Archive for the ‘Jurisdictional Competition’ Category

Here’s a quiz for readers.

When politicians increase taxes, the result is:

This is a trick question because the answer is (j), all of the above.

But let’s look at some of the evidence for (d), which deals with the fact that the geese with the golden eggs sometimes choose to fly away when they’re mistreated.

The Internal Revenue Service has a web page where you can look at how many taxpayers have left or entered a state, as well as where they went or where they came from.

And the recently updated results unsurprisingly show that taxpayers migrate from high-tax states to low-tax states.

Let’s look at some examples, beginning with Maryland. Here are some excerpts from a report in the Daily Caller.

Wealthy taxpayers and job-creating businesses fled Maryland at an accelerating rate as then-Gov. Martin O’Malley implemented a long list of tax hikes during his first five years in the state capital. More than 18,600 tax filers left Maryland with $4.2 billion in adjusted gross income from 2007 – O’Malley’s first year as governor — through 2012, according to a Daily Caller News Foundation analysis of the most recently available Internal Revenue Service state-level income and migration data. …Nearly 5,600 state-tax filers left Maryland in 2012 and took $1.6 billion with them, more than double the 2,300 who departed with $732 million in 2011. The fleeing 5,600 filers had average incomes of nearly $291,900. …Most of 2012’s departing residents moved to the more business-friendly Virginia, according to the data. …Florida was the third most common destination for Marylanders.

Here’s a chart looking at the income that moved into the state (green) compared to the much greater amount of income that left the state (red).

The story then makes a political observation.

O’Malley’s economic record may partially explain why his campaign for the 2016 Democratic presidential nomination has yet to gain traction among voters outside of Maryland.

Though I wonder whether this assertion is true. Given the popularity of Bernie Sanders, I can’t imagine many Democrat voters object to politicians who impose foolish tax policies.

Now let’s shift to California.

A column in the Sacramento Bee (h/t: Kevin Williamson) explores the same IRS data and doesn’t reach happy conclusions.

An unprecedented number of Californians left for other states during the last decade, according to new tax return data from the Internal Revenue Service. About 5 million Californians left between 2004 and 2013. Roughly 3.9 million people came here from other states during that period, for a net population loss of more than 1 million people. The trend resulted in a net loss of about $26 billion in annual income.

And where did they go?

Many of them went to zero-income tax states.

About 600,000 California residents left for Texas, which drew more Californians than any other state.

Here’s a map from the article and you can see other no-income tax states such as Nevada, Washington, Tennessee and Florida also enjoyed net migration from California.

Last but not least, let’s look at what happened with New York.

We’ll turn again to an article published by the Daily Caller.

More taxpaying residents left New York than any other state in the nation, IRS migration data from 2013 shows. During that year, around 115,000 New Yorkers left the state and packed up $5.65 billion in adjusted gross income (AGI) as well. …Although Democrat Governor Andrew Cuomo acknowledged that New York is the “highest tax state in the nation” and it has “cost us dearly,” he continues to put forth policies that economically cripple New York residents and businesses.

Once again, much of the shift went to state with no income taxes.

New York lost most of its population in 2013 to Florida — 20,465  residents ($1.35 billion loss), New Jersey — 16,223 residents ($1.1 billion loss), Texas — 10,784 residents ($354 million loss).

Though you have to wonder why anybody would move from New York to New Jersey. That’s like jumping out of the high-tax frying pan into the high-tax fire.

At this point, you may be wondering why the title of this column refers to lessons for Hillary when I’m writing about state tax policy.

The answer is that she wants to do for America what Jerry Brown is doing for California.

Check out these passages from a column in the Wall Street Journal by Alan Reynolds, my colleague at the Cato Institute.

Hillary Clinton’s most memorable economic proposal, debuted this summer, is her plan to impose a punishing 43.4% top tax rate on capital gains that are cashed in within a two-year holding period. The rate would drift down to 23.8%, but only for investors that sat on investments for six years. This is known as a “tapered” capital-gains tax, and it isn’t new. Mrs. Clinton is borrowing a page from Franklin D. Roosevelt, who trotted out this policy during the severe 1937-38 economic downturn, dubbed the Roosevelt Recession.

FDR had so many bad policies that it’s difficult to pinpoint the negative impact of any specific idea.

But there’s certainly some evidence that his malicious treatment of capital gains was spectacularly unsuccessful.

In the 12 months between February 1937 and 1938, the Dow Jones Industrial stock average fell 41%—to 111 from 188.4. That crash presaged one of the nation’s worst recessions, from May 1937 to June 1938, with GDP falling 10% and industrial production 32%. Unemployment swelled to 19% from 14%. Harvard economist Joseph Schumpeter, in his 1939 opus “Business Cycles,” noted that “the so-called capital gains tax has been held responsible for having accentuated, if not caused, the slump.” The steep tax on short-term gains, he argued, made it hard for small or new firms to issue stock. And the surtax on undistributed profits, Schumpeter wrote, “may well have had a paralyzing influence on enterprise and investment in general.” …A 2011 study from the Federal Reserve Bank of St. Louis reported…“The 1936 tax rate increases,” they concluded, “seem more likely culprits in causing the recession.” …A 2012 study in the Quarterly Journal of Economics attributes much of the 26% decline in business investment in the 1937-38 recession to higher taxes on capital.

So what’s Alan’s takeaway?

Hillary Clinton’s fix for an economy suffering under 2% growth is resuscitating a tax scheme with a history of ushering in recessions. The economy would be better off if the idea remained buried.

Maybe we should ask the same policy about her that we asked about FDR: Is she misguided or malicious?

P.S. Some folks may argue that Hillary has more leeway than governors to impose class-warfare tax policy because it’s harder to emigrate from America than it is to move across state borders.

That’s true.

The United States has odious exit taxes that restrict freedom of movement. And even though record numbers of Americans already have given up their passports, it’s still a tiny share of the population.

Likewise, not that many rich Americans have taken advantage of Puerto Rico’s status as a completely legal tax haven.

But while it’s true that it’s not easy for an American to escape the jurisdiction of the IRS, that doesn’t mean they’re helpless.

There are very simple steps that almost all rich people can take to dramatically lower their tax liabilities. So Hillary and the rest of the class-warfare crowd should think twice before repeating FDR’s horrible tax mistakes.

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Europe is suffering from economic stagnation caused in part by excessive fiscal burdens.

So what are European policy makers doing to address this problem?

If you think the answer might have something to do with a shift to responsible fiscal policy, you obviously have no familiarity with Europe’s political elite. But if you have paid attention to their behavior, you won’t be surprised to learn that they’re lashing out at jurisdictions with better policy.

Here are a few blurbs from a story in the Economic Times.

The European Union published its first list of international tax havens on Wednesday… “We are today publishing the top 30 non-cooperative jurisdictions consisting of those countries or territories that feature on at least 10 member states’ blacklists,” EU Economic Affairs Commissioner Pierre Moscovici told a news conference. 

This is a misguided exercise for several reasons, but here are the ones that merit some discussion.

1. I can’t resist starting with a philosophical point. Low-tax jurisdictions and so-called tax havens should be emulated rather than persecuted. Their modest fiscal burdens are strongly correlated with high levels of prosperity. It’s high-tax nations that should be blacklisted and shamed for their destructive policies.

2. This new EU blacklist is particularly nonsensical because there’s no rational (even from a leftist perspective) methodology. Jurisdictions get added to the blacklist if 10 or more EU nations don’t like their tax laws. Some nations, as cited in official EU documents, even use “the level of taxation for blacklisting purposes.”

3. As has always been the case with anti-tax competition campaigns, the entire exercise reeks of hypocrisy. Big European nations such as Luxembourg and Switzerland were left off the blacklist, and the United States also was omitted (though the EU figured it was okay to pick on the U.S. Virgin Islands for inexplicable reasons).

By the way, I’m not the only person to notice the hypocrisy. Here are some excerpts from a report in the U.K.-based Guardian.

A blacklist of the world’s 30 worst-offending tax havens, published on Wednesday by the European commission, includes the tiny Polynesian island of Niue, where 1,400 people live in semi-subsistence — but does not include Luxembourg, the EU’s wealthy tax avoidance hub. …the new register does not include countries such as the Netherlands, Ireland.

And Radio New Zealand made a similar point it its report.

Anthony van Fossen, an adjunct research fellow at Australia’s Griffith University, says the list seems to be picking on smaller, easy-to-target tax havens and ignoring major ones like Singapore, Switzerland and Luxembourg. “The list is very strange in that some major havens are ignored, particularly the havens in the European Union itself, and many minor havens, including some in the Pacific Islands are highlighted.”

The more one investigates this new EU project, the more irrational it appears.

Some of the larger and more sensible European nations, including Sweden, Germany, Denmark, and the United Kingdom, didn’t even participate. Or, if they did, they decided that every jurisdiction in the world has “tax good governance.”

But other nations put together incomprehensible lists, featuring some well-known low-tax jurisdictions, but also places that have never before been considered “tax havens.” Is Botswana really a hiding spot for French taxpayers? Do Finnish taxpayers actually protect their money in Tajikistan? Is Bolivia actually a haven for the Portuguese? Do the Belgians put their funds in St. Barthelemy, which is part of France? And do Greeks put their money in Bosnia?!?

As you can see from this map, the Greeks also listed nations such as Saudi Arabia and Paraguay. No wonder the nation is such a mess. It’s governed by brain-dead government officials.

I’ve saved the best evidence for the end. If you really want to grasp the level of irrationality in the EU blacklist, it’s even been criticized by the tax-loving (but not tax-paying) bureaucrats at the OECD. Here are some details from a report out of Cayman.

‘As the OECD and the Global Forum we would like to confirm that the only agreeable assessment of countries as regards their cooperation is made by the Global Forum and that a number of countries identified in the EU exercise are either fully or largely compliant and have committed to AEOI, sometimes even as early adopters’, the email states. …‘We have already expressed our concerns (to the EU Commission) and stand ready to further clarify to the media the position of the affected jurisdictions with regard to their compliance with the Global Forum standards’, Mr Saint-Amans and Ms Bhatia wrote.

Needless to say, being compliant with the OECD is nothing to celebrate. It means a jurisdiction has been bullied into surrendering its fiscal sovereignty and agreeing to serve as a deputy tax collector for high-tax governments.

But having taken that unfortunate step, it makes no sense for these low-tax jurisdictions to now be persecuted by the EU.

P.S. Let’s add to our collection of libertarian humor (see here and here for prior examples).

This image targets the Libertarian Party, but I’ve certainly dealt many times with folks that assert that all libertarians should “grow up” and accept big government.

For what it’s worth, if growing up means acquiescing to disgusting government overreach, I prefer to remain a child.

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There are some things in life that are guaranteed to make me smile.

Georgia Bulldog victories are on that list, of course, and I also relish occasional moments of glory on the softball field.

Shifting to the world of public policy, nothing warms my heart and brings a smile to my face faster than news that taxpayers have successfully escaped the greedy and grasping claws of government.

I cheered when successful French taxpayers moved across the border when Francois Hollande imposed a 75 percent class-warfare tax rate. And I was overjoyed when elitist French politicians whined that the geese with the golden eggs were escaping.

I was happy to learn about consumers traveling across borders to escape punitive air-travel taxes in places such as England and the Netherlands.

I applauded when Toyota moved hundreds of jobs from high-tax California to low-tax Texas. And when oppressed taxpayers successfully escaped from New Jersey. Or from Detroit.

I also was glad to find out that Americans can dramatically reduce their tax bills by moving to Puerto Rico, which is a completely legal tax haven for U.S. citizens.

I’m even happy when American companies use “inversions” to get out from under America’s insanely punitive approach to business taxation. I’ll also defend individual Americans who reluctantly give up their passports to protect themselves from confiscatory taxation.

The common theme in all these examples is that politicians were unable to seize as much money as they hoped because taxpayers had the ability to shift economic activity to jurisdictions with better policy.

This is why tax competition is so praiseworthy – and also why we need to be so concerned about sinister efforts to create cartels for the purpose of replacing this liberalizing process with an “OPEC for politicians.”

But I’m guilty of digressing. Today, we simply want to focus on good news.

And I know this Bloomberg story made me feel all warm and fuzzy. Here are some excerpts about the looming decision of at least one bank to escape excessive English taxes.

HSBC, Europe’s largest bank, has faced calls to move its domicile away from the British capital after the government increased the levy on bank’s balance sheets for an eighth time this year. HSBC is hit the hardest by the tax and paid 750 million pounds ($1.1 billion) last year. Both the Labour and Conservative parties have pledged a more onerous tax regime for banks in their manifestos for the May 7 U.K. election. “Banks and pay are still easy cannon fodder for politicians,” said Jonathan Tyce, senior banks analyst at Bloomberg Intelligence in London. “The lines between the Labour and Conservative parties are more blurred than usual and either way, it doesn’t look promising for banks or bankers.” …Standard Chartered Plc, another British bank that like HSBC makes most of its profit in Asia, is also being urged by Aberdeen Asset Management Plc, its second-largest shareholder, to relocate to Asia because of the cost of being in London.

Good. I hope both banks leave.

While I have grudgingly admitted that David Cameron’s government has done a decent job of restraining spending in recent years, taxpayers haven’t reaped many dividends. Yes, there have been some very successful reductions in the corporate tax rate and a modest reduction in the top tax rate on personal income, but these reforms were more than offset by big tax hikes when Cameron first took power.

P.S. If I understand correctly, HSBC didn’t get a bailout during the financial crisis. But if I’m wrong and the bank did mooch off taxpayers, then I’m much less sympathetic.

P.P.S. Shifting to another topic, I like to share examples of how some nations enjoy faster growth than others, mostly because these comparison invariably help to show why small government and free markets are the best route to prosperity.

To echo this point, here’s a very enlightening chart I just saw on Twitter, which shows per-capita economic output for a group of nations that were all roughly equal back in 1997.

What’s remarkable is that a couple of those nations dramatically boosted living standards in a very short period of time while others have stagnated.

And since I’ve written about the good reforms in Estonia and Poland and complained about bad policy in Venezuela and South Africa, you can understand why this is yet another example of why leftists have no good response to my two-part challenge.

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I’m a relentless (probably to the point of being annoying) proponent of tax competition among jurisdictions.

It’s one of the reasons why I favor tax havens and federalism. Simply stated, politicians are less likely to do bad things when they know economic activity can escape to places with better policy.

And I’m more than happy to pontificate on the theories that support my position. But every so often it helps to have a powerful real-world example.

Our example today deals with the fact that the United Kingdom has a very punitive tax on air passengers, but the U.K. government also is devolving some powers to regions such as Scotland. And this bit of decentralization is already generating some pressure for tax reductions.

Here are excerpts from a story in Scotland’s Herald.

The UK government’s decision to devolve control of Air Passenger Duty (APD) to Holyrood means that a family of four could eventually be saving as much as £388 for a one-way journey to long-haul destinations. The promise to hand the Scottish Government control of APD is part of the UK government’s devolution package… The Scottish Government last week said it would halve the rate within the next Parliament and abolish completely “when the public finances allow”.

That sounds like good news for travelers, but some folks aren’t happy.

…airports as well as tourism bodies south of the border are up in arms, fearing that it will create an uneven playing field for the aviation sector as passengers in the catchment areas of airports such as Newcastle, Manchester and Liverpool will simply drive across the border to rival airports in Scotland to avoid potentially huge APD costs. Newcastle airport’s planning director Graeme Mason told the Sunday Herald that Scotland cutting or scrapping the passenger levy would create an unfair “cross-border market distortion” that would fester unless the UK government matches any reduction in APD south of the border.

Notice the Orwellian distortion of language from Mr. Mason. We’re supposed to view lower taxes as a “cross-border market distortion.”

But what he (and others) refer to as a “distortion” is actually the healthy process of competition.

Just as the I-Phone was a “distortion” for the Blackberry, but very good news for consumers. Just as the personal computer was a “distortion” for the typewriter industry, but very good news for consumers.

Countries, just like companies, should suffer when they don’t provide good value in exchange for people’s hard-earned money.

Here’s more from the story, including the fact that English airports in the long run will probably benefit because the government will now feel pressure to lower the tax burden on air travel.

…anyone travelling long-haul could potentially save themselves hundreds of pounds. The saving could be enough, for example, to undermine direct flights between Newcastle and New York that are set to launch in the May. But in Scotland, the decision to devolve APD to Holyrood has been greeted with delight by airports, the tourist industry and businesses which have campaigned both before and since the independence referendum to get rid of the tax. And many of those behind the campaign say that airports in England will eventually benefit from the abolition of the tax in Scotland, as this increases pressure on the UK government to follow suit.

Here’s some real-world evidence of tax competition promoting better policy on travel taxes.

After introducing a form of APD in 2008 the Dutch government scrapped the tax within a year after Dutch residents started travelling in their droves to airports in neighbouring Germany to avoid the tax. Belgium, Denmark, Malta and Norway have also scrapped flight taxes for similar reasons. That leaves the UK as one of only five countries in Europe to levy a passenger departure tax (the others being Austria, France, Germany and Italy) but the UK tax is, on average, five times higher than those other countries and is thought to be the highest in the world… In 2011 the UK government was forced to slash APD on long-haul flights in Northern Ireland, to stem the flow of passengers travelling south to Dublin to take advantage of the Republic of Ireland’s low and now abolished tax on flights.

By the way, the story also reminds us about how dangerous it is to give a government a new source of revenue.

Air Passenger Duty (APD) was introduced by John Major’s UK Conservative government in 1994. It was originally payable at just £5 for one-way domestic and European flights and £10 elsewhere but it has become a nice little earner for successive governments who have steadily increased the levy to the point that it is now the highest tax of its kind anywhere in the world. Long-haul flights in the cheapest economy class are now charged between £67 and £94 per flight, depending on the distance travelled. Other classes of travel, including so-called premium economy class, are charged between £138 and £194 per long-haul flight while anyone travelling in a small plane is charged between £276 and £388 per flight.

Jut keep all this data in mind the next time someone tells you we should let politicians impose a VAT, an energy tax, or a financial tax.

Since we’re on the topic of tax competition, let’s look at the tennis world to see how taxes drive behavior.

In her column for the Wall Street Journal, Allysia Finley explains that top tennis players respond to fiscal incentives.

…tennis players respond to economic incentives and often act as strategically off the court as on. For the past three years Spain’s Rafael Nadal…has bowed out of England’s annual Queen’s Club tournament, traditionally a Wimbledon warm-up, because the U.K. charges foreign athletes a prorated tax on their world-wide income (including endorsements). The more tournaments he plays in Britain, the more he owes Her Majesty’s Government.

Heck, those U.K. tax laws on worldwide income are so powerful (in a bad way) that they even chased away the world’s fastest man.

So what nations offer a more hospitable environment?

Two of my favorite places, Monaco and Switzerland, are high on the list.

The top five French players on the men’s circuit— Jo-Wilfried Tsonga, Gael Monfils, Gilles Simon, Julien Benneteau and Richard Gasquet, as well as Germany’s Philipp Kohlschreiber, all claim residence in Switzerland, ostensibly to avoid paying their home countries’ punitive 45% top personal income-tax rates (not including surcharges or social-security contributions). …the most popular haven for tennis players is the principality of Monaco, which doesn’t tax foreigners’ world-wide income. …Swedish tennis legends Bjorn Borg and Mats Wilander escaped to Monte Carlo during their primes in the 1970s and ’80s to dodge their home country’s 90% top marginal rate, which has since fallen to 57%. …Today, Monaco is the putative home of many of the world’s top-ranked men and women players. They include Serbia’s Novak Djokovic (1), the Czech Republic’s Petra Kvitova (4), Tomas Berdych (7) and Lucie Safarova (16); Canada’s Milos Raonic (8); Denmark’s Caroline Wozniacki (8); Bulgaria’s Grigor Dimitrov (11); and Ukraine’s Alexandr Dolgopolov (23). Players who hail from former communist countries are especially keen, it seems, on keeping their hard-earned money.

Even inside the United States, we see the benefits of tax competition.

Florida is one of the big winners and California is a big loser.

The U.S. has its own Monaco: no-income-tax Florida. It’s no coincidence that America’s top-ranked players Serena (1) and Venus Williams (18) and John Isner (21), as well as Russia’s Maria Sharapova (2) and Japan’s Kei Nishikori (5) live in the Sunshine State. So do twins Mike and Bob Bryan, who have won 16 Grand Slam doubles titles. Like the Williamses, they come from California, where the 13.3% state income-tax rate is the nation’s highest.

Indeed, it’s not just tennis players. Golfers like Tiger Woods have Florida residency. And those that remain in California are plotting their escapes.

Even soccer players become supply-side economists!

So whether it’s taxpayers escaping from France or from New Jersey, tax competition is a wonderful and necessary restraint on the greed of politicians.

P.S. I’ve shared horror stories of anti-gun political correctness in schools.

Well, the Princess of the Levant just sent me this bit of humor.

For more gun control humor, click here.

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Tax competition is a very important tool for constraining the greed of the political class. Simply stated, politicians are less likely to impose bad tax policy if they are afraid that jobs and investment (and accompanying tax revenue) will move to jurisdictions with better tax policy.

This works to limit revenue grabs by politicians at the state level and it works to control the craving for money on the part of politicians at the national level.

But this doesn’t mean all forms of tax competition are equally desirable.

If a country lowers overall tax rates on personal income or corporate income in hopes of attracting business activity, that’s great for prosperity. If a jurisdiction seeks faster growth by reducing double taxation – such as lowering the tax rate on capital gains or abolishing the death tax, that’s also very beneficial.

Some politicians, however, try to entice businesses with special one-off deals, which means one politically well-connected company gets a tax break while the overall fiscal regime for other companies stays the same (or even gets worse).

That’s corrupt cronyism, not proper tax competition.

With this in mind, let’s consider the growing controversy about tax planning by multinational companies. There’s lot of controversy, both in the United States and in Europe, about whether companies are gaming the system.

The most recent kerfuffle deals with Luxembourg, which is accused of having a very friendly regime for business taxation.

Syed Kamall, a Tory member of the European Parliament, has a column in the Wall Street Journal Europe about the right kind of corporate tax competition.

It seems to have come as a great shock to many in the European Parliament that Luxembourg may have encouraged multinational companies to domicile there to pay lower taxes. I’m not sure where these members of parliament have been living for the past 20 years.

What worries Syed is that many European politicians want to use the news from Luxembourg as an excuse to push tax harmonization.

…an agenda of EU-wide tax harmonization…is rapidly gaining popularity in some quarters despite being exactly the wrong prescription for Europe. …tax harmonization…would hang the “Closed for Business” sign at Europe’s border. Tax competition across the single market helps keep tax rates competitive and drives inward investment. The Organization for Economic Co-operation and Development has said that “the ability [of companies] to choose the location of economic activity offsets shortcomings in government budgeting processes, limiting a tendency to spend and tax excessively.”

By the way, the OECD is a big proponent of tax harmonization, so it’s especially noteworthy that even those bureaucrats admitted that tax competition constrains greedy government.

You can click here for further examples of OECD economists admitting that tax competition is necessary and desirable, notwithstanding the anti-market policies being advocated by the political appointees who run the institution.

And since we’re discussing the merits of tax competition, we should point out that Mr. Kamall also mentioned those benefits.

The clearest example of that came with the tax reductions enacted by Margaret Thatcher and Ronald Reagan in the 1980s. Those tax-rate cuts in the U.K. and U.S. forced other industrialized nations to cut their average top marginal rate for personal income to 42% today from more than 67% in 1980 simply to remain competitive, according to the Adam Smith Institute. Tax competition has driven down the average top rate for corporate income in the developed world to less than 27% today from 48% in 1980. Tax competition in Europe encouraged many EU members from the former Soviet bloc to enact flat taxes, which have benefitted them substantially. …it’s important for leaders to keep making the case that tax-policy competition within the single market has been good for Europe.

And he correctly warns that tax harmonization would be a vehicle for higher tax burdens.

Imposing uniform rates under a harmonized system would turn the EU into a convoy that can move only as fast as the slowest ship. Europe’s tax rate would be only as low as the highest-taxing member. …A harmonized tax system would encourage companies and investors to seek new solutions outside the EU in order to avoid paying what would inevitably be higher, French-style levels of European taxation.

And if you don’t believe Mr. Kamall, just look at what’s happened over the past couple of years in Europe.

Last but not least, Syed points out that there is a pro-growth way of improving tax compliance.

The best way to cut down on tax avoidance is to cut tax rates and simplify tax codes. That way people and companies would be willing and able to pay their money to Europe’s exchequers, rather than paying accountants to find loopholes.

But that would require politicians to be responsible, so don’t hold your breath.

So what’s the bottom line? Is there a good way of identifying the desirable forms of tax competition that should be defended.

The simple answer is that it’s always a good idea to compete with lower tax rates that apply to all taxpayers. That’s true for tax rates on companies and households.

The more complex (but equally important) answer is that it’s also good to compete by having a properly designed tax system. On the business side, that means expensing instead of depreciation and territorial taxation rather than worldwide taxation. For households, it means having the proper definition of income so that there’s no longer pernicious discrimination against saving and investment.

Misguided tax competition, by contrast, exists when there are very narrow preferences that apply to a small handful of powerful taxpayers.

For more information on the general topic, here’s my video on the virtues of tax competition.

P.S. My support for tax competition is so intense that I even try to bring the message to unfriendly audiences, such as Capitol Hill and the New York Times.

P.P.S. Heck, my support for tax competition is so intense that I almost got tossed in a third-world jail. That’s true dedication!

P.P.P.S. In you admire hypocrisy, you’ll be very impressed that many rich statists utilize tax havens to protect their money even though they want you to give more of your income to government.

P.P.P.P.S. Speaking of hypocrisy, the main anti-tax competition international organization gives its bureaucrats tax-free salaries.

P.P.P.P.P.S. Since I just mentioned the OECD, I should note that it has a project to curtail business tax competition. They claim that their intention is to go after misguided forms of tax competition, but I’m not surprised that the real goal is to simply extract more money from companies.

P.P.P.P.P.P.S. I’m not sure how to classify this final bit of information, but it’s surely worth mentioning that Bill Clinton defends corporate tax competition. As does Bono.

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I’m not a big fan of international bureaucracies.

Regular readers know that the Organization for Economic Cooperation and Development is the worst institution from my perspective, followed by the International Monetary Fund.

Some folks ask why the United Nations isn’t higher on the list?

My answer is simple. The UN has a very statist orientation and it routinely advocates bad policy, but it is too incompetent to do much damage.

The OECD and IMF, by contrast, have some capacity to undermine global growth by encouraging more statism.

That being said, the UN occasionally does something that is so obnoxious that I can’t resist commenting. Especially since my tax dollars pay a big share of that bureaucracy’s bloated budget.

What has me irked is that the United Nations Conference on Trade and Development just released its annual Trade and Development Report.

You would think an institution that focuses on trade and development would be advocating free markets and small government.

But UNCTAD takes the opposite approach.

Here’s how the bureaucrats frame the issue in the report. Keep in mind that “market liberalism” is their term for free markets (in other words, classical liberalism).

Back in 1964, the international community recognized that “If privilege, extremes of wealth and poverty, and social injustice persist, then the goal of development is lost”. Yet, almost everywhere in recent years, the spread of market liberalism has coincided with highly unequal patterns of income and wealth distribution. A world where its 85 wealthiest citizens own more than its bottom three and a half billion was not the one envisaged 50 years ago. …the past three decades have demonstrated that delivery is unlikely with a one-size-fits-all approach to economic policy that cedes more and more space to the profitable ambitions of global firms and market forces. …the moment is right to propose another international “New Deal” that can realize the promise of “prosperity for all”.

But not only does UNCTAD utilize class-warfare rhetoric, they also try to support their ideological agenda with historical illiteracy.

I’ve pointed out that the western world became rich when government was very small and markets were liberated.

But the statists at the UN want us to think that big government deserves the credit.

None of today’s developed countries depended on market forces for their structural transformation and its attendant higher levels of employment, productivity and per capita incomes. Rather, they adopted country-specific measures to manage those forces, harnessing their creative side to build productive capacities and provide opportunities for dynamic firms and entrepreneurs, while guiding them in a more socially desired direction. They also used different forms of government action to mitigate the destructive tendencies of those same market forces. This approach of managing the market, not idolizing it, was repeated by the most rapidly growing emerging market economies − from the small social democratic economies of Northern Europe to the giant economies of East Asia − in the decades following the end of the Second World War.

Wow. They even want us to think big government deserves the credit for prosperity in Hong Kong and Singapore.

So you know the bureaucrats are either very stupid or very dishonest. I suspect the latter, but it doesn’t matter. All we need to know is that they are willing to make very preposterous claims to advance their agenda.

And what is their agenda? Well, a major theme is that politicians in developing nations need “policy space” to enable bigger government.

For instance, UNCTAD doesn’t like free trade but does like industrial policy (aka, crony capitalism).

Policy space is…reduced by free trade agreements… Along with the proliferation of trade agreements and their expansion into trade-related areas, there has been a global revival of interest in industrial policy.

But a big focus of the report is that tax competition is a threat to the “policy space” of politicians.

Fiscal space goes hand in hand with policy space. …strengthening government revenues is key. …This…allows for higher growth-enhancing public spending… The need for reclaiming and expanding fiscal space faces particular challenges in an increasingly globalizing economy. …A major problem is that globalization has affected the ability of governments to mobilize domestic revenues. …the increased mobility of capital and its greater use of fiscal havens have considerably altered the conditions for taxing income − both personal and corporate − and wealth. The dominant agenda of market liberalism has led to a globalized economy that encourages tax competition among countries, at times pushing them to a “race to the bottom”.

Gasp, how horrible! Politicians don’t have as much “policy space” to impose punitive taxes.

That’s the best advertisement for tax competition I’ve ever read, even if it is unintentional.

So what do the UN bureaucrats want to solve this supposed problem? Simple, just destroy financial privacy and fiscal sovereignty so that politicians have carte blanche to expand taxes.

…a number of developments aimed at improving transparency and exchange of information for tax purposes have taken place. They include a declaration by G20 leaders to promote information sharing… an OECD Action Plan on base erosion and Profit Shifting (BEPS), increased monitoring by several national tax authorities…and numerous bilateral tax treaties (BTTs) and tax information exchange agreements (TIEAs). …these initiatives are steps in the right direction.

With BEPS, indiscriminate information sharing, and more power for national tax police, UNCTAD has put together a trifecta of bad policies.

And to add insult to injury, all the bureaucrats at the UN get tax-free salaries while they concoct schemes to enable higher taxes on the rest of us.

Geesh, no wonder I sometimes have perverse fantasies about them.

And I’m very grateful that Senator Rand Paul is leading the fight against their evil ideas.

P.S. On a more pleasant topic, the “Beltway Bandits” just played in the softball world series in Las Vegas. We competed in the 55+ grouping and finished with three wins and two losses.

Not bad, but not good enough to win any trophies. But we got to play in replica Major League stadiums, which was a fun experience.

I can now say I’ve hit home runs in Dodger Stadium and Wrigley Field, and also doubled off the Green Monster at Fenway. Sounds impressive so long as nobody asks any follow-up questions!


P.P.S. Here’s something else that I found amusing.

Bill Clinton not only understands the inversion issue, but he’s also willing to publicly explain why Obama is wrong.

During an interview with CNBC on Tuesday, former President Bill Clinton called to cut corporate taxes and give companies a break on money stashed overseas, dinging President Barack Obama’s latest effort to combat corporate tax-dodging. When asked what should be done about corporate inversion transactions, Clinton responded with a host of GOP talking points about the tax burden on big business. “America has to face the fact that we have not reformed our corporate tax laws,” Clinton told CNBC, according to a transcript. “We have the highest overall corporate tax rates in the world. And we are now the only OECD country that also taxes overseas earnings on the difference between what the companies pay overseas and what they pay in America.”

But I guess we shouldn’t be surprised. This isn’t the first time he’s had sensible things to say on the issue of corporate taxation.

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I’ve complained over and over again that America’s tax code is a nightmare that undermines competitiveness and retards growth.

Our aggregate fiscal burden may not be as high as it is for many of our foreign competitors, but high tax rates and poor design mean the system is very punitive on a per-dollar-raised basis.

For more information, the Tax Foundation has put together an excellent report measuring international tax competitiveness.

Here’s the methodology.

The Tax Foundation’s International Tax Competitiveness Index (ITCI) measures the degree to which the 34 OECD countries’ tax systems promote competitiveness through low tax burdens on business investment and neutrality through a well-structured tax code. …No longer can a country tax business investment and activity at a high rate without adversely affecting its economic performance. In recent years, many countries have recognized this fact and have moved to reform their tax codes to be more competitive. However, others have failed to do so and are falling behind the global movement. …The competitiveness of a tax code is determined by several factors. The structure and rate of corporate taxes, property taxes, income taxes, cost recovery of business investment, and whether a country has a territorial system are some of the factors that determine whether a country’s tax code is competitive.

And here’s how the United States ranks.

The United States provides a good example of an uncompetitive tax code. …the United States now has the highest corporate income tax rate in the industrialized world. …The United States places 32nd out of the 34 OECD countries on the ITCI. There are three main drivers behind the U.S.’s low score. First, it has the highest corporate income tax rate in the OECD at 39.1 percent. Second, it is one of the only countries in the OECD that does not have a territorial tax system, which would exempt foreign profits earned by domestic corporations from domestic taxation. Finally, the United States loses points for having a relatively high, progressive individual income tax (combined top rate of 46.3 percent) that taxes both dividends and capital gains, albeit at a reduced rate.

Here are the rankings, including scores for the various components.

You have to scroll to the bottom to find the United States. It’s embarrassing that we’re below even Spain and Italy, though I guess it’s good that we managed to edge out Portugal and France.

Looking at the component data, all I can say is that we should be very thankful that politicians haven’t yet figured out how to impose a value-added tax.

I’m also wondering whether it’s better to be ranked 32 out of 34 nations or ranked 94 out of 100 nations?

But rather than focus too much on America’s bad score, let’s look at what some nations are doing right.

Estonia – I’m not surprised that this Baltic nations scores well. Any country that rejects Paul Krugman must be doing something right.

New Zealand – The Kiwis can maintain a decent tax system because they control government spending and limit government coercion.

Switzerland – Fiscal decentralization and sensible citizens are key factors in restraining bad tax policy in Switzerland.

Sweden – The individual income tax is onerous, but Sweden’s penchant for pro-market reform has helped generate good scores in other categories.

Australia – I’m worried the Aussies are drifting in the wrong direction, but any nations that abolishes its death tax deserves a high score.

To close, here’s some of what the editors at the Wall Street Journal opined this morning.

…the inaugural ranking puts the U.S. at 32nd out of 34 industrialized countries in the Organization for Economic Co-operation and Development (OECD). With the developed world’s highest corporate tax rate at over 39% including state levies, plus a rare demand that money earned overseas should be taxed as if it were earned domestically, the U.S. is almost in a class by itself. It ranks just behind Spain and Italy, of all economic humiliations. America did beat Portugal and France, which is currently run by an avowed socialist. …the U.S. would do even worse if it were measured against the world’s roughly 190 countries. The accounting firm KPMG maintains a corporate tax table that includes more than 130 countries and only one has a higher overall corporate tax rate than the U.S. The United Arab Emirates’ 55% rate is an exception, however, because it usually applies only to foreign oil companies.

The WSJ adds a very important point about the liberalizing impact of tax competition.

Liberals argue that U.S. tax rates don’t need to come down because they are already well below the level when Ronald Reagan came into office. But unlike the U.S., the world hasn’t stood still. Reagan’s tax-cutting example ignited a worldwide revolution that has seen waves of corporate tax-rate reductions. The U.S. last reduced the top marginal corporate income tax rate in 1986. But the Tax Foundation reports that other countries have reduced “the OECD average corporate tax rate from 47.5 percent in the early 1980s to around 25 percent today.”

This final excerpt should help explain why I spend a lot of time defending and promoting tax competition.

As bad as the tax system is now, just imagine how bad it would be if politicians didn’t have to worry about jobs and investment escaping.

P.S. If there was a way of measuring tax policies for foreign investors, I suspect the United States would jump a few spots in the rankings.

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