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Archive for the ‘Jurisdictional Competition’ Category

I sometimes wonder if I was put on this planet to defend tax competition and tax havens.

I argue for fiscal sovereignty, good tax policy, and financial privacy to the denizens of Capitol Hill, both in writing and in person.

I make the same arguments for readers of the New York Times, as well as readers of big-box store magazines.

My affection for low-tax jurisdictions is so strong that I ran the risk of getting thrown in a Mexican jail and also was accused of disloyalty to America by a bureaucrat for the Treasury Department.

Though I much prefer the hardship duty of arguing for tax competition and tax havens in places such as Bermuda, Antigua, Monaco, the British Virgin Islands, Anguilla, and the Cayman Islands. Yes, I’m willing to go the extra mile in the fight for economic liberty.

And, if nothing else, my intensity on these issues makes me quotable, at least to writers for the Economist.

Not one to mince words, Daniel Mitchell of the right-wing Cato Institute denounces the OECD’s push to co-ordinate global tax enforcement as “the devil’s spawn” and possibly even a step towards the fiscal equivalent of…the World Trade Organisation. Tax havens “should not have to enforce the burdensome tax laws of other countries”, he thunders. “Having grown rich with the tax policies of their choosing, the OECD countries are pulling up the ladder and saying, ‘you can’t do the same to attract investment’. It’s fiscal imperialism.”

But I’m not the only one with sensible views on these issues.

A different article in the Economist highlights some benefits made possible by “tax havens.”

Offshore centres oil the financial interface between larger economies, insists Alasdair Robertson of Maples. Grant Stein of Walkers, another Cayman firm, thinks of it as “the plumbing that connects the global financial system”. …They enjoy support from some fierce ideological warriors, including libertarians at the Cato Institute in Washington, DC. …many offshore transactions are about tax neutrality, not cheating. …“It’s not about evasion but about avoiding an extra, gratuitous layer of tax,” says John Collis of Conyers Dill & Pearman, a Bermuda law firm. Such structures offer legal neutrality too. In a joint venture in, say, the BVI, no shareholder has a home advantage; all get a sophisticated, predictable common-law system with a small but well-regarded local commercial court and Britain’s Privy Council as the ultimate arbiter. …Some offshore champions consider tax competition a good thing because it discourages countries from trying to tax their way out of trouble.

Writing for Hong Kong’s South China Morning Post, David Dodwell explains the valuable role of low-tax jurisdictions.

…offshore centres like Panama, the British Virgin Islands, Singapore, Hong Kong, Jersey, Lichtenstein or Switzerland serve a multitude of valuable roles. …Offshore financial centres have always acted as safe havens against such chaos or personal insecurity, and should be allowed to continue to do so. Is Hong Kong to be stigmatised as a tax haven because it offers a company low and simple tax arrangements compared with France, or Italy or India or wherever?

He uses his own experiences as an example.

When I settled permanently in Hong Kong, I did so not just because the work was interesting… I did so because I escaped onerous British taxes, and horrendous, stressful weeks completing nonsensically complex tax returns for Britain’s Inland Revenue. When I uplifted my Financial Times pension from Britain and placed it in a Hong Kong trust, I did so perfectly legally and transparently because if I had the pension sent to me monthly from Britain, it would be taxed. This was a pension built on a lifetime of hard-earned labour that had already been taxed once. I saw no justification for Britain’s inland revenue to tax me a second time. Was I acting unethically by eliminating a tax obligation to the British Government? …Building savings, and providing long-term security to my family…is not something I think I should feel embarrassed about. Nor should governments that create complex and burdensome personal and corporate tax regimes be surprised if people relocate to other jurisdictions where operating overheads are less onerous, and tax rules more simple and comprehensible.

He concludes with some wise words on the value of low-tax jurisdictions for the rest of the world.

As trade has exploded over the past four decades, so companies have become progressively more international, with operations sprawling across many economy and tax jurisdictions. Choosing a single low-tax base from which to coordinate such potentially messy production networks makes eminent good sense. So too is a zero-tax offshore location valuable as a way of avoiding double taxation for companies operating in more than one economy. …Use of such centres makes incorporation simpler, gives access to tried and tested legal systems including for arbitration, and tax-neutral treatment of investment. All legitimate reasons.

In a piece for the Financial Times that focuses primarily on British offshore financial centers, Richard Hay explains why so-called tax havens are so valuable.

Many of those who benefit from offshore centres — including millions receiving workplace pensions — are not aware of the key role they play in their financial affairs. Such financial centres facilitate trade, investment and economic growth. Globalisation has contributed to a doubling of world gross domestic product over the past two decades. Much of the benefit has accrued to developing countries, where dramatic declines in poverty have resulted from connecting local workforces to world consumers. …The true appeal of the UK offshore centres lies in their widely trusted British-inspired laws, courts, and professionals. The predictability and security offered by British institutions make such jurisdictions magnets for investors seeking reliable structures for international investment.

He cites one example of how Jersey (one of the Channel Islands, not the over-taxed New Jersey in the United States) produces big benefits for the United Kingdom.

UK offshore centres support British jobs, increase financing available for investment in the country and elevate the rate of return for savings. A 2013 study conducted by Capital Economics, a research consultancy, found that Jersey supports more than 140,000 British jobs — six times as many as the entire UK steel industry. The study found that Jersey’s contribution generates £2.5bn a year in tax for the exchequer, as much as the UK loses through all tax avoidance, onshore and offshore, combined.

And workers are big beneficiaries.

International investment is pooled in funds in tax-neutral countries like the Cayman Islands. Cost-efficient facilities afforded by such centres boost saving and pension returns, improving the lives of ordinary workers in retirement and easing the welfare burden on cash-strapped governments. Such pooled funds are liable to tax in the countries where their income and gains are earned, and again when received by the ultimate investors.

In a column for City A.M., James Quarmby highlights some of the practical and appropriate business reasons for utilizing so-called tax havens.

…the truth is that the major OFCs are extremely well regulated and have been so for many years. It is far harder to set up a company in Jersey than in the UK, for instance, because of its rigorous “know your client” rules. …most people use companies in OFCs for quite mundane, non-tax reasons. If you are trading or investing internationally, an offshore company is an essential building block for your business. …Experienced business people will tell you that there are certain emerging markets where, under no circumstances, would you want to resolve an investors’ dispute – you would much rather resolve it in a Cayman court where you could be sure of a fair fight. …Another reason for using an OFC is the bi-lateral treaties many of them have entered into with other countries. Mauritius, for instance, has excellent treaties with India and as a consequence it is now the world’s most important financial gateway to the sub-continent. Hong Kong, for similar reasons, is the gateway into China… OFCs are a vital part of our globalised world – without them international trade and investment would seriously suffer, global GDP would be lower, and the world would be a poorer place.

By the way, there is an effective and pro-growth way to boost tax compliance, as explained in another article in the Economist.

Getting rich people to pay their dues is an admirable ambition, but this attack is both hypocritical and misguided. It may be good populist politics, but leaders who want to make their countries work better should focus instead on cleaning up their own back yards and reforming their tax systems. …governments should not bash companies for trying to reduce their tax bills, if they do so legally. In the end, tax systems must be reformed. …Governments also need to lower corporate tax rates. Tapping companies is inefficient: firms pass the burden on to others. …Nor do corporate taxes raise much money: barely more than 2% of GDP (8.5% of tax revenue) in America and 2.7% in Britain. …a lower rate on a broader base…would be more efficient and would probably raise more revenue.

Pierre Bessard of Switzerland’s Liberales Institut looks at the big picture in his monograph on Individual Rights and the Fight Against Tax Evasion. He starts by noting that the entire anti-tax competition campaign is an illegitimate exercise of “might makes right.”

…the G20 as a body lacks democratic or legal legitimacy and is in effect a cartel of governments… The G20…is clearly a departure from the rule of law in international affairs and replaces negotiations with political pressure under the (explicit or implicit) threat of economic and financial sanctions.

He then explains that anti-tax competition advocates rely on laughable arguments about the supposed desirability of bigger government.

To make the G20 governments’ war against citizens protecting wealth and resources in “tax havens” more palatable, the OECD  has initially argued that governments “need every tax dollar legally due to combat the world recession”. As this argument lost its credibility as the evidence  increasingly showed that Keynesian-style fiscal interventionism worsened and prolonged the crisis, the OECD now holds that tax avoidance and tax evasion mean fewer resources “for infrastructure and services such as education and health, lowering standards of living in both developed and developing economies”. This statement, however, contradicts all theoretical and empirical evidence, which shows that a smaller scope and size of government go hand in hand with higher  economic growth and living standards.

And he also explains why tax competition leads to better tax policy and more growth.

By restricting government’s capacity to indefinitely raise the tax burden, the diversity of jurisdictions and systems unquestionably contributes to greater prosperity. The most obvious consequence of tax competition is its beneficial impact on saving, since lower taxes encourage capital accumulation. This in turn leads to more investment, more jobs and more economic welfare. …Experience shows that “tax havens”…play at most a preventive or corrective role of arbitrage in the face of excessive taxation. In general, tax competition from “tax havens” leads to a better balance between public services and the tax burden. …From an economic perspective, the use of “tax havens” facilitates capital accumulation and improves economic prosperity in the high-tax countries where the capital is eventually repatriated to be invested in factors of production. “Tax havens” therefore increase the efficiency of international  capital markets and thus the efficiency of capital allocation to the most productive investments, thereby contributing to raise overall living standards. As a result, “tax havens” benefit all residents, whether they make use of them directly or not. They serve to channel capital and avoid double or even triple taxation in high-tax countries and lead to better economic performance in those countries.

The bottom line is that tax competition protects individuals by at least partially constraining the greed of the political class.

…tax diversity is an essential condition for the preservation of individual liberty. Competition tends to restrict the predatory potential of the territorial monopoly on the use of coercion (which defines government). …An individual’s freedom of choice and legitimate rights to the fruits of his or her labor and property are thus better protected in a world with strong tax competition.

And Pierre closes by noting the powerful intellectual lineage in favor of systems diversity as a driver and protector of liberty.

…jurisdictional competition and the advantages of smaller, open territorial monopolies controlled by governments are important ideas of the intellectual liberal tradition. Such diverse thinkers as David Hume, Adam Smith, Montesquieu, Alexis de Tocqueville, Immanuel Kant, Wilhelm von Humboldt, and Turgot insisted on the role of institutional diversity and the right to exit for individual freedom.

P.S. Pierre also wrote a superb column a few years ago about tax competition, fiscal sovereignty, and financial privacy for the New York Times.

P.P.S. Here’s my video on the economic case for tax havens.

P.P.P.S. Let’s not forget that the Paris-based Organization for Economic Cooperation and Development is the international bureaucracy most active in the fight to destroy tax competition. The is doubly outrageous because, 1) our tax dollars subsidize the OECD, and 2) those bureaucrats get tax-free salaries!

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Why do many people engage in civil disobedience and decide not to comply with tax laws?

Our leftist friends (the ones who think that they’re compassionate because they want to spend other people’s money) assert that those who don’t obey the revenue demands of government are greedy tax evaders who don’t care about society.

And these leftists support more power and more money for the Internal Revenue Service in hopes of forcing higher levels of compliance.

Will this approach work? Are they right that governments should be more aggressive to obtain more obedience?

To answer questions of how to best deal with tax evasion, we should keep in mind three broad issues about the enforcement of any type of law:

1. Presumably there should be some sort of cost-benefit analysis. We don’t assign every person a cop, after all, even though that presumably would reduce crime. Simply stated, it wouldn’t be worth the cost.

2. We also understand that crime reduction isn’t the only thing that matters. We grant people basic constitutional rights, for instance, even though that frequently makes is more difficult to get convictions.

3. And what if laws are unjust, even to the point of leading citizens to engage in jury nullification? Does our legal system lose moral legitimacy when it is more lenient to those convicted of child pornography than it is to folks guilty of forgetting to file paperwork?

Now let’s consider specific tax-related issues.

I’ve written before that “tough on crime” is the right approach, but only if laws are legitimate. And that leads to a very interesting set of questions.

4. Is it appropriate to track down every penny, even if it results in absurdities such as the German government spending 800,000 euros to track down 25,000 euros of unpaid taxes on coffee beans ordered online?

5. Or what about the draconian FATCA law imposed by the United States government, which is only projected to raise $870 million per year, but will impose several times as much cost on taxpayers, drive investment out of American, and also causing significant anti-US resentment around the world?

6. And is there perhaps a good way of encouraging compliance?

The purpose of today’s (lengthy) column is to answer the final question.

More specifically, the right way to reduce tax evasion is to have a reasonable and non-punitive tax code that finances a modest-sized, non-corrupt government. This make tax compliance more likely and more just.

Here’s some of what I wrote back in 2012.

I don’t blame people from France for evading confiscatory taxation. I don’t blame people in corrupt nations such as Mexico for evading taxation. I don’t blame people in dictatorial nations such as Venezuela for evading taxation. But I would criticize people in Singapore,Switzerland, Hong Kong, or Estonia for dodging their tax liabilities. They are fortunate to live in nations with reasonable tax rates, low levels of corruption, and good rule of law.

Let’s elaborate on this issue.

And we’ll start by citing the world’s leading expert, Friedrich Schneider, who made these important points about low tax rates in an article for the International Monetary Fund.

…the major driving forces behind the size and growth of the shadow economy are an increasing burden of tax and social security payments… Several studies have found strong evidence that the tax regime influences the shadow economy. …In the United States, analysis shows that as the marginal federal personal income tax rate increases by one percentage point, other things being equal, the shadow economy grows by 1.4 percentage points.

With this bit of background, let’s look at the magnitude of non-compliance.

The Wall Street Journal reports on the history of dodging greedy governments.

Tax evasion has been around since ancient Mesopotamia, when the Sumerians were cheerfully working the black market. …The Romans were the most efficient tax collectors of all. Unfortunately Emperor Nero (ruling from A.D. 54 to 68) abandoned the high growth, low-tax policies of his predecessors. In their place he created a downward spiral of inflationary measures coupled with excessive taxation. By the third century, widespread tax evasion forced economically stressed Rome to practice expropriation. …Six hundred years later, during the Heian period (794-1185), Japan’s aristocracy acted in a similar manner and with similar consequences. …China’s Qing Dynasty (1644-1912) waged a harsh war against the tax-dodging gentry.

These same fights between governments and taxpayers exist today.

In a column published by the New York Times, we got some first-hand knowledge of the extraordinary steps people take to protect themselves from taxation in China.

In China, businesses have to give out invoices called fapiao to ensure that taxes are being paid. But the fapiao — the very mechanism intended to keep businesses honest — is sometimes the key to cheating on taxes. …My company would disguise my salary as a series of expenses, which would also save me from paying personal income tax. But to show proof of expenses, the accountant needed fapiao. It was my responsibility to collect the invoices. …But evading taxes in China was harder than I expected because everyone else was trying to evade taxes, too. …Though businesses are obligated to give out fapiao, many do not unless customers pester them. They are trying to minimize the paper trail so they too can avoid paying taxes on their true income. …some people are driven to buy fake invoices. It’s not hard; scalpers will sell them on the street, and companies that specialize in printing fake fapiao proliferate.

The author had mixed feelings about the experience.

I couldn’t figure out whether what I was doing was right or wrong. By demanding a fapiao, I was forcing some businesses to pay taxes they would otherwise evade. But all of this was in the service of helping my own company evade taxes. In this strange tale, I was both hero and villain. To me, tax evasion seemed intractable. Like a blown-up balloon, if you push in one part, another swells.

Meanwhile, Leonid Bershidsky, writing for Bloomberg, reviews what people do to escape the grasping hand of government in Greece.

In gross domestic product terms, Greece has the second biggest shadow economy among European Union countries without a Communist past…unreported revenue accounts for 23.3 percent of GDP, or $55.3 billion. …Had it been subject to taxes — at the prevailing 40 percent rate — the shadow economy would have contributed $22 billion to the government’s coffers.

Bershidsky cites some new academic research.

…researchers used loan application data from a big Greek bank. …The bank…regards the reported income figure as a fiction, as do many other banks in eastern and southern Europe. As a result, it uses estimates of “soft” — untaxed — income for its risk-scoring model. Artavanis, Tsoutsoura and Morse recreated these estimates and concluded that the true income of self-employed workers in Greece is 75 percent to 84 percent higher than the reported one.

Greek politician have tried to get more money from the shadow economy but haven’t been very successful.

Even the leftist government of former Prime Minister Alexis Tsipras, which came up with unworkable schemes to crack down on tax evasion — from using housewives and tourists to inform on small businesses to a levy on cash withdrawals — failed.

Bershidsky notes that some have called for indirect forms of taxation that are harder to evade.

The researchers suggest the government should sell occupation licenses through the powerful professional associations: a harsh but effective way to collect more money.

Though his conclusion rubs me the wrong way.

The shadow economy — and particularly the contributions of professionals — is an enormous potential resource for governments.

At the risk of editorializing, I would say that the untaxed money is “money politicians would like to use to buy votes” rather than calling it “an enormous potential resource.” Which is a point Bershidsky should understand since he wrote back in 2014 that European governments have spent themselves into a fiscal ditch.

Now let’s shift to the academic world. What do scholars have to say about tax compliance?

Two economists from the University of Rome have authored a study examining the role of fiscal policy on the underground economy and economic performance. They start by observing that ever-higher taxes are crippling economic performance in Europe.

…most European economies have been experiencing feeble growth and increasing levels of public debt. Compliance with the Stability and Growth Pact, and in particular with the primary deficit clause, has required many governments to raise taxes to exceptional high levels, thus hindering business venture and economic recovery.

And those high tax burdens don’t collect nearly as much money as politicians want because taxpayers have greater incentives to dodge the tax collectors.

…between a country’s tax system and the size of its shadow economy is a two-way relationship. …there exists a positive relationship between the dimension of the tax burden on economic activity and the size of the informal economy. …various tax reform scenarios, recently advocated in economic and policy circles as a means to promote growth, such as…ex-ante budget-neutral tax shifts involving reductions of distortionary taxes on labor and business compensated by an increase in the consumption tax or counterbalanced by decreases of government spending. We will see that all these fiscal reforms give rise to a resource reallocation effect from underground to official production or vice versa and have rather different implications in terms of output, fiscal solvency and welfare.

The authors look at the Italian evidence and find that lower tax rates would create a win-win situation.

Our main results can be summarized as follows. …the dimension of the underground sector is substantially decreased by fiscal interventions envisaging sizeable labor tax wedge reductions. Finally, all the considered tax reforms have positive effects on the fiscal consolidation process due to a combination of larger tax revenues and positive output growth. …consider the case in which the decrease of the business tax is met by a public spending cut…an expansionary effect on output, consumption and investments, and, despite the overall reduction of tax revenues, the public-debt-to-output ratio falls. However, we notice that the expansionary effects are…magnified on consumption and investments. In this model, in fact, public spending is a pure waste that crowds out the private component of aggregate demand, therefore it comes as no surprise that a tax cut on business, counterbalanced by a public spending reduction, is highly beneficial for both consumption and investments. …the underground sector shrinks.

The benefits of lower tax rates are especially significant if paired with reductions in the burden of government spending.

When the reduction of the business tax, personal income tax, and employers’ SSC tax rates are financed through a cut in public spending…we observe positive welfare effects… The main difference…is that consumption is significantly higher…due to the fact that this reform leaves the consumption tax unchanged, while public spending is a pure waste that crowds out private consumption. …all the policy changes that lower the labor tax wedge permanently reduce the dimension of the underground sector. Finally, all the considered tax reforms positively contribute to the fiscal consolidation process.

Let’s now look at some fascinating research produced by some other Italian economists.

They look at factors that lead to higher or lower levels of compliance.

…a high quality of the services provided by the State, and a fair treatment of taxpayers increase tax morale. More generally, a high level of trust in legal and political institutions has a positive effect on tax morale. …two further institutional characteristics that are likely to negatively affect an individual’s tax morale: corruption and complexity of the tax system.

By the way, “tax morale” is a rough measure of whether taxpayers willingly obey based on their perceptions of factors such as tax fairness and waste and corruption in government.

And that measure of morale naturally varies across countries.

…we examine how people from different countries react to varying tax rates and levels of efficiency. …We focus our analysis on three countries: Italy, Sweden and UK. …these three countries show differences concerning the two institutional characteristics we are focused on. Italy and Sweden show a high tax burden while UK shows a low one. Whereas, Sweden and UK can be considered efficient states, Italy is not.

By the way, I don’t particularly consider the United Kingdom to be a low-tax jurisdiction. And I don’t think it’s very efficient, especially if you examine the government-run healthcare system.

But everything is relative, I guess, and the U.K. is probably efficient compared to Italy.

Anyhow, here are the results of the study.

Experimental subjects react to institution incentives, no matter the country. More specifically, tax compliance increases as efficiency increases and decreases as the tax rate increases. However, although people’s reaction to changes in efficiency is homogeneous across countries, subjects from different countries react with a different degree to an increase in the tax rate. In particular, participants who live in Italy or Sweden – countries where the tax burden is usually high – react more strongly to an increase in the tax rate than our British subjects. At the same time, subjects in Sweden – where the efficiency of the public service is high – react less to tax rate increases than Italian subjects.

So low tax rates matter, but competent and frugal government also is part of the story.

In all 3 countries, higher tax rates imply lower compliance. This is in line with experimental evidence: as Alm (2012, p. 66) affirms: “most (but not all) experimental studies have found that a higher tax rate leads to less compliance” and “The presence of a public good financed by voluntary tax payments has been found to increase subject tax compliance”. …The stronger negative reaction of Italian subjects to an increase in the tax rate may be due to the fact that in everyday life they suffer from high tax rates combined with inefficiency and corruption. …In fact, in the final questionnaire, 67.5% of Italian participants state that people would be more likely to pay taxes if the government were more efficient (vs 34.4% and 30.3% in UK and Sweden respectively) and 54.6% would comply with their fiscal obligations if they had some control over how tax money were spent (vs 30.8% and 25.8% in UK and Sweden respectively)… No way to impose a high tax burden on citizens if the tax revenue is wasted through inefficiency and corruption.

Here’s one additional academic study from Columbia University. The author recognizes the role of tax rates in discouraging compliance, but focuses on the impact of tax complexity.

Here’s what he wrote about the underlying theory of tax compliance.

The basic theoretical framework for tax evasion was derived…from the Becker model of crime. This approach views tax evasion as a gamble. …when tax evasion is successful, the taxpayer gains by not paying taxes. In other cases, tax evasion is uncovered by tax authorities, and the taxpayer has to pay taxes due and fines. The taxpayer compares the expected gain to the expected loss. …This approach highlights a number of factors that determine whether and to what extent taxes are evaded. These are: the magnitude of potential savings (which, on the margin, is simply equal to the tax rate)… This model therefore highlights…natural policy parameters that can affect evasion. …the marginal gains from tax evasion could be reduced by imposing lower marginal tax rates.

Interestingly, he doesn’t see much difference between (illegal) evasion and (legal) avoidance.

The ideal compliance policy should target both tax avoidance and tax evasion. While there is a legal distinction between the two, from the economic point of view the difference is less explicit. Both types of activity involve a loss of revenue and both involve a loss of economic welfare.

He then brings tax complexity into the equation.

…the appropriate extent of tax enforcement critically depends on the underlying tax structure. In particular, the role of complexity in the tax system as a factor influencing the size of the tax gap, as well as legal but undesirable tax avoidance, are highlighted. Two principal implications of tax complexity are stressed here. First, complexity permits additional ways to shield income from tax and, consequently, complexity increases the overall cost of taxation. … Reasonable simplification can more adequately combat tax evasion and avoidance than traditional enforcement measures.

Here are some of his findings.

Tax avoidance is a function of ambiguity in the tax system. …Administrative investment in enforcement becomes more important when the tax system is more distortionary. One way to reduce the need for costly tax enforcement is to reduce distortions. … Higher complexity induces tax avoidance and other types of substitution responses. A tax system that allows for many different types of avoidance responses is likely to cause stronger behavioral effects and therefore higher excess burden. …Shutting down extra margins of response can be loosely summarized as expanding the tax base by eliminating preferential treatment of some types of income, deductions, and exemptions. …One of the consequences of complexity is that it makes it difficult for honest taxpayers to fulfill their obligations. …The bottom line is that complexity makes relying on penalties a much less appealing approach to enforcement. …From the complexity point of view, itemized deductions add a multitude of tax avoidance and evasion opportunities. …They stimulate avoidance by introducing extra margins with differential tax treatment.

Sounds to me like an argument for a flat tax.

Incidentally (and importantly), he acknowledges that greater enforcement may not be a wise option if the underlying tax law (such as the code’s harsh bias against income that is saved and invested) is overly destructive.

…tax avoidance—letting well enough alone—may be a simple and practical way of addressing shortcomings of an inefficient tax structure. For example, suppose that, as much of the optimal taxation literature suggests, capital incomes should not be taxed, or should only be taxed lightly. In that case, the best policy response would be cutting tax rates imposed on capital income. If it is not politically feasible to pursue such policies explicitly, a similar outcome can be accomplished by reducing enforcement or increasing avoidance opportunities in this area. …The preferred way of dealing with compliance problems is fixing the tax code.

Amen. Many types of tax evasion only exist because the politicians in Washington have saddled us with bad tax policy.

And when tax policy moves in the right direction, compliance improves. Consider what happened in the 1980s when Reagan’s reforms lowered the top tax rate from 70 percent to 28 percent. Rich people paid five times as much to the IRS, in large part because they declared 10 times as much income.

But it’s very unlikely that they actually earned 10 times as much income. Some non-trivial portion of that gain was because of less evasion and less avoidance.

Simply stated, it makes sense to comply with the tax system when rates are low.

Let’s close by addressing one of the ways that leftists want to improve compliance. They want to destroy financial privacy and give governments near-unlimited ability to collect and share financial information about taxpayers, all for the purpose of supposedly bolstering tax compliance.

This agenda, if ultimately successful, will cripple tax competition as a liberalizing force in the global economy.

This would be very unfortunate. Tax rates have fallen in recent decades, for instance, largely because governments have felt pressure to compete for jobs and investment.

That has led to tax systems that are less punitive. And politicians really can’t complain about being pressured to lower tax rates since these reforms generally led to more growth, which generated significant revenue feedback. In other words, the Laffer Curve works.

There’s even some evidence that tax competition leads to less government spending.

But these are bad things from a statist perspective.

This helps to explain why politicians from high-tax governments want to eviscerate tax competition and create some sort of global tax cartel. An “OPEC for politicians” would give them more leeway to impose class-warfare tax policy and buy votes.

The rhetoric they’ll use will be about reducing tax evasion. The real goal will be bigger government.

I’m not joking. Left-wing international bureaucracies such as the Organization for Economic Cooperation and Development have justified their anti-tax competition efforts by asserting that jurisdictional rivalry “may hamper the application of progressive tax rates and the achievement of redistributive goals.”

I suppose we should give them credit for being honest about their ideological agenda. But for those who want good tax policy (and who also understand why that’s the right way to boost tax compliance), it’s particularly galling that the OECD is being financed with American tax dollars to push in the other direction.

P.S. I don’t know if you’ll want to laugh or cry, but here are some very odd examples of tax enforcement.

P.P.S. Here’s more evidence that high tax rates and tax complexity facilitate corruption.

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In recent years, I’ve argued that America’s corporate tax system must be very bad if companies are not only redomiciling in places like Cayman and Bermuda, but also inverting to countries such as Canada and the United Kingdom.

Well, the same thing happens at the state level. Yes, companies (as well as entrepreneurs and investors) usually move from high-tax states to low-tax states, with zero-income tax jurisdictions like Texas reaping a windfall of new jobs.

But when a big company like General Electric announces that it will move its headquarters from Connecticut to a state like Massachusetts, that’s a damning indictment of Connecticut. After all, Massachusetts doesn’t exactly have a reputation as a low-tax refuge.

The always-superb editorial page of the Wall Street Journal looks at the big-picture implications.

Hard to believe, but Connecticut was once a low-tax haven in the Northeast. Its business climate has grown so hostile in recent years, however, that General Electric on Wednesday announced that it will move its headquarters to Boston. When Taxachusetts becomes a reprieve, Governor Dan Malloy ought to know Connecticut has a problem.

Exactly.

And what’s really amazing is that Connecticut didn’t even have an income tax as recently as 1990.

But once politicians got the power to impose that levy, the state has been in a downward spiral.

And it doesn’t appear that the decline will end anytime soon.

… last summer…Connecticut’s legislature grabbed an additional $1.3 billion in tax hikes, the fifth increase since 2011. …The state’s $40.3 billion two-year budget boosted the top marginal tax rate on individuals earning more than $500,000 to 6.99% from 6.7% and 6.5% in 2010. Mr. Malloy also extended for the second time a 20% corporate surtax that his Republican predecessor Jodi Rell had imposed in 2009. …The tax hikes have failed to cure Connecticut’s chronic budget woes.

Of course they haven’t. Raising taxes to cure an over-spending problem is like trying to douse a fire with gasoline.

But the tax-happy politicians have one achievement. They’ve managed to drive the economy into the dumps.

Since 2010 the…State has recorded zero real GDP growth, the lowest in the nation save Louisiana (-0.7%) and Maine (-0.6%). Connecticut is one of only four states (Illinois, Vermont, West Virginia) whose populations have declined since 2012.

Notwithstanding all this bad economic news, politicians in Hartford continue to spend like there’s no tomorrow.

Over the next two years spending is set to rise by $1.5 billion, including $700 million in higher personnel costs. Pension payments are soaring. Connecticut’s pension system is 48% funded, third worst in the country after Illinois and Kentucky.

Good grief, as Charlie Brown might say. The bottom line is that the productive people who are left in Connecticut should make plans to leave before it’s too late.

By the way, there are two other noteworthy observations in the WSJ‘s editorial.

First, I like the fact that General Electric has escaped the fiscal hell-hole of Connecticut, but I’m not a fan of the company because it likes to feed at the public trough.

And, indeed, it will be getting special privileges from Massachusetts.

Mr. Immelt says GE, which has been headquartered in Fairfield since 1974, selected Boston after considering…a “package of incentives” valued at as much as $145 million.

Huh, whatever happened to the quaint notion that the laws should apply equally to everyone? Why should GE enjoy one set of rules while other companies labor under a different set of rules?

I imagine Voltaire is spinning in his grave.

Second, even though Massachusetts was foolish enough to engage in favoritism for GE, the state actually isn’t as bad as its reputation.

As the WSJ explains, it has a flat tax for households and it also has been cutting its corporate rate.

Massachusetts has the lowest taxes in the Northeast outside of New Hampshire… The Tax Foundation ranks Massachusetts’s business tax climate 25th in the country, ahead of Georgia (39), Connecticut (44), Rhode Island (45) and New York (49). Massachusetts has worked to shake its high-tax image by cutting its corporate rate to 8% from 9.5% and flat income tax to 5.15% from 5.3% in 2008. In the same period, Connecticut has raised its corporate rate to 9% from 7.5% and its top income tax rate to 6.99% from 5%.

Wow, I’m embarrassed that I used to live in Connecticut.

Though, in my defense, I was a kid when my family escaped from New York and Connecticut was a zero-income tax state when that happened.

Now, though, Connecticut merely serves as a bad example.

There are two broad lessons from this episode.

  1. A state that doesn’t have an income tax should never allow the adoption of that awful levy. I’m thinking specifically of the folks in the Pacific Northwest since some of the big spenders in the state of Washington are advocating for that levy. And add Wyoming and Alaska to that list since politicians in those states over-spent when energy prices were high and some of them are now pushing to impose an income tax since tax receipts from energy are no longer climbing.
  2. A state with a flat tax should never allow the introduction of multiple rates. It’s remarkable that Massachusetts has a flat tax (thanks to an old provision in the state’s Constitution), but the key lesson is that the flat tax has made it difficult for leftist politicians to raise the rate since all taxpayers would be adversely impacted (this is also why it’s been difficult for big spenders in Illinois to raise tax rates). In a system with graduated rates, by contrast, it’s much easier for politicians to play the divide-and-conquer game and selectively raise some tax rate.

I’ll close with one additional observation that this story is yet another example of why federalism is good.

We get to learn the damaging impact of high taxes and excessive spending thanks to the fact that we still have some government taking place at the state and local level.

And this explains why our statist friends want centralization. If there’s a one-size-fits-all policy of high taxes and wasteful spending, it’s much harder to move across national borders than it is to move across state borders. That insulates politicians (though not fully since there are varying amounts of tax competition between nations, both for investment and people) from the consequences of their reckless behavior.

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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!

IMAG0135

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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Back in the 1980s and 1990s, there was a widespread consensus that high tax rates were economically misguided. Many Democrats, for instance, supported the 1986 Tax Reform Act that lowered the top tax rate from 50 percent to 28 percent (albeit offset by increased double taxation and more punitive depreciation rules).

And even in the 1990s, many on the left at least paid lip service to the notion that lower tax rates were better for prosperity than higher tax rates. Perhaps that’s because the overwhelming evidence of lower tax rates on the rich leading to higher revenue was fresh in their minds.

The modern left, however, seems completely fixated on class-warfare tax policy. Some of them want higher tax rates even if the government doesn’t collect more revenue!

I’ve already shared a bunch of data and evidence on the importance of low tax rates.

A review of the academic evidence by the Tax Foundation found overwhelming support for the notion that lower tax rates are good for growth.

An economist from Cornell found lower tax rates boost GDP.

Other economists found lower tax rates boost job creation, savings, and output.

Even economists at the Paris-based OECD have determined that high tax rates undermine economic performance.

Today, we’re going to augment this list with some fresh and powerful evidence.

Lots of new evidence. So grab a cup of coffee.

The New York Times, for instance, is noticing that high taxes drive away productive people. At least in France.

Here are some excerpts from a remarkable story.

A year earlier, Mr. Santacruz, who has two degrees in finance, was living in Paris near the Place de la Madeleine, working in a boutique finance firm. He had taken that job after his attempt to start a business in Marseille foundered under a pile of government regulations and a seemingly endless parade of taxes. The episode left him wary of starting any new projects in France. Yet he still hungered to be his own boss. He decided that he would try again. Just not in his own country.

What pushed him over the edge? Taxes, taxes, and more taxes.

…he returned to France to work with a friend’s father to open dental clinics in Marseille. “But the French administration turned it into a herculean effort,” he said. A one-month wait for a license turned into three months, then six. They tried simplifying the corporate structure but were stymied by regulatory hurdles. Hiring was delayed, partly because of social taxes that companies pay on salaries. In France, the share of nonwage costs for employers to fund unemployment benefits, education, health care and pensions is more than 33 percent. In Britain, it is around 20 percent. “Every week, more tax letters would come,” Mr. Santacruz recalled.

Monsieur Santacruz has lots of company.

…France has been losing talented citizens to other countries for decades, but the current exodus of entrepreneurs and young people is happening at a moment when France can ill afford it. The nation has had low-to-stagnant economic growth for the last five years and a generally climbing unemployment rate — now about 11 percent — and analysts warn that it risks sliding into economic sclerosis. …This month, the Chamber of Commerce and Industry of Paris, which represents 800,000 businesses, published a report saying that French executives were more worried than ever that “unemployment and moroseness are pushing young people to leave” the country, bleeding France of energetic workers. As the Pew Research Center put it last year, “no European country is becoming more dispirited and disillusioned faster than France.”

But it’s not just young entrepreneurs. It’s also those who already have achieved some level of success.

Some wealthy businesspeople have also been packing their bags. While entrepreneurs fret about the difficulties of getting a business off the ground, those who have succeeded in doing so say that society stigmatizes financial success. …Hand-wringing articles in French newspapers — including a three-page spread in Le Monde, have examined the implications of “les exilés.” …around 1.6 million of France’s 63 million citizens live outside the country. That is not a huge share, but it is up 60 percent from 2000, according to the Ministry of Foreign Affairs. Thousands are heading to Hong Kong, Mexico City, New York, Shanghai and other cities. About 50,000 French nationals live in Silicon Valley alone. But for the most part, they have fled across the English Channel, just a two-hour Eurostar ride from Paris. Around 350,000 French nationals are now rooted in Britain, about the same population as Nice, France’s fifth-largest city. …Diane Segalen, an executive recruiter for many of France’s biggest companies who recently moved most of her practice, Segalen & Associés, to London from Paris, says the competitiveness gap is easy to see just by reading the newspapers. “In Britain, you read about all the deals going on here,” Ms. Segalen said. “In the French papers, you read about taxes, more taxes, economic problems and the state’s involvement in everything.”

Let’s now check out another story, this time from the pages of the UK-based Daily Mail. We have some more news from France, where another successful French entrepreneur is escaping Monsieur Hollande’s 75 percent tax rate.

François-Henri Pinault, France’s third richest man, is relocating his family to London.  Pinault, the chief executive of Kering, a luxury goods group, has an estimated fortune of £9 billion.  The capital has recently become a popular destination for wealthy French, who are seeking to avoid a 75 per cent supertax introduced by increasingly unpopular Socialist President François Hollande. …It has been claimed that London has become the sixth largest ‘French city’ in the world, with more than 300,000 French people living there.

But it’s not just England. Other high-income French citizens, such as Gerard Depardieu and Bernard Arnault, are escaping to Belgium (which is an absurdly statist nation, but at least doesn’t impose a capital gains tax).

But let’s get back to the story. The billionaire’s actress wife, perhaps having learned from all the opprobrium heaped on Phil Mickelson when he said he might leave California after voters foolishly voted for a class-warfare tax hike, is pretending that taxes are not a motivating factor.

But despite the recent exodus of millionaires from France, Ms Hayek insisted that her family were moving to London for career reasons and not for tax purposes.  …Speaking about the move in an interview with The Times Magazine, the actress said: ‘I want to clarify, it’s not for tax purposes. We are still paying taxes here in France.  ‘We think that London has a lot more to offer than just a better tax situation.

And if you believe that, I have a bridge in Brooklyn that I’m willing to sell for a very good price.

Speaking of New York bridges, let’s go to the other side of Manhattan and cross into New Jersey.

It seems that class-warfare tax policy isn’t working any better in the Garden State than it is in France.

Here are some passages from a story in the Washington Free Beacon.

New Jersey’s high taxes may be costing the state billions of dollars a year in lost revenue as high-earning residents flee, according to a recent study. The study, Exodus on the Parkway, was completed by Regent Atlantic last year… The study shows the state has been steadily losing high-net-worth residents since 2004, when Democratic Gov. Jim McGreevey signed the millionaire’s tax into law. The law raised the state income tax 41 percent on those earning $500,000 or more a year. “The inception of this tax, coupled with New Jersey’s already high property and estate taxes, leaves no mystery about why the term ‘tax migration’ has become a buzzword among state residents and financial, legal, and political professionals,” the study, conducted by Regent states. …tax hikes are driving residents to states with lower tax rates: In 2010 alone, New Jersey lost taxable income of $5.5 billion because residents changed their state of domicile.

No wonder people are moving. New Jersey is one of the most over-taxed jurisdictions in America – and it has a dismal long-run outlook.

And when they move, they take lots of money with them.

“The sad reality is our residents are suffering because politicians talk a good game, but no one is willing to step up to the plate,” Americans for Prosperity New Jersey state director Daryn Iwicki said. The “oppressive tax climate is driving people out.” …One certified public accountant quoted in the study said he lost 95 percent of his high net worth clients. Other tax attorneys report similar results. …Michael Grohman, a tax attorney with Duane Morris, LLP, claimed his wealthy clients are “leaving [New Jersey] as fast as they can.” …If the current trend is not reversed, the consequences could be dire. “Essentially, we’ll find ourselves much like the city of Detroit, broke and without jobs,” Iwicki said.

By the way, make sure you don’t die in New Jersey.

The one bit of good news, for what it’s worth, is that Governor Christie is trying to keep matters from moving further in the wrong direction.

Here’s another interesting bit of evidence. The Wall Street Journal asked the folks at Allied Van Lines where wealthy people are moving. Here’s some of the report on that research.

Spread Sheet asked Allied to determine where wealthy households were moving, based on heavy-weight, high-value moves. According to the data, Texas saw the largest influx of well-heeled households moving into the state last year, consistent with move trends overall. South Carolina and Florida also posted net gains. On the flip side, Illinois and Pennsylvania saw more high-value households move out of state than in, according to the data. California saw the biggest net loss of heavy-weight moves. Last year, California had a net loss of 49,259 people to other states, according to the U.S. Census. …Texas had the highest net gain in terms of domestic migration—113,528 more people moved into the state than out last year, census data show. Job opportunities are home-buyers’ top reason for relocating to Texas, according to a Redfin survey last month of 1,909 customers and website users.

The upshot is that Texas has thumped California, which echoes what I’ve been saying for years.

One can only imagine what will happen over the next few years given the punitive impact of the higher tax rate imposed on the “rich” by spiteful California voters.

If I haven’t totally exhausted your interest in this topic, let’s close by reviewing some of the research included in John Hood’s recent article in Reason.

Over the past three decades, America’s state and local governments have experienced a large and underappreciated divergence. …Some political scientists call it the Big Sort. …Think of it as a vast natural experiment in economic policy. Because states have a lot otherwise in common-cultural values, economic integration, the institutions and actions of the federal government-testing the effects of different economic policies within America can be easier than testing them across countries. …And scholars have been studying the results. …t present our database contains 528 articles published between 1992 and 2013. On balance, their findings offer strong empirical support for the idea that limited government is good for economic progress.

And what do these studies say?

Of the 112 academic studies we found on overall state or local tax burdens, for example, 72 of them-64 percent-showed a negative association with economic performance. Only two studies linked higher overall tax burdens with stronger growth, while the rest yielded mixed or statistically insignificant findings. …There was a negative association between economic growth and higher personal income taxes in 67 percent of the studies. The proportion rose to 74 percent for higher marginal tax rates or tax code progressivity, and 69 percent for higher business or corporate taxes.

Here are some of the specific findings in the academic research.

James Hines of the University of Michigan found that “state taxes significantly influence the pattern of foreign direct investment in the U.S.” A 1 percent change in the tax rate was associated with an 8 percent change in the share of manufacturing investment from taxed investors. Another study, published in Public Finance Review in 2004, zeroed in on counties that lie along state borders. …Studying 30 years of data, the authors concluded that states that raised their income tax rates more than their neighbors had significantly slower growth rates in per-capita income. …economists Brian Goff, Alex Lebedinsky, and Stephen Lile of Western Kentucky University grouped pairs of states together based on common characteristics of geography and culture. …Writing in the April 2011 issue of Contemporary Economic Policy, the authors found “strong support for the idea that lower tax burdens tend to lead to higher levels of economic growth.”

By the way, even though this post is about tax policy, I can’t resist sharing some of Hood’s analysis of the impact of government spending.

Of the 43 studies testing the relationship between total state or local spending and economic growth, only five concluded that it was positive. Sixteen studies found that higher state spending was associated with weaker economic growth; the other 22 were inconclusive. …a few Keynesian bitter-enders insist that transfer programs such as Medicaid boost the economy via multiplier effects… Nearly three-quarters of the relevant studies found that welfare, health care subsidies, and other transfer spending are bad for economic growth.

And as I’ve repeatedly noted, it’s important to have good policy in all regards. And Hood shares some important data showing that laissez-faire states out-perform their neighbors.

…economists Lauren Heller and Frank Stephenson of Berry College used the Fraser Institute’s Economic Freedom of North America index to explore state economic growth from 1981 to 2009. They found that if a state adopted fiscal and regulatory policies sufficient to improve its economic freedom score by one point, it could expect unemployment to drop by 1.3 percentage points and labor-force participation to rise by 1.9 percentage points by the end of the period studied.

If you’ve made it this far, you deserve a reward. We have some amusing cartoons on class-warfare tax policy here, here, here, here, here, here, and here.

And here’s a funny bit from Penn and Teller on class warfare.

P.S. Higher tax rates also encourage corruption.

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Ukraine is in the news and that’s not a good thing.

I’m not a foreign policy expert, to be sure, but it can’t be a positive sign when nations with nuclear weapons start squabbling with each other. And that’s what’s happening now that Russia is supposedly occupying Crimea and perhaps other parts of Ukraine and Western powers are complaining.

I’m going to add my two cents to this issue, but I’m going to approach it from an unusual angle.

Look at this linguistic map of Ukraine. The red parts of the country show where Russian is the primary language and most people presumably are ethnically Russian.

Russian in Ukraine

Now look at these maps (from here, here, here, and here) showing various election results in the country.

Ukraine Election Results

Like I said, I’m not overly literate on foreign policy, but isn’t it obvious that the Ukrainians and the Russians have fundamentally different preferences?

No wonder there’s conflict.

But is there a solution? And one that doesn’t involve Putin annexing – either de facto or de jure – the southern and eastern portions of the nation?

It seems there are two options.

1. Secession – The first possibility is to let the two parts of Ukraine have an amicable (or at least non-violent) divorce. That’s what happened to the former Soviet Union. It’s what happened with Czechoslovakia became Slovakia and the Czech Republic. And it’s what happened (albeit with lots of violence) when Yugoslavia broke up.

For what it’s worth, I’ve already suggested that Belgium should split into two nations because of linguistic and cultural differences. So why not the same in Ukraine?

Heck, Walter Williams has argued that the same thing should happen in America, with the pro-liberty parts of the nation seceding from the statist regions.

2. Decentralization – The second possibility is for Ukraine to copy the Swiss model of radical decentralization. In Switzerland, even though there are French cantons, German cantons, and an Italian canton, the various regions of the country don’t squabble with each other because the central government is relatively powerless.

This approach obviously is more attractive than secession for folks who think that existing national borders should be sacrosanct.

And since this post is motivated by the turmoil in Ukraine, it’s worth pointing out that this also seems to be a logical way of defusing tensions across regions.

I confess I have a policy reason for supporting weaker national governments. Simply stated, there’s very strong evidence that decentralization means more tax competition, and when governments are forced to compete for jobs and investment, the economy is less likely to be burdened with high tax rates and excessive redistribution.

Indeed, we also have very strong evidence that the western world became prosperous precisely because the proliferation of small nations and principalities restrained the natural tendencies of governments to oppress and restrain economic activity.

And since Ukraine (notwithstanding it’s flat tax) has a very statist economic system – ranking only 126th in the Economic Freedom of the World index, maybe a bit of internal competition would trigger some much-needed liberalization.

P.S. If you’re intrigued by the secession idea promoted by Walter Williams, you’ll definitely enjoy this bit of humor about a national divorce in the United States.

P.P.S. If you think decentralization and federalism is a better option than secession, the good news is that more and more Americans have unfavorable views of Washington.

P.P.P.S. The tiny nation of Liechtenstein is comprised of seven villages and they have an explicit right to secede if they become unhappy with the central government in Vaduz. And even the statist political crowd in the United Kingdom is considering a bit of federalism.

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Some things in life are very dependable. Every year, for instance, the swallows return to Capistrano.

And you can also count on Dan Mitchell to wax poetic about the looming collapse of French statism.

Back in 2011, I said France was engaged in economic self-destruction.

In September 2012, I wrote that it was time to start the countdown for France’s fiscal crisis.

In October of that year, I pontificated about France’s looming fiscal suicide.

Last April, I warned that the fuse was burning on France’s fiscal time bomb.

In June of 2013, I stated that the looters and moochers in France were running out of victims to plunder.

And in October of last year, I expounded on France’s economic death spiral.

Geesh, looking at that list, I guess I’m guilty of – in the words of Paul Krugman – being part of the “plot against France” by trying to discredit that nation’s economy.

Or maybe I’m just ahead of my time because we’re now seeing articles that almost sound like they could have been written by me appearing in establishment outlets such as Newsweek. Check out some amazing excerpts from an article by Janine di Giovanni, who lives in France and serves as the magazine’s Middle East Editor.

…what is happening today in France is being compared to the revocation of 1685. …the king closed churches and persecuted the Huguenots. As a result, nearly 700,000 of them fled France, seeking asylum in England, Sweden, Switzerland, South Africa and other countries. The Huguenots, nearly a million strong before 1685, were thought of as the worker bees of France. They left without money, but took with them their many and various skills. They left France with a noticeable brain drain.

It’s happening again, except this time the cause is fiscal persecution rather than religious persecution. French politicians have changed the national sport from soccer to taxation!

Since the arrival of Socialist President François Hollande in 2012, income tax and social security contributions in France have skyrocketed. The top tax rate is 75 percent, and a great many pay in excess of 70 percent. As a result, there has been a frantic bolt for the border by the very people who create economic growth – business leaders, innovators, creative thinkers, and top executives. They are all leaving France to develop their talents elsewhere.

It’s an exaggeration to say “they are all leaving,” but France is turning Atlas Shrugged from fiction to reality.

“Au revoir, bloodsuckers”

Many of the nation’s most capable people are escaping – ranging from movie stars to top entrepreneurs.

What I find most amusing is that France’s parasitical political elite is whining and complaining that these people won’t remain immobile so they can be plundered.

And when the people who have the greatest ability leave, that has an impact on economic performance – and ordinary people are the ones who suffer the most.

…the past two years have seen a steady, noticeable decline in France. There is a grayness that the heavy hand of socialism casts. It is increasingly difficult to start a small business when you cannot fire useless employees and hire fresh new talent. Like the Huguenots, young graduates see no future and plan their escape to London. The official unemployment figure is more than 3 million; unofficially it’s more like 5 million.

The article also gives some details that will help you understand why the tax burden is so stifling. Simply stated, the government is far too big and pays for things that should not be even remotely connected to the public sector.

Part of this is the fault of the suffocating nanny state. …As a new mother, I was surprised at the many state benefits to be had if you filled out all the forms: Diapers were free; nannies were tax-deductible; free nurseries existed in every neighborhood. State social workers arrived at my door to help me “organize my nursery.” …The French state also paid for all new mothers, including me, to see a physical therapist twice a week to get our stomachs toned again.

Government-subsidized “toned” stomachs. Hey, maybe big government isn’t all bad. Sort of reminds me of the taxpayer-financed boob jobs in the United Kingdom (British taxpayers also pay for sex trips to Amsterdam).

More seriously, all the wasteful spending in France erodes the work ethic and creates a perverse form of dependency.

I had friends who belonged to trade unions, which allowed them to take entire summers off and collect 55 percent unemployment pay. From the time he was an able-bodied 30-year-old, a cameraman friend worked five months a year and spent the remaining seven months collecting state subsidies from the comfort of his house in the south of France. Another banker friend spent her three-month paid maternity leave sailing around Guadeloupe – as it is part of France, she continued to receive all the benefits. Yet another banker friend got fired, then took off nearly three years to find a new job, because the state was paying her so long as she had no job. “Why not? I deserve it,” she said when I questioned her. “I paid my benefits into the system.”

So what’s the bottom line? Well, the author sums up the issue quite nicely.

…all this handing out of money left the state bankrupt. …The most brilliant minds of France are escaping to London, Brussels, and New York rather than stultify at home. …“The best thinkers in France have left the country. What is now left is mediocrity.” From a chief legal counsel at a major French company: “France is dying a slow death. Socialism is killing it…”

As the old saying goes, this won’t end well. Maybe France will suffer a Greek-style meltdown, but perhaps it will “merely” suffer long-run stagnation and decline.

Which is a shame because France is a beautiful country and is ranked as one of the best places to live if you happen to already have a considerable amount of hard-to-tax wealth (and the French also were ranked among the top-10 most attractive people).

But bad government can screw up a country, even if it does have lots of natural advantages.

And that’s exactly what generations of French politicians have done to France. The tax system has become so bad that more than 8,000 French households had to pay more than 100 percent of their income to the government in 2012.

The French government has announced, by the way, that it intends to cap taxes so that no household ever pays more than 80 percent to the state. Gee, how merciful, particularly since the French President has echoed America’s Vice President and asserted that it’s patriotic to pay higher taxes.

That’s why I’ll stand by my prediction that President Obama will never be able to make America as bad as France. Heck, France has such a bad approach on taxes that Obama has felt compelled to oppose some of that country’s statist initiatives.

P.S. The prize for silliest example of government intervention in France goes to the law that makes it a crime to insult your spouse’s personal appearance.

P.P.S. The big puzzle is why the French put up with so much statism. Polling data from both 2010 and 2013 shows strong support for smaller government, and an astounding 52 percent of French citizens said they would consider moving to the United States if they got the opportunity. So why, then, do they elect statists such as Sarkozy and Hollande?!?

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Over the years, I’ve shared some ridiculous arguments from our leftist friends.

Paul Krugman, for instance, actually wrote that “scare stories” about government-run healthcare in the United Kingdom “are false.” Which means I get to recycle that absurd quote every time I share a new horror story about the failings of the British system.

Today we have some assertions from a statist that are even more absurd

Saint-Amans

“Taxes for thee, but not for me!”

Pascal Saint-Amans is a bureaucrat at the Paris-based Organization for Economic Cooperation and Development. He has spent his entire life sucking at the public teat. After spending many years with the French tax authority, he shifted to the OECD in 2007 and now is in charge of the bureaucracy’s Centre for Tax Policy Administration.

I don’t know why he made the shift, but perhaps he likes the fact that OECD bureaucrats get tax-free salaries, which nicely insulates him from having to deal with the negative consequences of the policies he advocates for folks in the private sector.

Anyhow, Saint-Amans, acting on behalf of the uncompetitive nations that control the OECD, is trying to create one-size-fits-all rules for international taxation and he just wrote a column for the left-wing Huffington Post website. Let’s look at a few excerpts, starting with his stated goal.

To regain the confidence and trust of our citizens, there is a pressing need for action. To this end, the OECD’s work…will pave the way for rehabilitating the global tax system.

You probably won’t be too surprised to learn that the OECD’s definition of “rehabilitating” in order to regain “confidence and trust” does not include tax cuts or fundamental reform. Instead, Monsieur Saint-Amans is referring to the bureaucracy’s work on “tax base erosion and profit shifting (BEPS) and automatic exchange of information.”

I’ve already explained that “exchange of information” is wrong, both because it forces low-tax jurisdictions to weaken their privacy laws so that high-tax governments can more easily double tax income that is saved and invested, and also because such a system necessitates the collection of personal financial data that could wind up in the hands of hackers, identity thieves, and – perhaps most worrisome – under the control of governments that are corrupt and/or venal.

The OECD’s palatial headquarters – funded by U.S. tax dollars

So let’s focus on the OECD’s “BEPS” plan, which is designed to deal with the supposed crisis of “massive revenue losses” caused by corporate tax planning.

I explained back in March why the BEPS proposal was deeply flawed and warned that it will lead to “formula apportionment” for multinational firms. That’s a bit of jargon, but all you need to understand is that the OECD wants to rig the rules of international taxation so that high-tax nations such as France can tax income earned by companies in countries with better business tax systems, such as Ireland.

In his column, Monsieur Saint-Amans tries to soothe the business community. He assures readers that he doesn’t want companies to pay more tax as a punishment. Instead, he wants us to believe his BEPS scheme is designed for the benefit of the business community.

Naturally, the business community feels like it’s in the cross-hairs. …But the point of crafting new international tax rules is not to punish the business community. It is to even the playing field and ensure predictability and fairness.

And maybe he’s right…at least in the sense that high tax rates will be “even” and “predictable” at very high rates all around the world if government succeed in destroying tax competition.

You’re probably thinking that Saint-Amans has a lot of chutzpah for making such a claim, but that’s just one example of his surreal rhetoric.

He also wants readers to believe that higher business tax burdens will “foster economic growth.”

The OECD’s role is to help countries foster economic growth by creating such a predictable environment in which businesses can operate.

I guess we’re supposed to believe that nations such as France grow the fastest and low-tax economies such as Hong Kong and Singapore are stagnant.

Yeah, right. No wonder he doesn’t even try to offer any evidence to support his absurd claims.

But I’ve saved the most absurd claim for last. He actually writes that a failure to confiscate more money from the business community could lead to less government spending – and he wants us to believe that this could further undermine prosperity!

Additionally, in some countries the resulting lack of tax revenue leads to reduced public investment that could promote growth.

Wow. I almost don’t know how to respond to this passage. Does he think government should be even bigger in France, where it already consumes 57 percent of the country’s economic output?

Presumably he’s making an argument that the burden of government spending should be higher in all nations.

If so, he’s ignoring research on the negative impact of excessive government spending from international bureaucracies such as the International Monetary FundWorld Bank, and European Central Bank. And since most of those organizations lean to the left, these results should be particularly persuasive.

He’s also apparently unaware of the work of scholars from all over the world, including the United StatesFinland, AustraliaSwedenItaly, Portugal, and the United Kingdom.

Perhaps he should peruse the compelling data in this video, which includes a comparison of the United States and Europe.

Not that I think it would matter. Saint-Amans is simply flunky for high-tax governments, and I imagine he’s willing to say and write ridiculous things to keep his sinecure.

Let’s close by reviewing some analysis of the OECD’s BEPS scheme. The Wall Street Journal is correctly skeptical of the OECD’s anti-tax competition campaign. Here’s what the WSJ wrote this past July.

…the world’s richest countries have hit upon a new idea that looks a lot like the old: International coordination to raise taxes on business. The Organization for Economic Cooperation and Development on Friday presented its action plan to combat what it calls “base erosion and profit shifting,” or BEPS. This is bureaucratese for not paying as much tax as government wishes you did. The plan bemoans the danger of “double non-taxation,” whatever that is, and even raises the specter of “global tax chaos” if this bogeyman called BEPS isn’t tamed. Don’t be fooled, because this is an attempt to limit corporate global tax competition and take more cash out of the private economy.

P.S. High-tax nations have succeeded in eroding tax competition in the past five years. The politicians generally claimed that they simply wanted to better enforce existing law. Some of them even said they would like to lower tax rates if they collected more revenue. So what did they do once taxpayers had fewer escape options? As you can probably guess, they raised personal income tax rates and increased value-added tax burdens.

P.P.S. If you want more evidence of the OECD’s ideological mission.

It has allied itself with the nutjobs from the so-called Occupy movement to push for bigger government and higher taxes.

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.

It 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.

It even concocts dishonest poverty numbers to advocate more redistribution in the United States.

P.P.P.S. I should take this opportunity to admit that Monsieur Saint-Amans probably could get a job in the private sector. His predecessor, for instance, got a lucrative job with a big accounting firm, presumably because “he had ‘value’ to the private sector only because of his insider connections with tax authorities in member nations.” See, it’s very lucrative to be a member of the parasite class.

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The welfare state is a nightmare.

Programs such as Medicaid are fiscal catastrophes. The food stamp program is riddled with waste. The EITC is easily defrauded, even sending checks to prisoners. And housing subsidies are a recipe for the worst forms of social engineering.

The entire system should be tossed in the trash.

But what’s the alternative? Some libertarians argue that we should eliminate the dozens of Washington programs and replace them with a government-guaranteed minimum income. I address this issue in an essay for Libertarianism.org.

Some libertarians argue that the state should provide a minimum basic income, mainly because this approach would be preferable to the costly and bureaucratic amalgamation of redistribution programs that currently exist. It’s hard to disagree with the notion that the current system is a failure. The Cato Institute’s Michael Tanner has produced a searing indictment of the modern welfare state, pointing out that more than $1 trillion is spent every year on redistribution programs for the ostensible purpose of alleviating economic hardship, yet (or more likely as a result) the poverty rate is at an all-time high. Perhaps one reason poverty remains high is that such programs make leisure more attractive than work, as painstakingly illustrated in a study produced by Tanner and Charles Hughes. Moreover, welfare programs create very high implicit marginal tax rates, making it very difficult for poor people to improve their living standards by engaging in additional productive behavior. It’s almost as if the system was designed to create permanent dependency.

In other words, it seems that nothing could be worse than the current system. And if you want more evidence, here’s a very powerful video on the failure of the modern welfare state.

But what about the idea of trashing what we have today and instead offering everyone some sort of basic income? As I noted in my essay, there are “…some very iconic libertarian figures who support at least some version of their approach, including Milton Friedman, Friedrich Hayek, and Charles Murray.”

I agree, but only sort of. I like the idea of radical reform, but I think there’s a better road to Rome. It’s called federalism.

The bottom line for advocates is that anything would be better than the current system, so why not try something new? They’re right, but there’s actually a better way of approaching the issue. Why not take all income-redistribution programs, put them into a single block grant, and then transfer the money – and responsibility – to state governments?

Here’s my argument for decentralization and federalism.

In an ideal world, the block grant would gradually diminish so that states would be responsible for both the collection and disbursement of all monies related to welfare. But that’s a secondary issue. The main benefit of this federalist approach is that you stop the Washington-driven expansion of the welfare state and you trigger the creation of 50 separate experiments on how best to provide a safety net. Some states might choose a basic income. Others might retain something very similar to the current system. Others might try a workfare-based approach, while some could dream up new ideas that wouldn’t stand a chance in a one-size-fits-all system run out of Washington, DC. And as states adopted different systems, they could learn from each other about what works and what doesn’t work. And since it’s easier to influence decisions that are closer to home, taxpayers at the state level almost certainly would have more ability to impact what happens with their money.

And here’s the bottom line on why a federalist approach is the libertarian solution to the welfare state.

It also will satisfy the libertarian desire to get Washington out of the business of income distribution, while presumably producing a system that actually does a better job of helping the less fortunate escape government dependency. In other words, all the advantages of the basic income plan without the potential system-wide downsides.

By the way, I explain in the article that the 1996 welfare reform legislation was a test case for the decentralization model. The analogy isn’t perfect, I admit, but there’s a very strong case to be made that replacing the federal welfare entitlement with a block grant was good for taxpayers and good for the poor…and that it shows why states do a better job of dealing with redistribution than Washington.

Last but not least, I’m just a policy wonk, but I think the federalism strategy also has political appeal. As just noted, it worked with welfare reform. And I suspect a lot of non-libertarians and non-conservatives will intuitively understand that you’ll get better results if you allow diversity and experimentation at the state level.

P.S. There would be some bad news if we decentralized the welfare state. It could mean an end to the Moocher Hall of Fame.

P.P.S. Replacing the welfare state with a (hopefully shrinking) block grant only addresses the problem of “means-tested” programs. If you also want to solve the problem of old-age entitlements, that requires Medicare reform and Social Security reform.

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There’s a tendency in public life to exaggerate the positive or negative implications of any particular policy.

This is why I try to be careful not to overstate the potential benefits of reforms I like, such as the flat tax. Yes, we would get better growth and there would be less corruption in Washington, but tax reform would not be a panacea for every ill. Many other policies also need to be fixed to generate sustained prosperity.

Likewise, I’m obviously not a fan of Obamacare, but I try to remind people that our system was already messed up even before Obama was elected. As such, repealing Obamacare – while the right thing to do – is just one of many things that need to happen to restore a competitive and efficient healthcare system.

Now that I’ve warned about the risks of overstatement, I’m going out on a limb to say that we may be at the point where France is taxing itself to the point of economic ruin.

One French budget expert warned that, “the spiraling welfare debt was particularly abnormal and particularly dangerous” and that “The strategy of fixing the system by collecting new revenue is reaching its limits.”

And even a European Union Commissioner thinks France has gone too far. As one newspaper reported, “Tax increases imposed by the Socialist-led government in France have reached a ‘fatal level’, the European Union’s commissioner for economic affairs said today. Olli Rehn warned that a series of tax hikes since the Socialists took power…threatens to ‘destroy growth and handicap the creation of jobs'”

You know you’re taxing too much when even Euro-crats in Brussels think the fiscal burden is excessive!

I’ve certainly added my two cents to this discussion, but I suspect people will be more willing to believe someone who endures the French fiscal regime every day.

And that’s our topic for today. A woman from France has written a very powerful indictment of France’s coercive and confiscatory economic system. Here are some excerpts from the UK-based Telegraph.

More than 70 per cent of the French feel taxes are “excessive”, and 80 per cent believe the president’s economic policy is “misguided” and “inefficient”. …Worse, after decades of living in one of the most redistributive systems in western Europe, 54 per cent of the French believe that taxes – of which there have been 84 new ones in the past two years, rising from 42 per cent of GDP in 2009 to 46.3 per cent this year – now widen social inequalities instead of reducing them.

Some of you may be wondering why French voters elected a socialist if they overwhelmingly think taxes are too high, but keep in mind that the former President was just as much of a statist.

I’m curious, by the way, about the data on taxes and social equality. Why do the French think higher taxes increase inequality? Is it that they think the higher taxes are being imposed on the middle class and the poor? Do they think that high taxes stifle growth and prevent upward mobility? Is it some combination of these factors, or something else altogether?

One thing we can say with certainty is that all these taxes have led to a bloated public sector.

By 2014, France’s public expenditure will overtake Denmark’s to become the world’s highest: 57 per cent of GDP. In effect, just to keep in the same place, like a hamster on a wheel, and ensure that the European Central Bank in Frankfurt isn’t too unhappy with us, Hollande now needs cash. …finance minister Pierre Moscovici recently admitted that he “understood” the French’s “exasperation” with their heavy tax burden. This earned him a sharp rap on the fingers from the president… “It’s not only that people don’t like to be treated like criminals just because they’re successful,” says a French banker friend who has recently moved to London. “But this uncertainty in every aspect of the tax system means it is impossible to do business: you don’t know what your future costs are, or your customer’s. You can’t buy, you can’t sell, you can’t hire, you can’t fire.”

Not surprisingly, this hostility to achievement is having a predictable impact.

…tax has been the clincher that sent hundreds, possibly thousands of French citizens abroad: not just “the rich”, whom Hollande, during his victorious campaign, said he personally “disliked”, …but also the ambitious young, who feel that their own country will turn on them the minute they achieve any measure of personal success. …one out of four French university graduates wants to emigrate, “and this rises to 80 per cent or 90 per cent in the case of marketable degrees”, says economics professor Jacques Régniez, who teaches at both the Sorbonne and the University of New York in Prague. “In one of my finance seminars, every single French student intends to go abroad.

Heck, a majority of French people have said they would be interested in escaping to the United States if they had the opportunity.

However, those are the productive and ambitious young people of France. Unfortunately, there’s another group of young French people, and they have different dreams.

…young people, and many of their parents, dream of getting any kind of state or local administration post…which ensures complete job security, unrelated to the economic situation, the market, or their own performance. More than a quarter of the French workforce is employed by some public body or other: schools, hospitals, local and regional councils, the police, the civil service proper – or those new subsidised public-service jobs the Hollande government is so keen on.

We have people like that in the United States as well.

What matters for a society, though, it whether there are too many people living off the government. When the moochers and looters outnumber (and out-vote) the people who are producing, the conditions exist for an economic death spiral.

Simply stated, the folks riding in the wagon keep voting to impose heavier burdens on those pulling the wagon. That eventually leads to economic ruin, and it leads to trouble even faster when the people pulling the wagon have the opportunity to move across borders.

Which is what is happening in France.

P.S. Here’s a powerful comparison of France and Switzerland.

P.P.S. More than 8,000 French households last year got to experience the Obama-version of a flat tax.

P.P.P.S. Americans shouldn’t feel superior to France since our tax code is worse in certain ways.

P.P.P.P.S. That being said, we’re not as bad as France, and even Obama won’t be able to change that.

P.P.P.P.P.S. I endorsed the current socialist President of France, but for a strategic reason.

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I’m very worried about America’s fiscal future. Simply stated, data from several sources (BIS, OECD, and IMF) indicates that we face a future Greek-style fiscal crisis unless policy makers implement genuine entitlement reform.

Unfortunately, politicians have little incentive to control spending and reform programs if they think that higher taxes are an option.

So how do we control their appetite for more revenue? There’s no silver bullet solution, but part of the answer is that we need tax competition and tax havens. Politicians are less likely to over-tax and over-spend if they’re afraid that the geese that lay the golden eggs can fly across the border.

In other words, tax competition is a necessary but not sufficient condition to promote good policy. And that’s why I’m willing to defend tax havens, even if it requires bringing a message of liberty to traditionally hostile audiences such as readers of the New York Times and viewers of CNN.

That’s also why I share well-written and compelling articles on the topic, such as this editorial by Pierre Bessard from Switzerland’s Liberales Institut and this column by Allister Heath of England’s City AM business newspaper.

I have a new piece to add to this collection. Professor Philip Booth and Dr Richard Wellings of the London-based Institute of Economic Affairs have produced a succinct and powerful case for tax competition and tax havens.

Here are some excerpts from the article they wrote for IFC Review. They start by warning that politicians have done a crummy job in most developed nations.

If we consider the performance of high-tax Western countries in recent years – which includes, amongst others, every EU country, plus the US – it has been pretty grim. These are countries which, despite their high levels of taxation, are building up huge debts. These countries also regulate their financial systems heavily, often through bodies which have huge discretion, and yet they have recently suffered the worst financial crisis since the Second World War. You would think that it would be this model – the corporatist model of high taxes and extensive regulation – that would be coming under scrutiny. However, like small children who wish to shift the blame, the EU is focusing its attention on International Financial Centres (IFCs).

Well said, though I would make one small correction. These nations have “huge debts” in part because of – not “despite” – “high levels of taxation.” More Taxes More Spending EU DataThat’s because of the Laffer Curve causing revenues to be lower than expected when taxes are raised and also because politicians can’t resist spending any revenue that is generated.

Returning to the article, Booth and Wellings make the important observation that these so-called tax havens largely exist because of bad policy in other nations.

Just as offshore centres came into being as a result of incompetent regulatory and tax policy from the US government in the 1960s and 1970s, these centres are just as important today in ensuring the free flow of international capital. The nature of our corporation tax systems is such that investors can be taxed several times over on the same profits. Companies can be taxed when they make profits; investment funds can be taxed on their returns; and investors in funds can be taxed by their home tax authorities. In addition, capital gains tax systems often end up taxing companies when their share price rises as a result of the retention of profits or the anticipation of future profits even though extra tax is levied on those profits when they accrue. If governments reformed their corporation tax systems so that they were coherent and focused on the shareholder rather than on the activities of companies themselves, there would be much less need for IFCs.

Amen. If politicians in high-tax nations really want to hurt tax havens, they should lower tax rates and reform their tax systems.

But I’m not holding my breath waiting for that to happen, so we need some external pressure to encourage good policy.

Booth and Wellings explain how tax competition leads to better policy, which leads to better economic performance.

…competition brings major economic benefits. There are very strong incentives for politicians to increase public spending (and hence taxes) in order to gain the support of powerful special interest groups and raise their chances of re-election. Partly as a result, most Western governments now confiscate around two-fifths of people’s earnings. Such high tax rates mean many wealth-creating economic activities are no longer viable. Indeed, long-term studies suggest that every one per cent added to the level of taxation (as a share of GDP) tends to reduce economic growth by about 0.15 per cent a year. Accordingly, a 10 percentage point increase would decrease average growth rates by around 1.5 per cent a year. High rates of taxation therefore have a very significant and negative long-term impact on living standards.

But I think this passage is the most important part of the article. Tax competition is necessary to protect people from greedy and short-sighted politicians.

This is one reason why IFCs are so important. They act as a deterrent to predatory politicians who wish to raise tax rates to highly damaging levels. Policymakers know that, if they set tax rates too high, business activity will shift to lower tax jurisdictions. The point at which tax increases no longer result in additional revenue to governments is therefore shifted downwards by competition from IFCs. This means tax rates will tend to be closer to the optimal rate for economic growth.

The authors also explain that slower growth has a big impact on government finances.

Lower levels of overall economic output mean fewer resources are available to spend on areas such as health and education. Arguments that high tax rates are necessary to fund essential public services are therefore deeply flawed. High-tax, high-spend policies are entirely counter-productive since their negative effect on economic output inevitably results in lower public spending in the long term. While state spending may absorb a larger share of the economy under the high-tax approach, the overall size of the economy will be very much smaller, limiting the resources available to government.

In other words, if the statists want both prosperity and ample tax revenue, they’re better off supporting modest-sized government and reasonable tax rates.

But this may be the fundamental divide between proponents of economic liberty and supporters of statism. Advocates of big government act as if they are more interested in punishing success than they are in enabling upward mobility for the less fortunate.

That seems perverse, but it’s the explanation that matches their behavior.

But it’s not my job to psychoanalyze statists. Let’s close by sharing my video primer on tax competition.

By the way, Professor Greg Mankiw at Harvard has made very similar points.

P.S. Leftists love to criticize “tax havens,” perhaps because they feel guilty about using them.

P.P.S. While the U.K. government is very misguided on fiscal policy issues (with the exception of Mark Field), there are a couple of Brits in the European Parliament. You’ll enjoy these short speeches by Dan Hannan and Godfrey Bloom.

Costco resultsP.P.P.S. I’m happy to share the news that late-reporting precincts have pushed me into a tie in the Costco poll on whether governments should try to tax outside their borders and persecute low-tax jurisdictions. As I noted last month, I was trailing by a 51-49 margin (though even that was somewhat surprising since I thought the poll used misleading language). Anyhow, here’s the debate and you can still cast a vote by clicking here.

P.P.P.P.S. Perhaps the most persuasive evidence is that the New York Times inadvertently admitted that tax competition is one of the few effective ways of fighting excessive government.

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What’s the biggest fiscal problem facing the developed world?

To an objective observer, the answer is a rising burden of government spending, caused by poorly designed entitlement programs, growing levels of dependency, and unfavorable demographics. The combination of these factors helps to explain why almost all industrialized nations – as confirmed by BIS, OECD, and IMF data – face a very grim fiscal future.

If lawmakers want to avert widespread Greek-style fiscal chaos and economic suffering, this suggests genuine entitlement reform and other steps to control the growth of the public sector.

But you probably won’t be surprised to learn that politicians instead are concocting new ways of extracting more money from the economy’s productive sector.

They’ve already been busy raising personal income tax rates and increasing value-added tax burdens, but that’s apparently not sufficient for our greedy overlords.

Now they want higher taxes on business. The Organization for Economic Cooperation and Development, for instance, put together a “base erosion and profit shifting” plan at the behest of the high-tax governments that dominate and control the Paris-based bureaucracy.

What is this BEPS plan? The Wall Street Journal explains that it’s a scheme to raise tax burdens on the business community.

After five years of failing to spur a robust economic recovery through spending and tax hikes, the world’s richest countries have hit upon a new idea that looks a lot like the old: International coordination to raise taxes on business. The Organization for Economic Cooperation and Development on Friday presented its action plan to combat what it calls “base erosion and profit shifting,” or BEPS. This is bureaucratese for not paying as much tax as government wishes you did. The plan bemoans the danger of “double non-taxation,” whatever that is, and even raises the specter of “global tax chaos” if this bogeyman called BEPS isn’t tamed. Don’t be fooled, because this is an attempt to limit corporate global tax competition and take more cash out of the private economy.

The WSJ is spot on. This is merely the latest chapter in the OECD’s anti-tax competition crusade. The bureaucracy represents the interests of WSJ Global Tax Grab Editorialhigh-tax governments that are seeking to impose higher tax burdens – a goal that will be easier to achieve if they can restrict the ability of taxpayers to benefit from better tax policy in other jurisdictions.

More specifically, the OECD basically wants a radical shift in international tax rules so that multinational companies are forced to declare more income in high-tax nations even though those firms have wisely structured their operations so that much of their income is earned in low-tax jurisdictions.

So does this mean that governments are being starved of revenue? Not surprisingly, there’s no truth to the argument that corporate tax revenue is disappearing.

Across the OECD, corporate-tax revenue has fluctuated between 2% and 3% of GDP and was 2.7% in 2011, the most recent year for published OECD data. In other words, for all the huffing and puffing, there is no crisis of corporate tax collection. The deficits across the developed world are the product of slow economic growth and overspending, not tax evasion. But none of this has stopped the OECD from offering its 15-point plan to increase the cost and complexity of complying with corporate-tax rules. …this will be another full employment opportunity for lawyers and accountants.

I made similar points, incidentally, when debunking Jeffrey Sachs’ assertion that tax competition has caused a “race to the bottom.”

The WSJ editorial makes the logical argument that governments with uncompetitive tax regimes should lower tax rates and reform punitive tax systems.

…the OECD plan also envisions a possible multinational treaty to combat the fictional plague of tax avoidance. This would merely be an opportunity for big countries with uncompetitive tax rates (the U.S., France and Japan) to squeeze smaller countries that use low rates to attract investment and jobs. Here’s an alternative: What if everyone moved toward lower rates and simpler tax codes, with fewer opportunities for gamesmanship and smaller rate disparities among countries?

The column also makes the obvious – but often overlooked – point that any taxes imposed on companies are actually paid by workers, consumers, and shareholders.

…corporations don’t pay taxes anyway. They merely collect taxes—from customers via higher prices, shareholders in lower returns, or employees in lower wages and benefits.

Last but not least, the WSJ correctly frets that politicians will now try to implement this misguided blueprint.

The G-20 finance ministers endorsed the OECD scheme on the weekend, and heads of government are due to take it up in St. Petersburg in early September. But if growth is their priority, as they keep saying it is, they’ll toss out this complex global revenue grab in favor of low rates, territorial taxes and simplicity. Every page of the OECD’s plan points in the opposite direction.

The folks at the Wall Street Journal are correct to worry, but they’re actually understating the problem. Yes, the BEPS plan is bad, but it’s actually much less onerous that what the OECD was contemplating earlier this year when the bureaucracy published a report suggesting a “global apportionment” system for business taxation.

Fortunately, the bureaucrats had to scale back their ambitions. Multinational companies objected to the OECD plan, as did the governments of nations with better (or at least less onerous) business tax structures.

It makes no sense, after all, for places such as the Netherlands, Ireland, Singapore, Estonia, Hong Kong, Bermuda, Switzerland, and the Cayman Islands to go along with a scheme that would enable high-tax governments to tax corporate income that is earned in these lower-tax jurisdictions.

But the fact that high-tax governments (and their lackeys at the OECD) scaled back their demands is hardly reassuring when one realizes that the current set of demands will be the stepping stone for the next set of demands.

That’s why it’s important to resist this misguided BEPS plan. It’s not just that it’s a bad idea. It’s also the precursor to even worse policy.

As I often say when speaking to audiences in low-tax jurisdictions, an appeasement strategy doesn’t make sense when dealing with politicians and bureaucrats from high-tax nations.

Simply stated, you don’t feed your arm to an alligator and expect him to become a vegetarian. It’s far more likely that he’ll show up the next day looking for another meal.

P.S. The OECD also is involved in a new “multilateral convention” that would give it the power to dictate national tax laws, and it has the support of the Obama Administration even though this new scheme would undermine America’s fiscal sovereignty!

P.P.S. Maybe the OECD wouldn’t be so quick to endorse higher taxes if the bureaucrats – who receive tax-free salaries – had to live under the rules they want to impose on others.

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Regular readers know that one of my main goals is to preserve and promote tax competition as a means of restraining the greed of the political class. Heck, I almost wound up in a Mexican jail because of my work defending low-tax jurisdictions.

As you can imagine, it’s difficult to persuade politicians. After all, why would they support policies such as fiscal sovereignty and financial privacy that hinder their ability to extract more revenue?

So I try to educate them about the link between taxes and growth in hopes that they will understand that a vibrant economy also means a large tax base.

And I specifically tell them that so-called tax havens play a very valuable role since they are an alternative source of investment capital for nations that have undermined domestic investment with bad tax policy.

And I also explain to them that low-tax jurisdictions give companies some much-needed flexibility to maintain operations in an otherwise hostile fiscal environment. Let’s look at that specific issue by reviewing some of the findings from a study by two Canadian economists about tax havens and business activity.

In the introduction to their study, they describe the general concern (among politicians) that competition between governments will lead to lower tax rates.

Increased mobility of goods and services is apt to give rise to an erosion of corporate tax bases in high-tax industrialized countries, a decline in tax revenues and a rise in competition among governments. Countries seeking to attract and retain mobile investment and the associated tax revenues may be induced to reduce tax rates below the levels that would obtain in the absence of mobility. In the view of some commentators, indeed, increased mobility can lead to a “race to the bottom” driving business tax rates to minimal levels, due to the fiscal externalities that mobility creates.

It certainly is true that tax competition has pressured politicians to lower tax rates, and the academic research shows that this is a good thing, notwithstanding complaints by leftists economists such as Jeffrey Sachs.

What folks on the left don’t understand is that there is a big difference between tax rates and tax revenue. Thanks in large part to Laffer-Curve effects, the big decline in tax rates in the past three decades has not led to a decline in tax revenues.

Indeed, taxes on income and profit, measured as a share of GDP, have increased as tax rates have declined.

But I’m getting distracted. The purpose of this post is to analyze the findings of the two Canadian economists.

Here are their major conclusions, which show that tax havens actually help high-tax nations by allowing companies to engage in “real economic activities” in spite of punitive tax policies.

Financial mobility is manifested in the decisions of multinational enterprises to separate research and development and capital financing activities from production and sales of outputs, and so to engage in “tax planning” to realize income from intellectual property and from capital in jurisdictions different from those where real economic activities are located. …While tax planning may reduce revenues of high-tax jurisdictions, therefore, it may have offsetting effects on real investment that are attractive to governments. In principle, then, the presence of international tax planning opportunities may allow countries to maintain or even increase high business tax rates, while preventing an outflow of foreign direct investment. …the investment-enhancing effects of international tax planning can dominate the revenue-erosion effects. The implications of this view are strong: an increase in international tax avoidance can lead to…an increase in the welfare of citizens of high-tax countries. …consistent with our model, governments may be reluctant to close such “loopholes,” because of fears of losses in multinational employment and, in particular, expatriations of ownership and headquarters operations to low-tax countries. …revenue losses due to tax planning are irrelevant, and what matters is the effect of tax planning on the level of multinational investment in high-tax countries and its deadweight costs for the economy, if any.

In other words, tax havens make it possible for companies to indirectly reduce their overall tax burden, thus making it economically feasible to continue operating – and retaining jobs – in nations with bad tax policy.

Other economists have reached similar conclusions. At about the 7:20 mark of this video, I cite research by Mihir Desai, Fritz Foley, and James Hines that also found that tax havens facilitate greater economic activity in high-tax nations.

P.S. I’ve done lots of debates about tax havens (on American TV, British TV, and French TV) and those of you attending FreedomFest can see me cross rhetorical swords in a debate with James Henry of the Tax Justice Network. As you can see from the agenda, I’ll also be moderating a panel on tax reform and introducing Charles Murray’s talk on how to limit the state.

P.S.S. There’s something about tax havens that causes statists to become even more irrational than they usually are. Some of them actually advocate military action against these peaceful jurisdictions! I’m wondering if this is their way of compensating for the guilt that they feel since many well-known leftists invest their money in these low-tax jurisdictions.

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Because we live in an upside-down world, Switzerland is being persecuted for being a productive, peaceful nation that has a strong human rights policy with regards to privacy.

More specifically, politicians from high-tax nations resent the fact that investors flock to Switzerland to benefit from good policies, and they are pressuring the Swiss government to weaken that nation’s human rights laws so that governments with bad fiscal systems have an easier time of tracking and taxing flight capital.

I’ve resigned myself to this happening for the simple reason that it is well nigh impossible for a small nation (even one as well-armed as Switzerland) to withstand the coercion when all the world’s big nations are trying to impose one-size-fits-all policies designed to make it easier to raise tax rates and expand the size and power of government.

Switzerland v IRSBut, as the Wall Street Journal reports, the Swiss aren’t going down without a fight.

Switzerland’s lower house of Parliament voted 123-63 against the measure, which would have enabled many of the Alpine nation’s banks to sidestep the Swiss banking secrecy laws and start handing information to the U.S. Department of Justice about any past help they may have given to Americans hiding undeclared wealth in Swiss accounts. Earlier Wednesday, the smaller, upper house of Switzerland’s Parliament voted 26-18 in favor of the proposed plan. But in the lower house, lawmakers had raised concerns about the heavy-handedness of the U.S. effort to have them sign off on legislation that might have exposed the country’s banks and bank employees to legal hazards. Lawmakers had also raised concerns about the lack of detail in the plan regarding potential fines for banks that would have opted to participate.

I heartily applaud the lawmakers who rejected the fiscal imperialism of the United States government.

As I stated in my recent BBC interview on tax havens, I believe in sovereignty, and the IRS should have no right to impose bad American tax law on economic activity inside Swiss borders (just as, say, China should have no right to demand that the United States help track down Tiananmen Square protestors that escaped to America).

But I’m not opening champagne just yet, in part because I don’t like the stuff and in part because I fear that this will be a temporary victory.

The Swiss have resisted American demands before, and on more than one occasion, only to eventually back down. And it’s hard to blame them when they’re threatened by odious forms of financial protectionism.

That being said, I’m going to enjoy this moment while it lasts and hope that somehow David can continue to withstand Goliath.

P.S. If you want to understand more about the underlying economic and philosophical implications of this issue, I heartily recommend this New York Times column by Pierre Bessard of Switzerland’s Insitut Liberal.

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Since I just left Monaco and am now in Geneva, this is an appropriate time to extol the virtues of so-called tax havens.

Monaco Casino

The name’s Bond….James Bond

But I don’t merely say nice things about low-tax jurisdictions when I’m in friendly environments.

I believe in swinging my sword in the belly of the beast.

That’s why I recently defended tax havens and tax competition for the fiscal heathens who read the New York Times.

In an even bigger display of futile optimism, I also just explained the benefits of tax competition, fiscal sovereignty, and financial privacy for the kleptocrats in Congress.

Here’s some of what I wrote for The Hill, starting with the obvious point that it is preposterous to blame tax havens for the financial crisis.

When the financial crisis hit, politicians from high-tax nations didn’t let the crisis go to waste. Acting through the G-20, they launched an attack on so-called tax havens, asserting that “hot money” from the offshore world somehow had caused the banking system to become unstable.  This campaign against low-tax jurisdictions made no sense. Nobody in the Cayman Islands or Monaco was responsible for the Federal Reserve’s easy money. Nobody in Panama or Singapore had anything to do with the corrupt system of Fannie Mae/Freddie Mac subsidies.

I then explained that tax havens once again are being attacked, though in this case multinational corporations are the main victims of a new scheme by the parasitical bureaucrats at the OECD.

So-called tax havens will suffer collateral damage, though, since big firms use them as very desirable platforms for a significant chunk of cross-border economic activity.

Tax havens are being attacked again… Funded with American tax dollars, the Organization for Economic Cooperation and Development (OECD) published a report on “Addressing Base Erosion and Profit Shifting,” (BEPS) and will follow up in a few months with specific recommendations.  This new OECD scheme is targeting multinational companies for a big tax hike, probably by requiring global tax returns, but that means tax havens are in the cross hairs because their pro-growth tax policies make them attractive locations for cross-border economic activity. Indeed, the OECD specifically has complained that “small jurisdictions act as conduits, receiving disproportionately large amounts of Foreign Direct Investment compared to large industrialised countries and investing disproportionately large amounts in major developed and emerging economies.” …its new campaign isn’t just targeting small tax havens, but will also undermine the relatively attractive fiscal systems in nations such as Ireland, Hong Kong, Switzerland, Slovakia, Singapore, Estonia, and the Netherlands. The burden of this will fall not on companies, but on workers, consumers, and shareholders.

I close with a warning that tax havens and tax competition are one of the few restraints on the greed of the political class. We need to preserve these liberalizing forces if we want to protect ourselves from even worse fiscal policy.

Tax Haven Article - The Hill…anti-tax haven demagoguery is perfectly acceptable in political circles since it is seen as expanding the power of government over taxpayers.  The real issue we should be addressing is whether we need some sort of external constraint to protect us from fiscal crises that are triggered by the overspending and overtaxing of the political class.  For a couple of decades following the Reagan and Thatcher tax cuts, governments around the world have been forced by tax competition to lower tax rates, reduce double taxation of saving and investment and reform their tax system.  Defenders of the welfare state and proponents of class-warfare tax policy have resented this liberalizing process and grab any opportunity to demonize tax havens, particularly since these jurisdictions have strong human rights laws that protect the financial privacy of investors.

For further information, I highly recommend the writings of Allister Heath and Pierre Bessard.

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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.

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I’m not a big fan of the German government. Angela Merkel has a disturbing desire to impose fiscal and political union on the European continent. And even the supposedly free market Free Democratic Party seems perfectly comfortable with a gradual descent into statism.

No wonder I mocked the Washington Post for labeling Germany a “fiscally conservative” nation.

But everything’s relative in the world of public policy. Compared to some basket cases in Europe, Germany is a laissez-faire paradise.

Here’s a fascinating report from an English-language news site in Europe.

Two Belgian government ministers have complained…that..Belgian companies are facing unfair competition. The two Belgian cabinet ministers were in Hannover (Germany) on Monday. They decided on their visit after often hearing in Belgium that it was cheaper to get Belgian cattle processed in Germany than at home.

So what is the unfair competition from Germany? Are there special tariffs or trade barriers that are artificially raising costs on Belgian products?

Nope, the Belgians are complaining that Germany doesn’t have a minimum wage and that regulations are not sufficiently onerous. Oh, the horror.

The Belgian ministers say that the most striking thing is that this can happen legally because there is no general minimum wage in Germany: “The company is not violating any regulations, because there are no regulations and that must stop” Mr Vande Lanotte told the VRT. The Belgians insist Belgian companies are the subject of unfair competition. Economy Minister Vande Lanotte says that in principle everybody should be treated in the same way: “Belgian companies cannot compete with their German competitors and this has ramifications.”

Gasp, there “are no regulations.” What sort of vicious dog-eat-dog system are the Germans running?!?

The answer, of course, is that Germany has lots of red tape.

More statist than France?!?

But apparently not as much intervention as Belgium. And you’ll notice that the “principle” that “everybody should be treated the same way” is really a stalking horse for the argument that there should be regulatory harmonization.

But the harmonization always means that everyone has to impose more onerous rules. Belgium doesn’t harmonize with Germany’s comparatively market-oriented policy. Instead, Germany is supposed to harmonize with the more statist and interventionist model of the Belgians.

In this sense, regulatory harmonization is like tax harmonization. It always means a heavier burden of government, not a lighter burden. Low-tax jurisdictions are badgered and harassed to make their tax systems worse so that fiscal hell-holes such as France don’t face “unfair competition.”

In an ideal world, the Germans would tell the Belgians to go jump in a lake.

But thanks to the never-ending pressure for regulation, harmonization, and centralization in Europe, it’s not that simple. The Brussels bureaucrats may decide to force Germany to adopt bad policy.

Mr Vande Lanotte intends to raise the issue of the absence of a minimum wage in many German sectors with the European Commission.

P.S. Germany also is better than the United States, at least on the issue of minimum wage mandates. Germany doesn’t have a minimum wage law. Obama, meanwhile, wants to saw off the bottom rungs of the economic ladder by pushing the U.S. minimum wage requirement even higher.

P.P.S. This story helps to explain why I want Belgium to split apart. If it became two nations, one Dutch and one French, I suspect we’d get better policy because they would then compete with each other instead of nagging Germany to become more statist.

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Several months ago, I wrote a rather wonky post explaining that the western world became rich in large part because of jurisdictional competition. Citing historians, philosophers, economists, and other great thinkers, I explained that the rivalry made possible by decentralization and diversity played a big role in both economic and political liberalization.

In other words, it’s not just a matter of tax competition and tax havens (though you know how I feel about those topics).

Now I want to provide another argument in favor of the jurisdictional differences that are encouraged by national sovereignty. Simply stated, it’s the idea of diversification. Reduce risk by making sure one or two mistakes won’t cause a catastrophe.

This isn’t my insight. The author of The Black Swan understands that this simple principle of financial investment also applies to government. He recently explained his thinking in a short interview with Foreign Policy. The magazine began with a few sentences of introduction.

Nassim Nicholas Taleb has made a career of going against the grain, and he has been successful enough that the title of his book The Black Swan is a catchphrase for global unpredictability far beyond its Wall Street origins. …His newest project is helping governments get smarter about risks.

The rest of the article is Taleb in his own words. Here are some of my favorite passages, beginning with some praise for Switzerland’s genuine federalism and strong criticism of the EU bureaucracy in Brussels.

The most stable country in the history of mankind, and probably the most boring, by the way, is Switzerland. It’s not even a city-state environment; it’s a municipal state. Most decisions are made at the local level, which allows for distributed errors that don’t adversely affect the wider system. Meanwhile, people want a united Europe, more alignment, and look at the problems. The solution is right in the middle of Europe — Switzerland. It’s not united! It doesn’t have a Brussels! It doesn’t need one.

But it’s important to understand why he likes Switzerland and dislikes the European Union: Small is beautiful. More specifically, decentralized decision making means less systemic risk.

We need smaller, more decentralized government. On paper, it might appear much more efficient to be large — to have economies of scale. But in reality, it’s much more efficient to be small. …an elephant can break a leg very easily, whereas you can toss a mouse out of a window and it’ll be fine. Size makes you fragile.

Taleb elaborates on this theme, echoing many of the thinkers I cited in my wonky September post.

The European Union is a horrible, stupid project. The idea that unification would create an economy that could compete with China and be more like the United States is pure garbage. What ruined China, throughout history, is the top-down state. What made Europe great was the diversity: political and economic. Having the same currency, the euro, was a terrible idea. It encouraged everyone to borrow to the hilt.

Because it’s a short article, he doesn’t cite many specific examples, so let me elaborate. One of the reasons for the financial crisis is that the world’s financial regulators thought it would be a good idea if everybody agreed to abide the same rules for weighing risks. This resulted in the Basel rules that tilted the playing field in favor of mortgage-backed securities, thus helping to create and pump up the housing bubble. And we know how that turned out.

But that’s just part of the story. The regulatory cartel also decided to provide a one-size-fits-all endorsement of government debt. Now we’re in the middle of a sovereign debt crisis, so we see how that’s turning out.

Unfortunately, governments seem drawn to harmonization like moths to a flame. To make matters worse, the corporate community often has the same instinct. Their motive often is somewhat benign. They like the idea of one rulebook rather than having to comply with different policies in every nations.

But mistakes made for benign reasons can be just as bad as mistakes made for malignant reasons.

P.S. Last but not least, it’s worth noting that Taleb is not a big fan of democracy.

I have a negative approach to democracy. I think it should be primarily a mechanism by which people can remove a bad leader

I don’t know if this is because he recognizes the danger of untrammeled majoritarianism, much like Thomas Sowell, George Will, and Walter Williams. But if you want more information on why 51 percent of the people shouldn’t be allowed to oppress 49 percent of the people, here’s a very good video.

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I’m not talking about secession in the United States, where the issue is linked to the ugliness of slavery (though at least Walter Williams can write about the issue without the risk of being accused of closet racism).

But what about Europe? I have a hard time understanding why nations on the other side of the Atlantic should not be allowed to split up if there are fundamental differences between regions. Who can be against the concept of self-determination?

Heck, tiny Liechtenstein explicitly gives villages the right to secede if two-thirds of voters agree. Shouldn’t people in other nations have the same freedom?

This is not just a hypothetical issue. Secession has become hot in several countries, with Catalonia threatening to leave Spain and Scotland threatening to leave the United Kingdom.

But because of recent election results, Belgium may be the country where an internal divorce is most likely. Here are some excerpts from a report in the UK-based Financial Times.

Flemish nationalists made sweeping gains across northern Belgium in local elections on Sunday, a success that will bolster separatists’ hopes for a break-up of the country. Bart De Wever, leader of the New Flemish Alliance (NVA), is set to become mayor of the northern city of Antwerp, Belgium’s economic heartland, after his party emerged as the largest one, ending about 90 years of socialist rule. …The strong result recorded by the Flemish nationalist is likely to have an impact across Europe, where the sovereign debt crisis, which has seen rich countries bail out poor ones, has revived separatist sentiment throughout the continent. Flanders, which is the most economically prosperous region of Belgium, has long resented financing the ailing economy of French-speaking Wallonia, and Sunday’s victory will strengthen its demand for self-rule. Lieven De Winter, a political scientist at Université Catholique de Louvain, said that Mr De Wever’s victory was a clear step forward for separatists who had long been campaigning for secession from the southern part of the country.

Purely as a matter of political drama, this is an interesting development. We saw the peaceful split of Czechoslovakia into the Czech Republic and Slovakia about 20 years ago. But we also saw a very painful breakup of Yugoslavia shortly thereafter.

Belgium’s divorce, if it happened, would be tranquil. But it would still be remarkable, particularly since it might encourage peaceful separatist movements in other regions of other nations.

I think this would be a welcome development for reasons I wrote about last month. Simply stated, the cause of liberty is best advanced by having a a large number of competing jurisdictions.

I’ve opined about this issue many times, usually from a fiscal policy perspective, explaining that governments are less likely to be oppressive when they know that people (or their money) can cross national borders.

Belgium definitely could use a big dose of economic liberalization. The burden of government spending is enormous, consuming 53.5 percent of economic output – worse than all other European nations besides Denmark, France, and Finland. The top tax rate on personal income is a crippling 53.7 percent, second only the Sweden. And with a 34 percent rate, the corporate tax rate is very uncompetitive, behind only France.

Sadly, there’s little chance of reform under the status quo since the people in Wallonia view high tax rates as a tool for extracting money from their neighbors in Flanders. But if Belgium split up, it’s quite likely that both new nations would adopt better policy as a signal to international investors and entrepreneurs. Or maybe the new nations would implement better policy as part of a friendly rivalry with each other.

So three cheers for peaceful secession and divorce in Belgium. At least we know things can’t get worse.

P.S. Brussels is the capital of Belgium, but it is also the capital of the European Union. Don’t be surprised if it becomes some sort of independent federal city if Flanders and Wallonia become independent. Sort of like Washington, but worse. Why worse? Because even though Washington is akin to a city of parasites feasting off the productive energy of the rest of America, Brussels and the European Union are an even more odious cesspool of harmonization, bureaucratization, and centralization, richly deserving of attacks from right, left, and center.

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I periodically mock the crazy statists of California. The state is almost surely doomed to suffer a Greek-style fiscal chaos. The only unknown is whether Illinois will beat the Golden State into default.

Governor Jerry Brown’s new “taxpayer restraint” fence?

The politicians in Sacramento impose very high taxes to fund a bloated bureaucracy that oversees a bunch of politically correct nonsense.

But the scam may be coming to an end. Margaret Thatcher famously warned that the problem with socialism is that sooner or later you run out of other people’s money.

Well, that’s happening sooner in California because more and more people are deciding to leave the state.

Yet the moochers and looters than run the state aren’t learning the right lesson. They think that successful people are a pinata that can be endlessly beaten in the search for more revenue.

But there will come a point when they realize that the geese with the golden eggs are flying away. What will they do when reality slaps them in the face?

In a just and good world, they will realize they screwed up and reverse the horrible policies that crippled California. They will reduce the burden of government spending and replace the state’s class-warfare tax system with a simple and fair flat tax.

Unfortunately, we don’t live in that world. I’m worried that politicians in Sacramento will read the latest column by Walter Williams and not realize he’s being satirical. Walter starts out with a good description of what’s happening in the state.

California was once the land of opportunity, but it is going down the tubes. …people are already leaving California in great numbers. …roughly 225,000 residents leave California each year — and have done so for the past 10 years. They take their money with them. …California’s out-migration results in large shares of income going to other states, mostly to Nevada ($5.67 billion), Arizona ($4.96 billion), Texas ($4.07 billion) and Oregon ($3.85 billion). That’s the problem. California politicians can fleece people in 2012, but there’s no guarantee that they can do the same in 2013 and later years; people can leave.

He then speculates, tongue in cheek, about what sort of totalitarian measures a state government might take to prevent taxpayers from escaping.

…there might be a way for California politicians to solve their fiscal mess. They can simply stop wealthy people from leaving the state or, alternatively, like some Third World nations, set limits on the amount of assets a resident can take out of the state. …California [could] set up border controls to stop people, as East Germans did at Checkpoint Charlie, before they cross the state line… What California Attorney General Kamala D. Harris might do is sue Nevada, Arizona, Texas and Oregon in the federal courts for enticing, through lower taxes and less onerous regulations, wealthy California taxpayers.

Walter is joking, of course, but keep in mind that the federal government already has ventured into this territory with Orwellian laws such as “FATCA” that create a global reach for bad American tax policy.

And does anyone think the kleptocrats that run California will do the right thing so long as they have any hope that some new expansion of government power will prop up the welfare state for a few more years?

I’m predicting that California will continue its relative decline, particularly when compared to zero-income-tax states like Texas, followed by a nightmare scenario as the special interests groups and their political lackeys look for some way of prolonging the scam.

P.S. Here’s some anti-California humor, including a cartoon that’s very relevant for the upcoming tax-hike referendum, an amusing joke feature Texas and a coyote, a Humpty Dumpty cartoon, a photo that shows the California bureaucracy in action, and a cartoon featuring archaeologists from the future.

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Since I’m probably the foremost defender of tax havens in the United States, I tend to get a lot of press inquiries whenever something happens that brings attention to these low-tax jurisdictions.

In recent months, almost all of the media calls have been because (gasp!) Mitt Romney engaged in sound business practices and used tax havens to boost earnings while also legally minimizing the amount of money siphoned off by the buffoons in Washington.

I’ve explained 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. I’ve also discussed the issue for the Wall Street Journal’s online interview program, and I slammed ABC News for empty and biased reporting on the issue.

Most recently, I got interviewed by NBC’s big station in New York City. They inexplicably seemed to think it was a big scoop that they were able to form a company in Nevis, though at least they gave me an opportunity to explain that taxpayers benefited from tax havens and tax competition.

But I don’t want to focus on my rather generic comments. Instead, I want to address the explicit assumption in the story that it is bad for Nevis (or any other jurisdiction) to have a simple and efficient process for forming companies.

Notwithstanding the news report, this is a good thing, a practice that should be applauded rather than condemned. Indeed, the World Bank highlights the importance of easy company formation in their important “Doing Business” project.

Moreover, there’s an implicit assumption in the story that not only is company formation somehow a sketchy thing, but that it’s only an issue for small Caribbean islands in the “offshore” world.

That’s completely inaccurate. Indeed, even leftists have acknowledged that Delaware is one of the premiere jurisdictions in the world for company formation, and I’ve explained that the U.S. has very attractive laws for international investors that have attracted trillions of dollars to the American economy.

Interestingly, we now have some very good evidence from three academics that the “offshore” world is much stricter about enforcing laws than the “onshore” world. Here’s what they did.

This paper reports the results of an experiment soliciting offers for these prohibited anonymous shell corporations. Our research team impersonated a variety of low- and high-risk customers, including would-be money launderers, corrupt officials, and terrorist financiers when requesting the anonymous companies. Evidence is drawn from more than 7,400 email solicitations to more than 3,700 Corporate Service Providers that make and sell shell companies in 182 countries. The experiment allows us to test whether international rules are actually effective when they mandate that those selling shell companies must collect identity documents from their customers.

And here’s what they found about so-called tax havens compared to high-tax nations. As you can see, the rules are much more likely to be obeyed in the low-tax jurisdictions that are always getting smeared.

A finding that runs directly counter to the conventional wisdom is that rich countries in the Organization of Economic Cooperation and Development (OECD) are worse at enforcing the rules on corporate transparency than are poor countries (see Figure 2). For developing countries the Dodgy Shopping Count is 12, while for developed countries it is 7.8 (and tax havens are much higher at 25.2, as discussed below). The significance of this finding is that it does not seem to be particularly expensive to enforce the rules on shell companies, given that poor nations do better than rich countries. This suggests that the relatively lackluster performance in rich countries reflects a simple unwillingness to enforce the rules, rather than any incapacity. One of the biggest surprises of the project was the relative performance of rich, developed states compared with poorer, developing countries and tax havens (see Figure 3). The overwhelming policy consensus, strongly articulated in G20 communiqués and by many NGOs, is that tax havens provide strict secrecy and lax regulation, especially when it comes to shell companies. This consensus is wrong. The Dodgy Shopping Count for tax havens is 25.2, which is in fact much higher than the score for rich, developed countries at 7.8 – meaning it is more than three times harder to obtain an untraceable shell company in tax havens than in developed countries. Some of the top-ranked countries in the world are tax havens such as Jersey, the Cayman Islands and the Bahamas, while some developed countries like the United Kingdom, Australia, Canada and the United States rank near the bottom of the list. It is easier to obtain an untraceable shell company from incorporation services (though not law firms) in the United States than in any other country save Kenya.

These are remarkable findings, but now let me take a moment to explain the correct interpretation of these results. Some people will argue that this data shows that there should be harsher rules imposed on the “onshore”  company formation business.

Au contraire. The goal should be to ease the regulatory burden everywhere. Simply stated, it is foolish to fight terrorism, corruption, and money laundering with costly rules that require the monitoring of countless legal actions.

Indeed, I’ve already explained how anti-money laundering rules are ineffective – or perhaps even counterproductive – in the fight against crime, largely because they generate a haystack of information, thus putting law enforcement in the unenviable position of searching for needles.

From a cost-benefit perspective, law enforcement should focus on actual criminal behavior. It wouldn’t make sense, after all, to have the government spy on everyone who buys a car merely because some people use autos when committing crime.

But that’s pretty much a good description of the mentality behind rules and regulations that target the company formation business.

P.S. For more information on the beneficial impact of so-called tax havens, Pierre Bessard wrote a great column about the topic for the New York Times.

P.P.S. I don’t want to overlook my statist friends. Here are a couple of short anti-tax haven videos from left wingers. The first one is tedious and amateurish, but I found the second one reasonably entertaining.

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During the dark ages, nations like China were relatively advanced while Europeans were living in squalid huts.

But that began to change several hundred years ago. Europe experienced the enlightenment and industrial revolution while the empires of Asia languished.

What accounts for this dramatic shift?

I’m not going to pretend there’s a single explanation, but part of the answer is that Europe benefited from decentralization and jurisdictional competition. More specifically, governments were forced to adopt better policies because labor and capital had significant ability to cross borders in search of less oppression.

I’m certainly a big fan of making governments compete with each other, but even I didn’t realize how jurisdictional rivalry gave us modernity.

But you don’t have to believe me. This topic was discussed by Professor Roland Vaubel at last week’s Mont Pelerin Society meeting. Here are some excerpts from one of Professor Vaubel’s papers on the topic.

…competition among the public institutions of different countries can benefit from an international competitive order which preserves peace  and prevents governments from colluding with each other at the expense of third parties, notably their citizens.

This post will have lots of additional excerpts, but if you’re not as excited by the issue as I am, just take a moment to review this table from Vaubel’s paper (click it for a larger image). You will see that the intellectual history of this issue is enormous, and the common theme is that big, centralized states hinder development.

Remember that this table merely looks at the classical thinkers on the issue. The paper also includes modern thinkers, some of who are quoted below. And I also have a postscript that shows how many Nobel Prize-winning economists see jurisdictional competition as a tool for restraining excessive government.

But let’s see what insights we can find from the great thinkers of history, starting with this passage from Charles Montesquieu that Vaubel cites in his paper.

In Europe, the natural divisions form many medium-sized states in which the government of laws is not incompatible with the maintenance of the state; on the other hand, they are so favourable to this that without laws this state falls into decadence and becomes inferior to all the others. This is what has formed a genius for liberty, which makes it very difficult to subjugate each part and to put it under a foreign force other than by laws and by what is useful to its commerce… princes have had to govern themselves more wisely than they themselves would have thought, for it turned out that great acts of authority were so clumsy that experience itself has made known that only goodness of government brings prosperity.

In other words, the mobility of capital among jurisdictions limits government interference.

The father of economics, Adam Smith, made a very similar point. Here’s a passage from the Wealth of Nations that Vaubel includes in his paper.

The … proprietor of stock is properly a citizen of the world and is not necessarily attached to any particular country. He would be apt to abandon the country in which he is exposed to a vexatious inquisition in order to be assessed a burdensome tax and would remove his stock to some country where he could either carry on his business or enjoy his fortune at ease. A tax that tended to drive away stock from a particular country would so far tend to dry up every source of revenue both to the sovereign and society … The nations, accordingly, who have attempted to tax the revenue arising from stock, instead of any severe inquisition … have been obliged to content themselves with some very loose and, therefore, more or less arbitrary estimation. The abuses which sometimes creep into the local and provincial administration of a local or provincial revenue, however enormous so ever they may appear, are in reality, however, almost always very trifling in comparison with those which commonly take place in the administration and expenditure of the revenue of a great empire.

Jacques Turgot (Bastiat was not the only great French economist) looked at the new nation of the United States and saw the benefits of jurisdictional competition.

The asylum which (the American people) opens to the oppressed of all nations must console the earth. The ease with which it will now be possible to take advantage of this situation, and thus to escape from the consequences of a bad government, will oblige the European governments to be just and enlightened

And Immanuel Kant observed.

…civil liberty cannot now be easily assailed without inflicting such damage as will be felt in all trades and industries and especially in commerce; and this would entail a diminution of the powers of the state in external relations. This liberty, moreover, gradually advances further. But if the citizen is hindered in seeking his prosperity in any way suitable to himself that is consistent with the liberty of others, the activity of business is  checked generally; and thereby the powers of the whole state are again weakened.

Kant expanded on this notion in another publication.

…peace is created and guaranteed by an equilibrium of forces and a most vigorous rivalry. Thus, nature wisely separates the nations.

Professor Vaubel remarked that, “In other words, Kant prefers interjurisdictional anarchy to centralised despotism.”

Lord Acton also noted the dangers of centralization.

…the distribution of power among several states is the best check on democracy. By multiplying centres of government and discussion it promotes the diffusion of political knowledge and the maintenance of healthy and independent opinion. It is the protectorate of minorities and the consecration of self-government. …It is bad to be oppressed by a minority but it is worse to be oppressed by a majority.

Max Weber wrote.

The competitive struggle (among the European nation states) created the largest opportunities for modern western capitalism. The separate states had to compete for mobile capital, which dictated to them the conditions under which it would assist them to power.

Weber’s comments are significant from a terminological perspective. As Vaubel noted in his paper, “This is the first time that we find the economic term “competition” rather than jealousy (Hume) or rivalry (Kant) or emulation (Gibbon) in this literature.”

From Eric Jones.

…how did Europeans escape crippling exploitation by their rulers? … The rulers of the relatively small European states learned that by supplying the services of order and adjudication they could attract and retain the most and best-paying constituents …European kings were never as absolute as they wished. The power dispersed among the great proprietors was a check on them, as was the rising power of the market.

Harold Berman of Harvard wrote.

In the Western legal tradition diverse jurisdictions and diverse legal systems coexist and compete within the same community. … The pluralism of Western law was a source of legal sophistication and of legal growth. It was also a source of freedom.

Brian Tierny noted that rivalry between church and state also helped advance liberty.

In the Middle Ages there was never just one hierarchy of government exercising absolute authority but always two – church and state to use the language of a later age – often contending with one another, each limiting the other’s power” (1995, p. 66). “Since, in the conflicts between church and state, each side always sought to limit the power of the other, the situation encouraged theories of resistance to tyranny and constitutional limitations on government.

Here are some additional quotes from more modern academics, all taken directly from Professor Vaubel’s paper.

  • “In the West, the absence of an empire removed the crucial bureaucratic block on the development of market forces; merchants persecuted  in one place could always go with their capital elsewhere” (John A. Hall 1985, p. 102).
  • “The paradox is that competition between states, economic and political rivalry, and international tension are the best guarantees of continuing progress … The very tension which presents the greatest threat to our survival assures that, if we survive at all, some states, in order to compete better, will be obliged to encourage intellectual freedom and progress” (Daniel Chirot 1986, p. 296).
  • “Competition among the political leaders of the newly emerging nation states … was an important factor in overcoming the inherited distaste of the rural military aristocracy for the new merchant class. Had the merchants been dealing with a political monopoly, they might not have been able to purchase the required freedom of action at a price compatible with the development of trade” (Nathan Rosenberg, L.E. Birdzell 1986, pp. 136ff.).
  • “The political and social consequences of this decentralized, largely unsupervised growth of commerce … and markets were of the greatest significance. In the first place, there was no way in which such economic developments could be fully suppressed … There existed no uniform authority in Europe which could effectively halt this or that commercial development; no central government whose change in priorities could cause the rise and fall of a particular industry; no systematic and universal plundering of businessmen and entrepreneurs by tax gatherers … In Europe there were always some princes and local lords willing to tolerate merchants and their ways even when others plundered and expelled them” (Paul Kennedy 1987, pp. 19f.).
  • “The availability of alternative nation states for production meant that labour expelled from one nation could find other nations in which to locate, and the possibilities opened for capital mobility could operate as a deterrent to widespread political confiscations” (Stanley L. Engerman 1988, p. 14).
  • “Western technological creativity rested on two foundations: a materialistic pragmatism based on the belief that the manipulation of nature in the service of economic welfare was acceptable, indeed, commendable behavior, and the continuous competition between political units for political and economic hegemony” (Joel Mokyr 1990, p. 302).
  • “The various European societies complemented one another, and their internal competition gave (Europe) a dynamism that China lacked” (Mokyr 2003, p. 18).
  • “Ironically, then, Europe’s great good fortune lay  in the fall of Rome and the weakness and division that ensued … The Roman dream of unity, authority, and order (the pax Romana) remained, indeed has persisted to  the present. After all, one has usually seen fragmentation as a great misfortune, as a recipe for conflict … And yet, … fragmentation was the strongest brake on wilful,  oppressive behaviour. Political rivalry and the right of exit made all the difference” ( David S. Landes 1998, pp. 37f.).

For those interested in the topic, Vaubel’s entire paper is worth reading. But if you don’t have time, just remember that national sovereignty should be celebrated. Not because national governments are good, but because competition between governments is the best protector of liberty and civilization.

I favor tax competition, financial privacy, and fiscal sovereignty because these institutions lead to better tax policy. But Vaubel teaches us that promotion of better tax policy is just the tip of the iceberg.

P.S. Since this post is designed to show the intellectual case for jurisdictional rivalry, here are some quotes from a number of Nobel Prize-winning economists.

George Stigler:
Competition among communities offers not obstacles but opportunities to various communities to choose the type and scale of government functions they wish.
Gary Becker:
…competition among nations tends to produce a race to the top rather than to the bottom by limiting the ability of powerful and voracious groups and politicians in each nation to impose their will at the expense of the interests of the vast majority of their populations.
James Buchanan:
…tax competition among separate units…is an objective to be sought in its own right.
Milton Friedman:
Competition among national governments in the public services they provide and in the taxes they impose is every bit as productive as competition among individuals or enterprises in the goods and services they offer for sale and the prices at which they offer them.

Edward Prescott:

With apologies to Adam Smith, it’s fair to say that politicians of like mind seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise taxes. This is why international bureaucracies should not be allowed to create tax cartels, which benefit governments at the expense of the people.

Edmund Phelps:

[I]t’s kind of a shame that there seems to be developing a kind of tendency for Western Europe to envelope Eastern Europe and require of Eastern Europe that they adopt the same economic institutions and regulations and everything.  …We want to have some role models… If all these countries to the East are brought in and homogenized with the Western European members then that opportunity will be lost.
Douglass North:
…international competition provided a powerful incentive for other countries to adapt their institutional structures to provide equal incentives for economic growth and the spread of the ‘industrial revolution.’
Friedrich Hayek:
…while it has always been characteristic of those favouring an increase in governmental powers to support maximum concentration of powers, those mainly concerned with individual liberty have generally advocated decentralisation.

Vernon Smith:

[Tax competition] is a very good thing. …Competition in all forms of government policy is important. That is really the great strength of globalization …tending to force change on the part of the countries that have higher tax and also regulatory and other policies than some of the more innovative countries. …The way to get revenue is doing all you can to encourage growth and wealth creation and then that gives you more income to tax at the lower rate down the road.

In other words, it’s not just me making these arguments.

But I’m probably the only person mentioned in this post who almost got tossed into a Mexican jail for having these views. But that’s the risk one takes when fighting evil.

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If we want to avoid the kind of Greek-style fiscal collapse implied by this BIS and OECD data, we need some external force to limit the tendency of politicians to over-tax and over-spend.

That’s why I’m a big advocate of tax competition, fiscal sovereignty, and financial privacy (read Pierre Bessard and Allister Heath to understand why these issues are critical).

Simply stated, I want people to have the freedom to benefit from better tax policy in other jurisdictions, especially since that penalizes governments that get too greedy.

I’m currently surrounded by hundreds of people who share my views since I’m in Prague at a meeting of the Mont Pelerin Society. And I’m particularly happy since Professor Lars Feld of the University of Freiburg presented a paper yesterday on “Redistribution through public budgets: Who pays, who receives, and what effects do political institutions have?”.

His research produced all sorts of interesting results, but I was drawn to his estimates on how tax competition and fiscal decentralization are an effective means of restraining bad fiscal policy.

Here are some findings from the study, which was co-authored with Jan Schnellenbach of the University of Heidelberg.

In line with the previous subsections, we find that countries with a higher GDP per employee, i.e. a higher overall labor productivity, have a more unequal primary income distribution. …fiscal competition within a country or trade openness as an indicator of globalization do not exacerbate, but reduce the gap between income classes. …expenditure and revenue decentralization restrict the government’s ability to redistribute income when fiscal decentralization also involves fiscal competition. …fiscal decentralization, when accompanied by high fiscal autonomy, involves significantly less fiscal redistribution. Please also note that fiscal competition induces a more equal distribution of primary income and, even though the distribution of disposable income is more unequal, it is open how the effect of fiscal competition on income distribution should be evaluated. Because measures of income redistribution usu-ally have adverse incentive effects which consequently affect economic growth negatively, fiscal competition might be favorable for countries which have strong egalitarian preferences. A rising tide lifts all boats and might in the long-run outperform countries with more moderate income redistribution even in distributional terms.

The paper includes a bunch of empirical results that are too arcane to reproduce here, but they basically show that the welfare state is difficult to maintain if taxpayers have the ability to vote with their feet.

Or perhaps the better way to interpret the data is that fiscal competition makes it difficult for governments to expand the welfare state to dangerous levels. In other words, it is a way of protecting governments from the worst impulses of their politicians.

I can’t resist sharing one additional bit of information from the Feld-Schnellenbach paper. They compare redistribution in several nations. As you can see in the table reproduced below, the United States and Switzerland benefit from having the lowest levels of overall redistribution (circled in red).

It’s no coincidence that the U.S. and Switzerland are also the two nations with the most decentralization (some argue that Canada may be more decentralized that the U.S., but Canada also scores very well in this measure, so the point is strong regardless).

Interestingly, Switzerland definitely has significantly more genuine federalism than any other nation, so you won’t be surprised to see that Switzerland is far and away the nation with the lowest level of tax redistribution (circled in blue).

One clear example of Switzerland’s sensible approach is that voters overwhelmingly rejected a 2010 referendum that would have imposed a minimum federal tax rate of 22 percent on incomes above 250,000 Swiss Francs (about $262,000 U.S. dollars). And the Swiss also have a spending cap that has reduced the burden of government spending while most other nations have moved in the wrong direction.

While there are some things about Switzerland I don’t like, its political institutions are a good role model. And since good institutions promote good policy (one of the hypotheses in the Feld-Schnellenbach paper) and good policy leads to more prosperity, you won’t be surprised to learn that Swiss living standards now exceed those in the United States. And they’re the highest-ranked nation in the World Economic Forum’s Global Competitiveness Report.

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