also condemned to the never-ending chore of debunking left-wing attacks on tax havens. The big-government crowd viscerally despises these jurisdictions because tax competition threatens the ability of politicians to engage in class warfare/redistribution policies.
To determine whether tax havens are immoral, let’s peruse Mr. Vallely’s column. It begins with an attack on Ugland House in the Cayman Islands.
There is a building in the Cayman Islands that is home to 12,000 corporations. It must be a very big building. Or a very big tax scam.
If lying is immoral, this is a quick black mark on Mr. Vallely rather than tax havens. I’ve already explained, in a post eviscerating an empty-suit Senator from North Dakota, that a company’s home is merely the place where it is chartered for legal purposes. A firm’s legal domicile has nothing to do with where it does business or where it is headquartered.
In other words, there is nothing nefarious about Ugland House, just as there is nothing wrong with the small building in Delaware that is home to more than 200,000 companies. Obama, by the way, demagogued about Ugland House during the 2008 campaign.
Now that we’ve established that the author is a careless and know-nothing hack, let’s see what else he has to say.
Are there any legitimate reasons why anyone would want to have a secret bank account – and pay a premium to maintain their anonymity – or move their money to one of the pink dots on the map which are the final remnants of the British empire: the Caymans, Bermuda, the Turks and Caicos and the British Virgin Islands?
o Persecuted ethnic Chinese in Indonesia and the Philippines?
o Political dissidents in places such as Russia and Venezuela?
o Entrepreneurs in thug regimes such as Venezuela and Zimbabwe?
o Families threatened by kidnapping failed states such as Mexico?
o Homosexuals in murderous regimes such as Iran?
As this video explains, there are billions of people around the world that are subject to state-sanctioned (or at least state-permitted) religious, ethnic, racial, political, sexual, and economic persecution. These people are especially likely to be targeted if they have any money, so the ability to invest their assets offshore and keep that information hidden from venal governments can, in some cases, be a life-or-death matter.
And let’s not forget the residents of failed states, where crime, expropriation, kidnapping, corruption, extortion, and economic mismanagement are ubiquitous. These people also need havens where they can safely and confidentially invest their money.
The author of the column is probably oblivious to these practical, real-world concerns. Instead, he is content with sweeping proclamations.
The moral case against is clear enough. Tax havens epitomise unfairness, cheating and injustice. .
But if he is against unfairness, cheating, and injustice, why does he want to empower the institution – government – that is the source of oppression in the world?
To be fair, our left-wing friend does attempt to address the other side of the argument.
Apologists insist that tax havens protect individual liberty. They promote the accumulation of capital, fair competition between nations and better tax law elsewhere in the world. They also foster economic growth. …Yet even if all that were true – and it is not – does it outweigh the ethical harm they do? The numbered bank accounts of tax havens are notoriously sanctuaries for the spoils of theft, fraud, bribery, terrorism, drug-dealing, illegal betting, money-laundering and plunder by Arab despots such as Gaddafi, Mubarak and Ben Ali, all of whom had Swiss accounts frozen.
But he can’t resist trying to discredit the economic argument by resorting to more demagoguery, asserting that tax havens are shadowy regimes. Not surprisingly, he offers no supporting data. Moreover, you won’t be surprised to learn that the real-world evidence directly contradicts what he wrote. The most comprehensive analysis of dirty money finds 28 problem jurisdictions, and only one could be considered a tax haven.
Last but not least, the author addresses the issue that really motivates the left – the potential loss of access to other people’s money, funds that they want the government to confiscate and redistribute.
Christian Aid reckons that tax dodging costs developing countries at least $160bn a year – far more than they receive in aid. The US research centre Integrity estimated that more than $1.2trn drained out of poor countries illicitly in 2008 alone. …Some say an attack on tax havens is an attack on wealth creation. It is no such thing. It is a demand for the good functioning of capitalism, balancing the demands of efficiency and of justice, and placing a value on social harmony.
There are several problems with this passage, including the (perhaps deliberate) mixing of tax evasion and tax avoidance. But the key point is that the burden of government spending in most nations is now at record levels, undermining prosperity and reducing growth. Why should add more fuel to the fire by giving politicians even more money to waste?
Let’s now shift from the inaccurate ramblings of a left-winger to some real-world evidence. The Wall Street Journal has an article on the Canton of Zug, Switzerland’s tax haven within a tax haven. This hopefully won’t surprise anyone, but low-tax policies have been very beneficial for Zug.
Developed nations from Japan to America are desperate for growth, but this tiny lake-filled Swiss canton is wrestling with a different problem: too much of it. Zug’s history of rock-bottom tax rates, for individuals and corporations alike, has brought it an A-list of multinational businesses. Luxury shops abound, government coffers are flush, and there are so many jobs that employers sometimes have a hard time finding people to fill them. …If Switzerland is the world’s most famous tax haven, Zug amounts to a haven within a haven.
Here’s some of the evidence of how better fiscal policy promotes prosperity. This is economic data, to be sure, but isn’t the choice between growth and stagnation also a moral issue?
Zug long was a poor farming region, but in 1947 its leaders began to trim tax rates in an effort to attract companies and the well-heeled. In Switzerland, two-thirds of total taxes, including individual and corporate income taxes, are levied by the cantons, not the central government. The cantons also wield other powers that enable them compete for business, such as the authority to make residency and building permits easy to get. …businesses moved in, many establishing regional headquarters. Over the past decade, the number of companies with operations of some sort in the canton jumped to 30,000 from 19,000. The number of jobs in Zug rose 20% in six years, driven by the economic boom and foreign companies’ efforts to minimize their taxes. At a time when the unemployment rate in the European Union (to which Switzerland doesn’t belong) is 9.4%, Zug’s is 1.9%.
It turns out that Zug is growing so fast that lawmakers actually want to discourage more investment. What a nice problem to have.
Describing Zug’s development as “astonishing,” Matthias Michel, the head of the canton government, said, “We are too small for the success we have had.” …Zug has largely stopped trying to lure more multinationals, according to Mr. Michel.
…the Swiss are mostly holding fast to their fiscal beliefs. Last November, in a national referendum, they overwhelmingly rejected a proposal that would have established a minimum 22% tax rate on incomes over 250,000 francs, or about $315,000.
This global tax cartel will be akin to an OPEC for politicians, and the impact on taxpayers will be quite similar to the impact of the real OPEC on motorists.
If that’s a moral outcome, then I want to be a hedonist.
To conclude, here are two other videos on tax havens. This one looks at the economic issues.
And here’s a video debunking some of the usual attacks on low-tax jurisdictions.
Greetings from Montreux, Switzerland, on the shores of Lake Geneva. There aren’t many places where palm trees are framed by snow-capped mountains. Heck, even I managed to take a decent photo.
But let’s shift back to the world of public policy. Every time I’m in Switzerland, my admiration for the country increases. Here are five ways Switzerland is better than the United States.
3. Because of a belief that individuals have a right to control information about their personal affairs, Switzerland has a strong human rights policy that protects financial privacy. In the United States, the government can look at your bank account and does not even need a search warrant.
4. Switzerland has a positive form of multiculturalism with people living together peacefully notwithstanding different languages and different religions. In the United States, by contrast, the government causes strife and resentment with a system of racial spoils.
5. Gun ownership is pervasive in Switzerland, and the Swiss people value this freedom. Moreover, how can one not admire a nation where all able-bodied males have fully automatic rifles in their homes? To be sure, the United States is very good by world standards in protecting this freedom, so the Swiss don’t really have an advantage on this issue, but it’s still worth mentioning.
Notwithstanding my admiration for Switzerland, there are five reasons why I don’t plan on expatriating.
1. I’m not rich and don’t particularly see how I will get rich anytime soon. Switzerland is not a cheap place to live.
2. It would be very time-consuming and expensive to go to Georgia Bulldog games, and I doubt the games would be on TV.
5. Even though it’s considered a bit uncouth among some libertarians, I do have certain patriotic impulses. I’m not about to surrender my nation to the plundering thieves from Washington.
The United States, Canada, and Switzerland are the only developed nations that have some degree of genuine federalism (Germany and Australia don’t count by my standards), and Switzerland is the only country where the central government is smaller than the local/regional governments. This is one of the reasons why Switzerland is so admirable, as partly explained in this Center for Freedom and Prosperity article on the Swiss tax system.
But perhaps other nations are learning from Switzerland’s success. The United Kingdom is devolving some power to Scotland, as reported by the Irish Times. This is just a small step, and it’s unclear how it will work since Scotland leans left and is heavily subsidized by England. But the value of federalism is that jurisdictions compete with each other and cross-regional subsidies are reduced. So if Scotland wants to use its new powers to make the wrong choices, at least only the Scottish people will suffer.
Scotland is to get substantial new powers to set its own income tax rates and win new rights to borrow money in phase two of the devolution of greater autonomy to the Scottish parliament. The measures were described by Scottish secretary Michael Moore as the most significant transfer of financial power out of London since the formation of the UK more than 300 years ago, making Holyrood more accountable to voters. …The proposals form the centrepiece of a new Scotland Bill drafted by the UK government, which will allow the Scottish government to increase or cut income tax rates by up to 50 per cent for basic rate taxpayers, and by 20 per cent at the highest rate. The measures also go further than expected by offering the Scottish government much greater borrowing powers, and more quickly, than originally recommended by a cross-party commission on devolution chaired by Kenneth Calman. …In addition, Holyrood will be allowed to introduce new, Scotland-only taxes, with Westminster’s approval, and have control over stamp duty and landfill tax. In all, the powers will give Holyrood control over about £12 billion or 35 per cent of its current spending: its block grant from the treasury, worth £29 billion a year, will be cut by an equal amount.
I’ve always had a soft spot for Switzerland. The nation’s decentralized structure shows the value of federalism, both as a means of limiting the size of government and as a way of promoting tranquility in a nation with several languages, religions, and ethnic groups. I also admire Switzerland’s valiant attempt to preserve financial privacy in a world dominated by greedy, high-tax governments.
I now have another reason to admire the Swiss. Voters yesterday overwhelmingly rejected a class-warfare proposal to impose higher tax rates on the income and wealth of rich residents. The Social Democrats did their best to make the hate-and-envy scheme palatable. Only the very richest taxpayers would have been affected. But Swiss voters, like voters in Washington state earlier this month, understood that giving politicians more money is never a solution for any problem.
In a referendum today, 59 percent of voters turned down the proposal by the Social Democrats to enact minimum taxes on income and wealth. Residents would have paid taxes of at least 22 percent on annual income above 250,000 francs ($249,000), according to the proposed changes. Switzerland’s executive and parliamentary branches had rejected the proposal, saying it would interfere with the cantons’ tax-autonomy regulations. The changes would also damage the nation’s attractiveness, the government, led by President Doris Leuthard, said before the vote. The Alpine country’s reputation as a low-tax refuge has attracted bankers and entrepreneurs such as Ingvar Kamprad, the Swedish founder of Ikea AB furniture stores, and members of the Brenninkmeijer family, who owns retailer C&A Group.
It’s never wise to draw too many conclusions from one vote, but it certainly seems that voters usually reject higher taxes when they get a chance to cast votes. Even tax increases targeting a tiny minority of the population generally get rejected. The only exception that comes to mind is the unfortunate decision by Oregon voters earlier this year to raise tax rates.
After being in 1st place in 2007 and 2008, America dropped behind Switzerland in the World Economic Forum’s Global Competitiveness Report in 2009. The 2010 ranking was just released, and the United States has tumbled two more spots to 4th place, behind Switzerland, Sweden, and Singapore. I’m not a complete fan of the World Economic Forum’s methodology (the Economic Freedom of the World rankings are the best measure of sound economic policy), but it’s almost surely a bad sign when a country moves down in the rankings. The timing of the fall will lead some to blame Barack Obama, and I certainly agree that his policies are making America less competitive, but Bush also deserves blame for increasing the burden of government and compromising America’s economic vitality. Here’s a blurb from the Associated Press.
The U.S. has slipped down the ranks of competitive economies, falling behind Sweden and Singapore due to huge deficits and pessimism about government, a global economic group said Thursday. Switzerland retained the top spot for the second year in the annual ranking by the Geneva-based World Economic Forum. It combines economic data and a survey of more than 13,500 business executives. Sweden moved up to second place while Singapore stayed at No. 3. The United States was in second place last year after falling from No. 1 in 2008.
This story from Business Week warmed my heart. Switzerland’s cantons are competing to create better tax policy, and this is attracting companies seeking to escape the kleptocracies elsewhere in Europe. This shows the value of tax competition (imagine how bad taxes would be in Germany and France if politicians in those nations didn’t have to worry about taxpayers escaping over the border) and the benefits of federalism (unlike the United States, Switzerland has not made the mistake of letting the central government becoming the dominant force in fiscal policy).
“Low corporate taxes will help Switzerland attract business, but it’s also creating tension as European governments seek revenue to plug their fiscal deficits.” said Alan McQuaid, chief economist at Bloxham Stockbrokers in Dublin. Switzerland reported a fiscal surplus last year, and cantons from Zurich to Schwyz are lowering taxes. “There is still a clear downward trend in taxation,” said Martin Eichler, head of research at BakBasel, an economic consulting firm in Basel, Switzerland. “There is pressure to be attractive to companies and the cantons are saying that if we have to save somewhere, then it won’t be on tax.” Swiss corporate tax rates, including a federal rate of 8.5 percent, range from 11.8 percent in the town of Pfaeffikon in Schwyz to 24.2 percent in Geneva, according to tax consultant Mattig-Suter & Partner. That compares with a corporate tax rate of 28 percent in the U.K. and 35 percent in the U.S. Vaud, running east along the lake from Geneva to Montreux, persuaded Shire Plc to set up an office last month with the help of tax relief on its corporate rate of 23.5 percent, said Eric Maire, the canton’s senior project director for economic promotion. That follows the March decision of Ineos Group Holdings Plc to relocate from its U.K. base. …Tax increases in the U.K. played a “key role” in persuading firms such as BlueCrest Capital Management and Brevan Howard Asset Management LLP to shift part of their London-based operations to Geneva, said Loeffler. Smaller cantons want to emulate Zug, which used a tax rate of 15.8 percent to more than double its number of registered companies to 29,134 since 1990. The canton is home to miner Xstrata Plc and Transocean Ltd., the world’s largest offshore oil and gas driller.
Okay, the title of this post is an absurd exaggeration, but I am not optimistic about the future of the United Kingdom. Government spending has exploded over the last ten-plus years (the largest expansion in the burden of government spending among developed nations), and this unsurprisingly has led to punitive class-warfare policies. I saved this article from the Daily Mail from a couple of months ago because I was curious to see whether predictions about talent fleeing London would prove accurate:
London will become the most highly taxed financial centre in the world when the new 50 per cent income tax rate for those earning £150,000 or more comes into force next month. Taxes will be higher than for financial workers living in the other key centres of New York, Paris, Frankfurt, Geneva, Zurich, Dubai and Hong Kong, KPMG calculated. The findings will raise fears that Labour’s levies are driving businesses and bankers overseas and threatening Britain’s competitiveness. …Tullett announced last December that it will help employees move abroad if they want to avoid the top rate of tax, and Mr Smith said workers are already looking at relocating. Graeme Leach of the Institute of Directors said: ‘The 50 per cent rate is a policy that should never have been announced. The indirect impact on entrepreneurial aspiration, business confidence and foreign investment is likely to be significant.
As we can see from this Bloomberg article, it appears that the feckless big-government policies of all the major parties are driving productive investors and entrepreneurs to jurisdictions with better tax law. Switzerland seems to be the biggest beneficiary. As you read the details below, one thing to keep in mind is that at least Brits are free to emigrate. The U.S. government imposes repugnant Soviet-style exit taxes designed to ransack successful people who want the freedom to move someplace with more liberty:
…more than 100 bankers, hedge fund managers and wealthy retirees are gathered on a cold March night to plot their escape from Britain. Swiss government officials and Geneva-based financial advisers have come to London to lure rich residents with glowing descriptions of the country’s low taxes, safe streets, private-banking options and convenient ski weekends. …Next door, an overflow crowd of 50 more attendees enjoys wine and canapes as they watch the presentation on closed- circuit televisions in a mahogany-lined library, which includes a chart showing the prevalence of English as a language for doing business in Switzerland. A JPMorgan Chase & Co. banker who declined to be identified confides he’s planning to relocate next year. His main complaint: higher U.K. taxes, a theme the Swiss delegation has pounced upon. “Some people think it’s morally wrong to be working for the government for more than half the year,” says Jonathan Ivinson, a Geneva-based tax partner at international law firm Hogan & Hartson LLP… London’s highest earners must now pay a 50 percent tax on incomes above 150,000 pounds ($227,200) that came into force on April 6, replacing a 40 percent top rate. …During the campaign, both Brown and Cameron said they backed additional curbs on the U.K. financial industry — including a bank transaction levy — and agreed that Britain’s dire financial state would lock in higher tax rates for the foreseeable future: …As the taxman’s take grows larger, Switzerland is shaping up as the most-welcoming alternative for British exiles. Light- touch regulation and the willingness of cantons, as regional governments are called, to negotiate special tax rates for both individuals and businesses have prompted at least 30 London hedge fund managers to consider moving to Geneva in the past year, says Shelby du Pasquier, a Geneva-based partner at Lenz & Staehelin, a Swiss law firm. Investment management and advisory services aren’t regulated in Switzerland, apart from anti-money laundering rules, and the federal government and several cantons last year reduced taxes on dividend payments for entrepreneurs, including owners of hedge fund firms, he says. …Geneva has already attracted some of London’s top talent. Alan Howard, co-founder of Brevan Howard Asset Management LLP, Europe’s largest hedge fund firm, has rented office space in Geneva for 60 traders relocating from London. …BlueCrest Capital Management Ltd., Europe’s third-largest hedge fund firm, has opened a Geneva office for as many as 70 traders and analysts who have worked in London on its two biggest funds. They’re being joined by BlueCrest co-founder Michael Platt and Leda Braga, manager of the $9 billion BlueTrend fund, according to people familiar with the firm’s transitional plans. …The departures of those principals prove that the threat to London’s prominence as a financial center is real, says Stuart Fraser, head of policy at the City of London Corporation, which runs the financial district. …U.K. top tax rates will exceed those in Germany and France for the first time since 1989, according to a study by accounting firm KPMG. A banker earning 1 million pounds a year in London will now take home less than his counterparts in Frankfurt, Hong Kong, New York, Paris, Singapore and Zurich, KPMG says. “The U.K. has abandoned one of its key principles when it comes to tax, which is predictability,” says Bertrand des Pallieres, founder of SPQR Capital LLP, a London-based hedge fund firm with about $700 million in assets as of April. He left the U.K. last year and opened an office in Geneva after the new tax rate was announced. It’s not only funds looking at leaving. Broker Tullett Prebon said in December it would allow its 700 employees in London to move to “more certain tax regimes.” Several of Tullett Prebon’s major desks are now planning to move key personnel, the company says. …London Mayor Boris Johnson estimates that up to 9,000 bankers, hedge fund managers and private-equity executives could leave the city, according to a letter he sent to the Labour government in January. …Marcel Jouault is working to make sure that agitated Britons wind up in Pfaeffikon, a village on the shore of Lake Zurich. Pfaeffikon’s 11.8 percent corporate tax rate and 19 percent personal income levy are both Switzerland’s lowest, helping the village lure funds that handle about $100 billion in investments, according to hedge fund research firm Opalesque Ltd.
In a rational world, Switzerland would be a role model for other nations. It is quite prosperous thanks largely to a modest burden of government. There is remarkable ethnic and religoius diversity, but virtually no tension because power is decentralized (sort of what America’s Founders envisioned for the United States). Yet despite these – and many other – attractive features, Switzerland is being persecuted because of strong human rights laws that protect financial privacy. Money-hungry politicians from other nations resent Swtizerland’s attractive policies, and they would rather trample Swiss sovereignty rather than fix their own oppressive tax laws. An official from the Swiss Bankers Association provides some background in a New York Times column:
In Switzerland, this tradition of treating a client’s financial affairs in confidence became law in 1934 when it was codified in Article 47 of the country’s first-ever federal banking act as a contemporary reaction to the economic crisis, various domestic political considerations and well-publicized cases of espionage involving France and Germany. …Banking secrecy, therefore, is not some gimmick the Swiss devised to attract foreign clients to their banks. It reflects the very high degree of trust that exists between the Swiss state and its citizens and it has strong democratic foundations. …The Swiss are proud of their system and they reward it with a high level of taxpayer honesty. It works because the Swiss vote their own taxes, they have a high degree of control over the way tax revenues are spent and over all they believe their tax system to be reasonable, comprehensible, transparent and fair. The principle of self-declaration backed up with withholding taxes and, if necessary, stiff fines supports this “honesty box” system. …Doesn’t Switzerland hear the snapping jaws and cracking whips of foreign finance ministers, tax collectors, O.E.C.D. bureaucrats, cash-dispensing government agents and other denizens of the encroaching real world as they circle round Mother Helvetia intent on biting huge chunks out of her banking secrecy, if not swallowing it whole? …In March last year the Swiss announced they would give up the evasion-fraud distinction for foreign bank clients and adopt the O.E.C.D. standards on information exchange in tax matters. …However, requests for assistance must be made with regard to a specific individual, and “fishing expeditions” — any indiscriminate trawling through bank accounts in the hope of finding something interesting — remain ruled out. …Switzerland demonstrates to the world that it is possible for a state to collect taxes with a high degree of taxpayer honesty and without the authorities being corroded with suspicion about the financial activities of their citizens. Citizens in a democracy would never allow their police force to have an automatic right of forced entry into their homes just on the off-chance of finding some stolen goods, so why on earth should the state have an automatic right of forced entry into citizens’ banks accounts just on the off-chance of discovering some tax evasion? There must be a limit to the extent to which respect for an individual’s privacy is sacrificed on the altar of international cooperation in tax matters.
Sadly, the United States is part of the effort to create a global tax cartel. An “OPEC for politicians” would be terrible news for taxpayers, though, much as a cartel of gas stations would be bad for driviers. So-called tax havens play a valuable role in curtailing the greed of the political class. Ask yourself a simple question: Would politicians be more likely or less likely to raise tax rates if they knew taxpayers had no escape options?
A Swiss court just threw a wrench in the gears of an IRS effort to impose bad US tax law on an extraterritorial basis, ruling that UBS does not have to hand over data to the American tax authorities. This ruling nullifies an agreement that the Swiss government was coerced into making with the US government last year. In typical arrogant fashion, the IRS already has indicated that it still expects acquiescence, notwithstanding Switzerland’s strong human rights policy on personal privacy. The Bloomberg story excerpted below has the details, but it’s worth noting that this entire fight exists solely because the internal revenue code imposes double taxation on income that is saved and invested and imposes that bad policy on economic activity outside America’s border. But just as other governments should not have the right to impose their laws on things that happen in America, the United States should not have the right to trample the sovereignty of other nations:
A UBS AG account holder won a Swiss court case preventing data from being disclosed in a ruling that may impede a U.S. crackdown on overseas tax evasion. The failure by U.S. citizens to complete certain tax forms or declare income doesn’t constitute “tax fraud” that would require Switzerland to disclose account data, the country’s Federal Administrative Court ruled in a judgment released today. …“The prosecutors at the Justice Department are not going to be happy with this opinion,” Namorato said in an interview in Washington. “It guts the settlement that they negotiated with the Swiss authorities.” …The Swiss government said in a statement that it will decide Jan. 27 how the Swiss-U.S. agreement can be implemented in light of the ruling. U.S. Justice Department spokesman Charles Miller declined to comment. …The Internal Revenue Service said in a statement that while the agency hadn’t reviewed the ruling it “had every expectation that the Swiss government will continue to honor the terms of the agreement.” …Today’s ruling involved a single test case, and the court said there were 25 more involving similar claims that it will ask the Swiss tax authority to review. “It’s a landmark decision,” said Bernhard Loetscher a partner at Zurich-based law firm CMS von Erlach Henrici AG. “The court considers the case so crystal clear that it invited the SFTA to withdraw the 25 other claims.” …Under the 1996 double taxation treaty, “tax fraud and the like” means fraudulent behavior that causes or attempts an illegal and important reduction in tax owed. Examples included keeping separate accounts of incorrect profit, losses and orders, as well as a scheme of lies. Switzerland distinguishes between tax fraud, which is a crime, and tax evasion, which is a civil offense. “The U.S. will soon start to renegotiate the double taxation treaty, to give up the distinction between tax evasion and tax fraud,” said Zurich lawyer Wolfram Kuoni. “The key battle will be if it will apply retrospectively.”
This battle is part of a broader effort by uncompetitive nations to persecute “tax havens.” Creating a tax cartel for the benefit of greedy politicians in France, Germany, and the United States would be a mistake. An “OPEC for politicians” would pave the way for higher taxes, as explained here, here, and here. But this also is a human rights issue. Look at what happened recently in the thugocracy known as Venezuela, where Chavez began a new wave of expropriation. The Venezuelans with money in Cayman, Miami, and Switzerland were safe, but the people with assets inside the country have been ripped off by a criminal government. Or what about people subjected to persecution, such as political dissidents in Russia? Or Jews in North Africa? Or ethnic Chinese in Indonesia? Or homosexuals in Iran? And how about people in places such as Mexico where kidnappings are common and successful people are targeted, often on the basis of information leaked from tax departments. This world needs safe havens, jurisdictions such as Switzerland and the Cayman Islands that offer oppressed people the protection of honest courts, financial privacy, and the rule of law. Heck, even the bureaucrat in charge of the OECD’s anti-tax competition campaign admitted to a British paper that “tax havens are essential for individuals who live in unstable regimes.” With politicians making America less stable with each passing day, let’s hope this essential freedom is available in the future.
This has a similar title to an earlier blog post, but the topic is completely different. The U.K.-based Times has a fascinating story about how how tax rates are driving business out of London, thus showing the insanity of class-warfare tax policy. Two excerpts are must reading, though the message will fall on deaf ears at the White House. The first looks at the big picture, noting how Switlzerland is very attractive because of reasonable tax rates and political stability:
As the financial weather worsens in Britain — bankers are being taxed 50% on this year’s bonuses, and from April half of any income over £150,000 will go straight to the Inland Revenue — many of our super-rich are threatening to abandon London. Discreet advisers in Geneva, Zurich and the high-end Swiss ski resorts say that a steady trickle of wealthy Brits have either made the move or are strongly considering a new life in the mountains. In December alone eight British-based hedge funds decided to move there. “They want to be out of the UK by April,” says David Butler of Kinetic, which provides services for hedge funds. “There’s a lot of momentum to leave. Geneva is the most popular choice. These people are a kind of club: they go where the others are.” He predicts that up to 150 funds will follow. …Switzerland is also enormously stable: 100-year mortgages are common, property is a safe investment, and the average income is $68,000, against $44,000 in the UK. The Swiss are unlikely to bring in the kind of arbitrary tax changes that have made London’s bankers so jumpy. …The fear for the British Treasury is that a big international investment bank might relocate. So far, that has not happened. But Bob Diamond of Barclays Capital, one of Britain’s highest-paid bankers, warned last month: “Both financial capital and human capital are extremely mobile.”
The second excerpt is based on two conversations with former British residents, both of whom are no longer being raped by Gordon Brown and his crowd of redistributionists. This should be a warning to Obama and his crowd, but England actually is not as bad as America in one key respect – investors and entrepreneurs can leave the United Kingdom without being ransacked at the border. People leaving the United States, by contrast, has subject to onerous exit taxes (disturbingly akin to the policies imposed by the Soviet Union and Nazi Germany, albeit motivated by greed and envy rather than hate):
As a British citizen, “I’d get totally clobbered by the taxman if I came back to London”, he admits. He is not wrong. Mike Warburton, tax director at Grant Thornton accountants, says: “If he returned to the UK, he would be taxed on his worldwide income and gains as a UK resident domiciled individual.” Say James has £40m invested, and is getting a paltry return of 2% a year (£800,000); it would give him a tax bill of around £400,000. He would also be clobbered, says Warburton, “on income and gains arising after his return to the UK from any capital built up while he was overseas, and gains are taxable at 18%. Even if he put the capital into an offshore trust, he would still be caught by tax-avoidance rules in the UK. Not an appealing prospect.” In Switzerland, by contrast, life is sweet. All that is required is a deal with the local canton to pay a flat yearly forfait (forfeit). Happily for bankers, it is all negotiable: the better connected your tax lawyer is with the local canton official, the better your deal. The Swiss are famously good at keeping financial secrets, so there is no published list of which canton charges what, but the going rate in Geneva, the most expensive one, is about £180,000 a year. …Another option is to become a resident, which is fairly simple as long as you are rich and from America or the EU, then pay tax at the local rates, which are linked to the value of property and are typically only 20% of income. …Might her London banking friends follow her out here? “Sure, why not?” she says, sipping white wine. “They’re all pretty pissed off at the tax on bonuses and the new top rate of 50%. People like me, we’re motivated by money. If you take so much away in tax, there’s no incentive.” Just look at the tax on a bonus of £200,000. First, there is the new bonus tax of 50%, which costs the company another £87,500. Then there is employer’s National Insurance of £25,600. Then the employee pays income tax at 40% on the £200,000, which is £80,000, and employee’s NI, another £2,000. So the total tax is a whopping £195,100. This represents a 98% tax burden on the net payment of £200,000 to the employee.
The guns-cause-crime mantra of the left has never made sense, particularly when there are some heavily-armed nations where crime is very low. Israel is a good example, but Switzerland may be an even better country to highlight since it has been living in peace with its neighbors since the Napoleanic Wars. This video helps explain why:
Tax competition is an issue that arouses passion on both sides of the debate. Libertarians and other free-market advocates welcome tax competition as a way of restraining the greed of politicians. Governments have lowered tax rates in recent decades, for instance, because politicians are afraid that the geese that lay the golden eggs can fly across the border. But collectivists despise tax competition – for exactly the same reason. They want investors, entrepreneurs, and companies to passively serve as free vending machines, dispensing never-ending piles of money for politicians. So when a left-wing group puts together a ranking of the world’s “top secrecy jurisdictions” in hopes of undermining tax competition, proponents of individual freedom can use that list as a guide to world’s most investor-friendly nations. The good news is that an American state, Delaware, is number one on the list. And since being a tax haven is a magnet for investment, this is good news for U.S. competitiveness. The bad news is that American taxpayers are not allowed to benefit from many of Delaware’s “tax haven” policies. Here’s what a left-wing columnist in the United Kingdom wrote about the issue:
You’re a billionaire but you don’t want anyone, least of all the taxman, to know. What do you do? Head for a palm-fringed island paradise or a snow-covered Alpine micro-state? Wrong. The world’s most opaque jurisdictions – the ones that will best shield you and your cash from the light – are mostly in the heart of the most sophisticated and powerful global financial centres. London, Luxembourg and Zurich are in the top five most secretive jurisdictions, according the first comprehensive index of financial transparency ever compiled. Yet top of the pile, beating the British Virgin Islands, Belize or Liechtenstein as the best place to hide wealth, is Delaware. One of the smallest states in the US, it offers the best protection for anyone who does not want to disclose their identity as a beneficial owner of a company. That is one very good reason why the East Coast state hosts 50% of the US’s quoted firms and 650,000 companies – almost equivalent to one company per Delaware resident. …Delaware – the political power-base of the US vice-president, Joe Biden – offers high levels of banking secrecy and does not make details of trusts, company accounts and beneficial ownership a matter of public record. Delaware also allows companies to re-domicile within its borders with minimal disclosure, and allows the existence of privacy-enhancing “protected cell” or “segregated portfolio” companies, among many other stratagems useful for protecting the identity of those who do business there.
I’m in Switzerland for a couple of speeches in Geneva and one speech in Zurich. I’d like to say I’m also visiting my money, but that would only be true if I had enough money for a Swiss account. Alas.
Switzerland is an admirable nation for many reasons, especially its strong human rights policy in defense of financial privacy. But I also admire its fealty to federalism. Indeed, unlike the United States, it has largely kept the central government from becoming a dominant force in the nation’s fiscal policy. As this study from the Center for Freedom and Prosperity (authored by a Swiss expert) explains, more than two-thirds of taxing and spending takes place at the canton and municipal level. In America, by contrast, the federal government now dominates, with two-thirds of taxing and spending coming from Washington.
One final observation. I’m staying in what might be called the United Nations district of Geneva, and one can’t help but notice all the urbane foreigners – particularly from the developing world – wandering the town and patronizing the tony restaurants. Maybe I’m just a cranky libertarian, but I can’t stop thinking about the tremendous misallocation of human capital this represents (not to mention the huge waste of money). Many of these people are probably the “best and brightest” from their various homelands, and they presumably could contribute to their nations’ prosperity by being back home doing something productive. But thanks to the proliferation of international bureaucracies, few of which can make even an implausible claim of doing anything worthwhile, these people are net liabilities rather than net assets.
Business Week reports on how low taxes are helping to attract jobs and investment – a lesson that increasingly seems too complex for politicians in the United States and United Kingdom:
As governments around the globe struggle to contain huge deficits, companies and executives are bracing for higher taxes. And increasingly they are turning to Switzerland for relief. …Swiss cantons are openly and legally urging multinationals to relocate. This fall, U.S. fast-food giant McDonald’s (MCD) will move its European headquarters to Geneva from London, joining Kraft Foods (KFT), Yahoo! (YHOO), and Nissan. They’ve all relocated their main Europe offices to Switzerland in the last two years to take advantage of low corporate taxes. …”There is a lot of interest from companies looking to shift their taxable profit to countries with lower rates,” says Andreas Müller, an international corporate tax partner at KPMG in Zurich. Meanwhile, Britain and Ireland are increasing personal income tax rates for top earners. In the U.S., tax hikes seem inevitable. Switzerland has no such plans, says Stéphane Garelli, professor of competitiveness at IMD Business School in Lausanne. The 26 Swiss cantons are free to set their own rates, so Swiss-based companies’ effective average tax rates range from 10.8% to 24% of net income (those effective rates include federal taxes, which are the same throughout the country). Ten cantons even cut rates in 2008 to lure investment. After slashing its corporate rate to 6.6% in 2006, the canton of Obwalden lowered rates to 6% last year, just after the nearby canton of Appenzell Ausserrhoden did the same. “A company might pay 50% less tax just by moving 30 miles down the road,” says Martin Naville, CEO of the Swiss-American Chamber of Commerce in Zurich. …While the Swiss court companies, the British unwittingly help the Swiss out. As of last year, foreigners living in the U.K. for seven years or more must pay tax on income and capital gains earned outside Britain or fork over an annual $49,000 on top of what they ordinarily owe the government. And starting next April, the top income tax rate will jump to 51.5%, including social security payments. That’s up from 40% for anyone, citizen or foreign resident, earning more than $245,000. The hikes have prompted some hedge funds and private equity firms to head to Switzerland, analysts say. Krom River, a commodities fund with $750 million under management, moved to the canton of Zug last year. The lure: Swiss stability. “Companies can be sure that once they invest, there won’t be any surprises,” says Naville.
I explain why the Obama Administration should not export America’s wretched internal revenue code to other nations that have better tax policy and more respect for human rights.
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