Archive for March 23rd, 2013

I’ve been very critical of the Organization for Economic Cooperation and Development. Most recently, I criticized the Paris-based bureaucracy for making the rather remarkable assertion that a value-added tax would boost growth and employment.

But that’s just the tip of the iceberg.

Now the bureaucrats have concocted another scheme to increase the size and scape of government. The OECD just published a study on “Addressing Base Erosion and Profit Shifting” that seemingly is designed to lay the groundwork for a radical rewrite of business taxation.

In a new Tax & Budget Bulletin for Cato, I outline some of my concerns with this new “BEPS” initiative.

…the BEPS report…calls for dramatic changes in corporate tax policy based on the presumption that governments are not seizing enough revenue from multinational companies. The OECD essentially argues that it is illegitimate for businesses to shift economic activity to jurisdictions that have more favorable tax laws. …The core accusation in the OECD report is that firms systematically—but legally—reduce their tax burdens by taking advantage of differences in national tax policies.

Ironically, the OECD admits in the report that revenues have been trending upwards.

…the report acknowledges that “… revenues from corporate income taxes as a share of gross domestic product have increased over time. …Other than offering anecdotes, the OECD provides no evidence that a revenue problem exists. In this sense, the BEPS report is very similar to the OECD’s 1998 “Harmful Tax Competition” report, which asserted that so-called tax havens were causing damage but did not offer any hard evidence of any actual damage.

To elaborate, the BEPS scheme should be considered Part II of the OECD’s anti-tax competition project. Part I was the attack on so-called tax havens, which began back in the mid- to late-1990s.

The OECD justified that campaign by asserting there was a need to fight illegal tax evasion (conveniently overlooking, of course, the fact that nations should not have the right to impose their laws on what happens in other countries).

The BEPS initiative is remarkable because it is going after legal tax avoidance. Even though governments already have carte blanche to change business tax policy.

…governments already have immense powers to restrict corporate tax planning through “transfer pricing” rules and other regulations. Moreover, there is barely any mention of the huge number of tax treaties between nations that further regulate multinational taxation.

So what does the OECD want?

…the OECD hints at its intended outcome when it says that the effort “will require some ‘out of the box’ thinking” and that business activity could be “identified through elements such as sales, workforce, payroll, and fixed assets.” That language suggests that the OECD intends to push global formula apportionment, which means that governments would have the power to reallocate corporate income regardless of where it is actually earned.

And what does this mean? Nothing good, unless you think governments should have more money and investment should be further penalized.

Formula apportionment is attractive to governments that have punitive tax regimes, and it would be a blow to nations with more sensible low-tax systems. …business income currently earned in tax-friendly countries, such as Ireland and the Netherlands, would be reclassified as French-source income or German-source income based on arbitrary calculations of company sales and other factors. …nations with high tax rates would likely gain revenue, while jurisdictions with pro-growth systems would be losers, including Ireland, Hong Kong, Switzerland, Estonia, Luxembourg, Singapore, and the Netherlands.

Since the United States is a high-tax nation for corporations, why should Americans care?

For several reasons, including the fact that it wouldn’t be a good idea to give politicians more revenue that will be used to increase the burden of government spending.

But most important, tax policy will get worse everywhere if tax competition is undermined.

…formula apportionment would be worse than a zero-sum game because it would create a web of regulations that would undermine tax competition and become increasingly onerous over time. Consider that tax competition has spurred OECD governments to cut their corporate tax rates from an average of 48 percent in the early 1980s to 24 percent today. If a formula apportionment system had been in place, the world would have been left with much higher tax rates, and thus less investment and economic growth. …If governments gain the power to define global taxable income, they will have incentives to rig the rules to unfairly gain more revenue. For example, governments could move toward less favorable, anti-investment depreciation schedules, which would harm global growth.

You don’t have to believe me that the BEPS project is designed to further increase the tax burden. The OECD admits that higher taxes are the intended outcome.

The OECD complains that “… governments are often under pressure to offer a competitive tax environment,” and that “failure to collaborate … could be damaging in terms of … a race to the bottom with respect to corporate income taxes.” In other words, the OECD is admitting that the BEPS project seeks higher tax burdens and the curtailment of tax competition.

Writing for Forbes, Andy Quinlan of the Center for Freedom and Prosperity highlights how the BEPS scheme will undermine tax competition and enable higher taxes.

…the OECD wants to undo taxpayer gains made in recent decades thanks to tax competition. Since the 1980′s, average global income taxes on both individuals and corporations have dropped significantly, improving incentives in the productive sector of the economy to generate economic growth. These pro-growth reforms are the result of tax competition, or the pressure to adopt competitive economic policies that is put on governments by an increasingly globalized society where both labor and capital are mobile. Tax competition is the only force working on the side of taxpayers, which explains the organized campaign by global elite to defeat it. …If taxpayers want to preserve gains made thanks to tax competition, they must be weary of the threat posed by global tax cartels though organizations such as the OECD.

Speaking of the OECD, this video tells you everything you need to know.

The final kicker is that the bureaucrats at the OECD get tax-free salaries, so they’re insulated from the negative impact of the bad policies they want to impose on everyone else.

That’s even more outrageous than the fact that the OECD tried to have me thrown in a Mexican jail for the supposed crime of standing in the public lobby of a public hotel.

Anguilla 2013P.S. I just gave a speech to the Anguilla branch of the Society for Trust and Estate Professionals, and much of my remarks focused on the dangers of the BEPS scheme.

I took this picture from my balcony. As you can see, there are some fringe benefits to being a policy wonk.

And I travel to Nevis on Sunday to give another speech.

Tough work, but somebody has to do it. Needless to say, withe possibility of late-season snow forecast for Monday in the DC area, I’m utterly bereft I won’t be there to enjoy the experience.

Read Full Post »

A month ago, I answered a question about reconciling the absence of libertarian societies with the supposed superiority of libertarian principles.

I gave an uncharacteristically optimistic response, arguing that the world in many ways has become more free thanks to libertarian policies (or, to be more accurate, a decline in statism).

This led to several follow-up questions, mostly premised on the notion that I must be smoking crack to think government has become less of a burden. My defense would be that the world is more free than it was 40 years ago, but probably less free than it was 10 years ago, so it depends on your benchmark. And I definitely agree that the world is trending toward less freedom (with these charts being a very sobering example).

But the question that caught my eye, and makes for a good follow-up, comes from a reader in Missouri: “Why aren’t libertarians more persuasive?”

To elaborate, the question assumes that libertarianism is the right approach and that the evidence supports libertarian policies, so another way of phrasing the question is: “What is wrong with libertarians that they can’t sell libertarian ideas?”

Rising DependencyThe easy and simple answer is to say the problem is that the people are too susceptible to being bribed by politicians. As illustrated by the chart, more and more Americans are getting hooked on the heroin of government dependency.

And as more Americans adopt the moocher mindset found in Vermont, libertarians have a hard time developing a winning message.

But I think the reader is really asking whether the problem with libertarianism is…well, libertarians.

This is a fair question. Having given hundreds of speeches and engaged in thousands of conversation, I can say that many people make the following assumptions about libertarians.

1. On economic policy, libertarians don’t care about the poor. Since I work on fiscal issues, this is the one I deal with all the time. I try to explain – ad nauseam – that we want smaller government and more economic freedom because faster growth is the only effective way to lower poverty and help the poor. But a lot of people think we’re defending the status quo.

2. On social policy, libertarians are libertines, embracing and endorsing hedonism. This is probably the most common stereotype, and there definitely are libertarians who are motivated by a desire to get rid of laws that impinge on their freedom to do things like smoke pot. But the libertarian position is not that pot is good, but rather that prohibition is bad.

3. On foreign policy, libertarians are oblivious to external threats such as al Qaeda. I’ve had several people, for instance, complain about Ron Paul opposing the killing of Osama bin Laden, and they assume that means libertarians are somehow the modern-day equivalent of Soviet appeasers. Yet our message is that we favor national defense, but that we think we’ll have far less need to defend ourselves if we stop intervening in ways that have nothing to do with national security.

4. And in general, libertarians are ultra-individualists who reject concepts such as community, family, and nation. While it’s true that libertarians are motivated by individual freedom, opposition to government coercion does not imply that people can’t be good neighbors or good parents. Indeed, we would argue that a free society promotes private virtue. And there’s nothing inconsistent with patriotism and libertarianism, as illustrated by this t-shirt.

Looking at what I’ve written, I realize I haven’t answered the question. All I’ve done is identified some stereotypes and explained why they’re not accurate.

So I’ll simply conclude by making a rather unremarkable observation that overcoming these perceptions is a big challenge for libertarians – assuming that we want to make greater inroads with the masses.

P.S. I got nagged by several readers for not posting a “Question of the Week” last weekend. What can I say, I’m old and forgetful. But you can always peruse previous versions if you’re somehow suffering.

But I’ll try to compensate for my oversight with some humor. Since this post is about the supposed shortcoming of libertarians, here’s some self-mocking humor. We’ll start with a video portraying Somalia as a libertarian paradise, followed by cartoons on libertarian ice fishing and libertarian lifeguards, then an info-graphic showing 24 types of libertarians, and close with a poster showing how the world sees libertarians.

Read Full Post »

%d bloggers like this: