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Posts Tagged ‘Tax Havens’

Earlier this year, I defended Mitt Romney and Bain Capital from the absurd accusation that they did something wrong by utilizing low-tax jurisdictions.

So-called tax havens, as I’ve explained on many occasions, play a valuable role in the world economy. Indeed, they should be emulated rather than persecuted.

In a follow-up post, I mocked ABC News for a ridiculous non-story as they tried to make Romney appear guilty for following good business practices.

The issue has become hot again, so I talked about Romney and tax havens with Jason Riley at the Wall Street Journal.

Since nobody has claimed that Romney violated U.S. tax law, this kerfuffle only exists because the left wants to create the impression that tax havens are bad and then tar the GOP’s presumptive nominee with guilt by association.

Brian Garst of the Center for Freedom and Prosperity nails the issue in his column for the Daily Caller.

People who invest or bank overseas do not hate America. Oftentimes, they are simply banking where their money is earned to avoid the hassle of exchange rate and wire transfer fees. …It’s also smart practice to diversify. …Mitt Romney should not be cowed into shame over his banking practices just because he doesn’t strictly park his after-tax earnings in American banks, but should instead seize the opportunity to more aggressively defend against populist attacks on financial privacy and explain the benefits of jurisdictional tax competition.

That’s good advice, but I’m not holding my breath waiting for Romney to defend Switzerland and other jurisdictions with good policy. That would require an underlying belief in freedom and liberty, which seems to be lacking.

But you would think that he might respond by noting that many top Democrats directly invest in tax havens, and that presumably all of them – as I noted in my WSJ interview – are indirectly invested in these financial centers.

P.S. It’s probably a lost cause, but I’m an old-fashioned guy who thinks that people shouldn’t blatantly lie, so here’s my obligatory complaint that many politicians, journalists, and policy folks are repeating the debunked assertion that so-called tax havens deprive the U.S. Treasury of $100 billion per year. Obama threw around that make-believe number in the 2008 campaign, as seen in this video. But as shown in the final video of this post, the $100 billion figure was concocted out of thin air by a former John Kerry staffer, who confessed he made up the number when the Congressional Research Service asked for his methodology.

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I’m not a big fan of the Organization for Economic Cooperation and Development. This Paris-based international bureaucracy doesn’t get as much attention as the United Nations or International Monetary Fund, but it’s probably does more damage to freedom and prosperity if measured on a per-dollar-spent basis.

For instance:

  • 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 has endorsed Obama’s class-warfare agenda, publishing documents endorsing “higher marginal tax rates” so that the so-called rich “contribute their fair share.”

But now I’ve come across something that is bizarrely reprehensible. The bureaucrats in Paris are allying themselves with the cranks, buffoons, and totalitarians from the so-called Occupy movement.

In the bureaucracy’s quarterly magazine, the OECD Observer, one of the Occupy clowns was given a platform to promote more statism. The poorly written article is mostly filled with empty clichés and “change” and “challenges,” but it does specifically embrace the OECD’s anti-tax competition project as a tool to promote higher taxes and more redistributionism.

In OECD member countries, a grassroots movement has manifested itself in the overnight occupation of public space and the exercise of direct democracy… The first lesson to draw from Occupy is that civil society has the scope to be a dynamic force for change. …In London these efforts produced statements on corporations, economics, the environment and local government within weeks. …We all know that we face profound challenges in the way we organise our economies, our societies and our government. …There’s a reason why “We are the 99%” has become such a rallying cry. There are external threats to democratic governance too, and some of these may need to be tackled anew on an international scale. Tax havens and secrecy jurisdictions bring governments into a harmful race to the bottom that is against their population’s interests. They are a major driver of inequality, which we know correlates to poor health and social outcomes. The OECD has played an important role in drawing policymakers’ attention to these issues, but those efforts now need to be stepped up.

If you want the specific arguments about why tax competition and tax havens are desirable, I urge you to peruse the work of Allister Heath and Pierre Bessard.

The main purpose of this post, though, is to ask why American taxpayers are sending about $100 million each year to Paris to subsidize the OECD’s left-wing agenda? This video has more details.

Here are a few additional blurbs about OECD activities that are being financed with your tax dollars.

The analogy isn’t perfect, but funding the OECD is the international version of subsidizing ACORN. A way for the left to use our money to push their agenda.

Which is why I’ve argued that the GOP – if it is serious about its claim of fiscal responsibility – should immediately end handouts for the Paris-based bureaucrats.

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I’m perfectly willing to give my opponents credit when they do something clever and/or effective.

I posted this video making fun of libertarians, for instance, because it is genuinely funny. People like me, I will confess, sometimes are so allergic to government that we do things that make us easy targets for satire.

Well, here’s a video parody of Mitt Romney and the Cayman Islands, obviously designed to resemble the Corona beer commercials. I’m not impressed.

My tepid reaction is not because I recently defended Romney’s use of Cayman-based investment vehicles.

Indeed, here’s an old video attacking tax havens, and I think it’s sufficiently amusing that I just uploaded it onto my Youtube channel because it’s worth sharing and I couldn’t find it online.

Both of these leftist videos make silly and inaccurate points, but the anti-Romney video is simplistic and the entire premise is false. He’s not hiding anything. Intelligent satire uses the truth as a starting point. This video doesn’t.

The anti-Cheney video, by contrast, has some big mistakes, but at least it is based on the accurate premise that companies legally try to reduce their taxes. Moreover, the Jimmy Buffett music is a nice touch.

Since I’ve share a couple of anti-tax haven videos, I feel compelled to post one of mine for some balance. And since I recently posted my video on the economic case for tax havens, here’s my video on the moral case for tax havens.

And if you want to really understand these issues, I humbly suggest you look at the paper I wrote for the UK-based Adam Smith Institute.

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I’m not a big fan of Mitt Romney. I hammered him the day before Christmas for being open to a value-added tax, and criticized him in previous posts for his less-than-stellar record on healthcare, his weakness on Social Security reform, his anemic list of proposed budget savings, and his reprehensible support for ethanol subsidies.

But I also believe in being intellectually honest, so I’ll defend a politician I don’t like (even Obama) when they do the right thing or when they get attacked for the wrong reason.

In the case of Romney, some of his GOP opponents are criticizing him for job losses and/or bankruptcies at some of the companies in which he invested while in charge of Bain Capital. But I don’t need to focus on that issue, because James Pethokoukis of AEI already has done a great job of debunking that bit of anti-Romney demagoguery.

In this post, I want to focus on the issue of tax havens.

Regular readers know that I’m a big defender of these low-tax jurisdictions, for both moral and economic reasons, and I guess that reporters must know that as well because I’ve received a couple of calls from the press in recent weeks. But I suspect I”m not being called because reporters want to understand international tax policy. Instead, based on the questions, it appears that the establishment media wants to hit Romney for utilizing tax havens as part of his work at Bain Capital.

As far as I can tell, none of these reporters have come out with a story. And I’m also not aware that any of Romney’s political rivals have tried to exploit the issue.

But I think it’s just a matter of time, so I want to preemptively address this issue. So let’s go back to 2007 and look at some excerpts from a story in the Los Angeles Times about the use of so-called tax havens by Romney and Bain Capital.

While in private business, Mitt Romney utilized shell companies in two offshore tax havens to help eligible investors avoid paying U.S. taxes, federal and state records show. Romney gained no personal tax benefit from the legal operations in Bermuda and the Cayman Islands. But aides to the Republican presidential hopeful and former colleagues acknowledged that the tax-friendly jurisdictions helped attract billions of additional investment dollars to Romney’s former company, Bain Capital, and thus boosted profits for Romney and his partners. …Romney was listed as a general partner and personally invested in BCIP Associates III Cayman, a private equity fund that is registered at a post office box on Grand Cayman Island and that indirectly buys equity in U.S. companies. The arrangement shields foreign investors from U.S. taxes they would pay for investing in U.S. companies. …In Bermuda, Romney served as president and sole shareholder for four years of Sankaty High Yield Asset Investors Ltd. It funneled money into Bain Capital’s Sankaty family of hedge funds, which invest in bonds and other debt issued by corporations, as well as bank loans. Like thousands of similar financial entities, Sankaty maintains no office or staff in Bermuda. Its only presence consists of a nameplate at a lawyer’s office in downtown Hamilton, capital of the British island territory. … Investing through what’s known as a blocker corporation in Bermuda protects tax-exempt American institutions, such as pension plans, hospitals and university endowments, from paying a 35% tax on what the Internal Revenue Service calls “unrelated business income” from domestic hedge funds that invest in debt, experts say. …Brad Malt, who controls Romney’s financial trust, said Bain Capital organized the Cayman fund to attract money from foreign institutional investors. “This is not Mitt trying to do something strange,” he said. “This is Bain trying to raise some number of billions from investors around the world.”

There are a couple of things worth noting about these excerpts.

1. Nobody has hinted that Romney did anything illegal for the simple reason that using low-tax jurisdictions is normal, appropriate, and intelligent for any business or investor. Criticizing Romney for using tax havens would be akin to attacking me for living in Virginia, which has lower taxes than Maryland.

2. Jurisdictions such as Bermuda and the Cayman Islands are good platforms for business activity, which is no different than a state like Delaware being a good platform for business activity. Indeed, Delaware has been ranked as the world’s top tax haven by one group (though American citizens unfortunately aren’t able to benefit).

3. America’s corporate tax system is hopelessly anti-competitive, so it is quite fortunate that both investors and companies can use tax havens to profitably invest in the United States. This helps protect the American economy and American workers by attracting trillions of dollars to the U.S. economy.

These three points are just the tip of the iceberg. Watch this video for more information about the economic benefit of tax havens.

Last but not least, here’s a prediction. I think it’s just a matter of time until Romney gets attacked for utilizing tax havens, though the press may wait until after he gets the GOP nomination.

But when those attacks occur, I’m extremely confident that the stories will fail to mention that prominent Democrats routinely utilize tax havens for business and investment purposes, including as Bill Clinton, John Kerry, John Edwards, Robert Rubin, Peter Orszag, and Richard Blumenthal.

It’s almost enough to make you think this cartoon is correct and that the establishment press is biased.

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I’m not a fan of international bureaucracies.

I’ve criticized the United Nations for wanting global taxes. I’ve condemned the International Monetary Fund for promoting bigger government. I’ve even excoriated the largely unknown Basel Committee on Banking Supervision for misguided regulations that contributed to the financial crisis.

But the worse international bureaucracy, at least when measured on a per-dollar-spent basis, has to be the Paris-based Organization for Economic Cooperation and Development.

OECD Headquarters: Living the good life at US expense

American taxpayers finance nearly one-fourth of the OECD’s budget, at a cost of more than $100 million per year, and in exchange we get a never-ending stream of bad policy recommendations.

This Center for Freedom and Prosperity study has all the gory details. The OECD bureaucrats (who get tax-free salaries, by the way) endorsed Obamacare, supported the failed stimulus, and are big advocates of a value-added tax for America.

What’s especially frustrating is that the OECD initially was designed to be a relatively innocuous bureaucracy that focused on statistics. Indeed, it was even viewed as a free-market counterpart to the Soviet Bloc’s Council for Mutual Economic Assistance.

My, how things change.

Perhaps the most odious example of bad OECD policy is the campaign against tax competition. Beginning during the 1990s, the OECD has attacked low-tax jurisdiction for the supposed crime of having good tax laws that attract jobs and capital from high-tax nations such as France and Greece.

So why did the OECD launch this project to prop up Europe’s welfare states?  The answer can be found in an excellent new study from Professor Andrew Morriss at the University of Alabama Law School and Lotta Moberg, a Ph.D student in economics at George Mason University.

It’s a publication designed for academic journals, but it avoids jargon and gibberish, so a regular person can read and understand how the OECD has morphed from a harmless (though presumably still wasteful) bureaucracy into a force for global statism. Here are some of the key findings in the study.

…this transition was in part the result of entrepreneurship by a group of OECD staff, who spotted an opportunity to expand their mission, bringing with it a concomitant increase in resources and prestige. They accomplished this by providing a framework for interests within a group of high tax states to create a cartel that would channel competition in tax policy away from areas where those states had a competitive disadvantage and toward areas in which they had a competitive advantage. …These states then sought to restrict tax competition, which in turn required them to create a means of delegitimizing such competition and by preventing each other from defecting from the cartel by lowering tax rates unilaterally. …The French…realized that single-country financial controls were unworkable within a global financial system.

In other words, the bureaucrats at the OECD and governments from decrepit welfare states like France both saw a benefit in creating a tax cartel.

This “OPEC for politicians” is grossly contrary to good tax policy, international comity, and national sovereignty. But those factors didn’t matter.

Unfortunately, it’s quite likely that we will see further schemes from the OECD and other international bureaucracies. The politicians have learned that transnational cartels increase their power.

…the evolution of the OECD from a facilitator of economic competition to a cartel enforcer represents something new in international organization behavior. …The cartelization of tax policy is an important effort to hold off the impact of the forces unleashed by competition on a more level playing field, but it is certainly not the only one. …If the opportunity is provided, it may be better from a politician’s point of view to form a cartel on taxation as a protection. With a cartel, there are fewer constraints on domestic policy, improving the politicians’ welfare by increasing the degrees of freedom available to satisfy domestic constituents and win re-election.

This video has more information on why the OECD is contrary to the interests of American taxpayers.

Needless to say, it is outrageous that the politicians in Washington are sending more than $100 million to Paris every year to subsidize this bureaucracy. For all intents and purposes, we are being coerced into paying for a bunch of European bureaucrats so they can then advocate even bigger government in the United States.

And those bureaucrats get tax-free salaries why pushing for higher taxes for the rest of us!

Can anyone think of a more destructive item in the federal budget, at least when measured on a per-dollar-spent basis? I can’t. That’s why I’ve been fighting the OECD for years, even to the point that the bureaucrats threatened to put me in a Mexican jail for the “crime” of standing in the public lobby of a public hotel.

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Senator John Kerry is enriched by tax havens. Former Democratic Senator (and professional slug) John Edwards got to use tax havens. Former President Bill Clinton got to benefit from tax havens. Connecticut’s Attorney General (and Senate candidate), Richard Blumenthal, saves money with tax havens.

Now we find out that a major Democratic donor and significant other to a Democratic Congresswoman from Maine, Donald Sussman, appears to be guilty of the horrible crime of…gasp…trying to lower his tax burden by using a tax haven. What makes this story interesting in part is the hypocrisy angle. Why is it leftists want all of us to pay more, but they get to utilize havens – or, in the case of folks like Geithner, Daschle, and Rangel, engage in outright evasion?

I’ve argued many times that tax havens are very beneficial for the world economy, so I certainly have no objection to what these Democrats are doing. I just wish they would let the rest of us in on some of the action.

But the other juicy part of the story is that there appears to be a legal catch-22 for Sussman and Congresswoman Pingree. In order for Sussman to be eligible for the big tax savings in the Virgin Islands, he needs to be a legal resident. But in order for Congresswoman Pingree to legally take rides on Sussman’s corporate jet, he needs to be living with her in Maine (technically, riding on his jet is only supposed to be legal if he’s a family member, but I guess shacking up counts in today’s society). Here’s are some amusing excerpts from the Weekly Standard.

As far as liberal financiers go, you don’t get much more powerful than S. Donald Sussman. Since 1989, the hedge-fund billionaire has pumped millions into the coffers of Democratic politicians and their political pet projects. …he’s been one of the top contributors to left-leaning 527 organizations during the 2010 election cycle. But while Sussman has long kept a behind-the-scenes profile, a recent ethics controversy in Maine has flung him into the center of a complicated dispute over state residency, tax dodging and congressional ethics – the implications of which extend all the way from the rocky coast of southern Maine to the offshore tax haven of the U.S. Virgin Islands. According to Sussman’s fiancée, Rep Chellie Pingree (D-ME), the philanthropist lives with her and has been a resident of Maine since 2009. But financial records and other documents indicate that Sussman has claimed full-time residency and extensive tax breaks in the U.S. Virgin Islands for years – and may be continuing to claim them. …Confusion over Sussman’s residency status has been dogging his fiancée’s congressional reelection bid for weeks. As the former president of an ethics watchdog group, Pingree caught flack in late September after she was found to be traveling on Sussman’s private jet – an activity prohibited by election rules, unless the aircraft owner is a family member. In response to Republican criticism over the incident, the congresswoman said that Sussman lives with her in Maine, which may qualify him as family. The House Ethics committee has since cleared her of any charges. …But this seems to conflict with records that suggest a company owned by Sussman is currently receiving financial benefits in the U.S. Virgin Islands. A decade ago, Sussman founded Trust Asset Management, LLP., in St. Thomas, and began paying himself income from his Connecticut-based hedge-fund firm through it. As recently as September, Trust Asset Management LLP., was listed as an active beneficiary of the Virgin Island’s tax breaks, known as the Economic Development Commission (EDC) benefits. U.S. Virgin Island tax attorneys said that in order to receive these benefits through the EDC, a company owner must be a “bona fide” resident of the territory – meaning that the individual needs to live in the area for more than six months out of the year. …Other information has added to the confusion over Sussman’s residency status. During an interview with the Virgin Islands Daily News in July, the hedge-fund owner reportedly told the paper that he has resided full-time in the territory since 2000. …Sussman’s Securities and Exchange Commission filings from September also list his address as the Virgin Islands, as do political contributions he made in 2009. The website for the Great Cruz Bay Homeowners Association in St. John names Sussman as the organization’s president. Over the past few years, the U.S. Virgin Islands have come under scrutiny for being a magnet for criminal tax evaders; individuals who want to take advantage of the territory’s 90 percent tax savings, but don’t want to make it their primary home.

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Here’s a Reuters story about the Australian Tax Office harassing Paul Hogan, better known to Americans as Crocodile Dundee, because of a tax dispute. The grinches at the tax office took advantage of Hogan’s return for his mother’s funeral to hold him hostage, refusing to let him leave the country until he coughs up some cash. It appears that the tax police in Australia are just as politicized and above the law as the IRS. Hogan has never been charged with tax evasion and there are plenty of signs that the bureaucrats want to make him a high-profile victim to justify the amount of money that has been squandered in a probe of supposed offshore evasion.
Actor Paul Hogan, star of the “Crocodile Dundee” movies, has vowed to continue fighting the Australian tax office which has barred him from leaving Australia until he pays a massive bill, saying he’s victim of a witch hunt. Hogan, 70, was served with a departure prohibition order 10 days ago while in Australia to attend his 101-year-old mother’s funeral which has prevented him from leaving to return to Los Angeles where he lives with his wife and son. The Australian Tax Office refused to comment on reports of seeking tax on A$38 million ($34 million) of allegedly undeclared income from Hogan, saying it cannot give details of individual taxpayers. But the actor went public in the Australian media this week to put forward his side in his five-year row with the tax office, saying he had done nothing wrong and the tax office was on a witch hunt for a high-profile case. …”If I was a tax evader, which I’m not, I must be the dumbest one in the world to keep coming back here instead of fleeing to a tax haven … I know they’re absolutely desperate to nail some high-profile character with money to justify the expense to the taxpayer.” Hogan, who was once a painter on the Sydney Harbour Bridge, is under investigation as part of Australia’s biggest probe into offshore tax evasion, Operation Wickenby. The operation is budgeted to cost at least $300 million. The tax office has claimed he put tens of millions of dollars in film royalties in offshore tax havens, a claim that he has denied. He has never been charged with tax evasion.
This story is symbolic of a bigger issue, which is the the unfortunate tendency of governments to create ever-more oppressive and misguided laws in response to failures of existing policy. We see this in the failed War on Drugs, which leads to trampling of civil liberties and erosion of privacy. We see it in the failed War on Poverty, which leads to more redistribution that further traps people in dependency. We see it in the failed government-run education system, which wastes more money every year as outcomes remain stagnant and children from poor and minority communities suffer.
 
In the case of tax policy, politicians impose high tax rates and punitive forms of double taxation. As anybody with a modicum of common sense could predict, this bad tax policy undermines economic performance and drives economic activity to jurisdictions with better tax law. The politicians then have two ways to respond. They can lower tax rates and reform tax systems, an approach that simultaneously would boost growth and improve compliance. Or they can tighten the thumbscrews on taxpayers, trample their rights, and conspire with other high-tax nations to punish the jurisdictions that do have good policy.
 
Not surprisingly, most politicians choose the latter approach. And the attack on low-tax jurisdictions is a particularly loathsome part of their response. As this video explains, tax competition is a liberalizing force in the world economy and the effort by high-tax nations to penalize so-called tax havens is driven by a statist impulse to prop up decrepit and inefficient welfare states.

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