New European Data: When Tax Competition Is Weakened, Politicians Respond by Increasing Tax Rates

I often argue that we need to preserve tax competition and tax havens in order to limit the greed of the political class.

Without some sort of external constraint, they will over-tax and over-spend, creating the kind of downward economic spiral already happening in some European nations.

Speaking of which, new evidence from Europe bolsters my case.

Back in 2009, facing pressure from the big G-20 nations, all of the world’s major low-tax jurisdictions – even Switzerland – acquiesced to the notion that human rights laws protecting financial privacy no longer would apply to foreign investors.

In other words, high-tax governments now have much greater ability to track – and tax – flight capital.

So how have they responded since that time? Well, look at this chart from the European Union’s new report on taxation trends. Tax rates have begun to increase, reversing a very positive trend (which began with the Reagan and Thatcher tax cuts, though this chart only shows data since 1995).

We can’t say, of course, that the increase in tax rates since 2009 is because tax competition was eroded. Just like we can’t say the reduction of tax rates in the preceding years was because of tax competition.

But we do know that simple economic theory tells us that monopolists are more likely to raise prices than firms in competitive markets. Likewise, governments are more likely to raise tax rates if they think taxpayers don’t have escape options.

And we also know that the proponents of higher tax rates, such as the statist bureaucrats at the Paris-based OECD, are also the biggest opponents of tax competition. The OECD even complained in one of its reports that tax competition “may hamper the application of progressive tax rates.”

Well, those international bureaucrats (who, by the way, get tax-free salaries) are getting their wish. Tax rates are increasing.

“Let them eat cake”

So the political class can breathe a sigh of relief.

But what about the people of Europe? Well, economic growth is almost non-existent and unemployment is at record levels.

However, you can’t make an omelet without breaking a few eggs. As a past representative of Europe’s political elite once remarked, “let them eat cake.”

Marie Antoinette eventually may have regretted her choice of words, but Europe’s current politicians are probably more clever and have contingency plans. When the you-know-what hits the fan and Europe descends into social disarray and economic chaos, ordinary people will be the ones at risk.

Unfortunately, the United States is on the same path, as shown by these sobering charts from the Bank for International Settlements (and also as illustrated by these very funny Michael Ramirez and Bob Gorrell cartoons).

For more information on the important liberalizing impact of tax competition, here’s the video I narrated for the Center for Freedom and Prosperity.

But remember that restraining fiscal burdens is not the only reason to preserve tax competition and tax havens. There also are very important moral reasons to support low-tax jurisdictions.

Read Full Post »

Raise Your Glass and Give a Toast to Celebrate the Real-World Benefits of Lower Taxes and Economic Freedom

I share a lot of economic theory and empirical evidence in favor of lower tax rates. And I’m constantly extolling the virtues of overall economic freedom.

But sometimes it helps to have a real-world example of how a specific industry responds when it is freed from onerous taxation and pointless regulation.

Tom Acitelli explains in the Wall Street Journal how the American beer industry was rejuvenated by deregulation and tax cuts. Here are some excerpts from his column.

As recently as 35 years ago, there were fewer than 50 breweries in the whole country… The story of the U.S. ascent to the top tier of world beer began in the late 1970s, when brewing was liberated from government taxation and regulation that had held it back since Prohibition. …The brewing industry had been trying unsuccessfully for years to get Washington to lower excise taxes on beer produced by smaller brewers. …H.R. 3605 cut the federal excise tax on beer to $7 from $9 per barrel on the first 60,000 barrels produced, so long as a brewery produced no more than two million barrels annually.  …The tax cut unleashed a revolution in American brewing. Hundreds of smaller breweries began to open across the country selling what came to be called craft beer.

But the industry wasn’t held back just by taxation.

Some of the stars of American craft beer, such as Ken Grossman of Sierra Nevada and Sam Calagione at Dogfish Head, got their start with home brewing—an activity that until the late 1970s was illegal in the U.S. …the government did little to enforce the anti-home-brewing law. Still, the air of illegality discouraged many who might have taken up home-brewing… Enthusiasts in the U.S. kept their interests underground, usually sharing information only with a small circle of other home brewers. Who knew when the government might start enforcing the home-brewing prohibition? Gradually, though, the secretive home brewers grew bolder. …They lobbied…to introduce legislation legalizing home-brewing at the federal level. …legislation…was reconciled with a House bill in August 1978. President Carter signed the law that October, and it took effect the following February. Home-brewing of up to 200 gallons a year per household was suddenly permitted.

So what happened when economic liberty was legalized?

The result: Home-brewing took off, helping to spur the movement toward craft beer that had been touched off by the beer tax reduction. The beer industry swelled in the 1980s and 1990s, producing thousands of jobs and tens of millions of dollars in annual tax revenue. The rise of American beer wasn’t an accident. It was spurred by efforts to cut taxes and regulation that unleashed entrepreneurship. Too bad Washington doesn’t raise a toast to that idea more often.

The part about “millions of dollars in annual tax revenue” rubs me the wrong way, as I explained in a recent post about marijuana legalization in Colorado, but even an anti-taxer like myself recognizes that ending a form of prohibition is a net plus for freedom.

And I definitely like what Acitelli writes about applying more broadly the lessons of lower taxes and deregulation. Heck, if we’re good students and study hard, maybe some day we can be Hong Kong instead of France.

Read Full Post »