There’s a growing controversy about whether the various coronavirus-lockdown rules should be relaxed for people who have been vaccinated (as opposed to being relaxed for hypocritical politicians).
And if those restrictions are relaxed, vaccinated people presumably will need some sort of proof, like a “vaccine passport.”
Many people understandably are hesitant about this concept, particularly if government is involved. After all, we have many examples of seemingly innocuous ideas becoming nightmarish mistakes (such as adopting the income tax).
And the last thing any of us would want (I hope!) is something that could devolve into an authoritarian, Chinese-style system for monitoring and controlling private life.
But what if government isn’t involved? What if private businesses decide that customers are only allowed if they prove they’ve been vaccinated?
And that’s true even if we think the owners of the businesses are making silly choices. After all, it’s their property.
Some conservatives, however, either don’t understand libertarian principles or they’re willing to abandon those principles for political convenience.
For instance, Will Wilkinson observes that many Republicans are forgetting the libertarian principle of freedom of association.
Conservatives have been freaking out about the mere possibility of vaccine passports… The idea is that the ability to credibly prove vaccination status will speed the restoration of normal social and economic life. This works by allowing businesses, schools, sports leagues, etc. to discriminate against those who haven’t been vaccinated. …one of the bright lines dividing American liberals and conservatives concerns the limits of freedom of association. Conservatives, and especially those with a libertarian streak, are far more likely to be absolutists about the right to exclude anyone from your property, business, or private club or association for any reason. …If the Civil Rights Act is problematic because it infringes on freedom of association, the permissibility of discriminating against customers who might carry a fatal infection is a total no-brainer. Right? Ha! …there is no actual principle at work here. Conservatives are consistent only in their opportunistic incoherence.
Moreover, in his column for the Atlantic, David Frum notes that the GOP is hypocritically abandoning its support for property rights.
Whether vaccine passports ever will exist remains highly uncertain. A lot of questions remain about the technology required—and about whether the concept makes any business sense. …For now, then, the discussion about vaccine passports remains theoretical—which makes the discussion all the more impassioned and embittered. DeSantis and others are loudly advertising that with COVID-19, …their version of freedom puts greater priority on right-wing cultural folkways than on rights of property and ownership. …To appease those cultural blocs, Republican politicians must be willing to sacrifice everything, including what used to be the party’s foundational principles. …to avoid contradicting the delusions of anti-vaccine paranoiacs, property rights must give way, freedom to operate a business must yield. …with COVID-19, …the new post-Trump message from the post-Trump GOP is: Private property is socialism; state expropriation is freedom. It’s a strange doctrine for a party supposedly committed to liberty and the Constitution, but here we are.
I think it’s fair to say that neither Wilkinson nor Frum are libertarians, or even conservatives, but I also think they are correct in pointing out that there is a lot of hypocrisy and incoherence.
That being said, I am glad that there’s lots of resistance to the idea of vaccine passports. Why? Because if businesses impose such rules and there’s no pushback, that probably increases the likelihood that politicians will try something similar.
And that’s where libertarians should be drawing the line, as Professor Don Boudreaux has noted.
After all, if a business does something we don’t like, we are free to patronize competitors. But if government does something we don’t like, there’s the horrible choice of obey or go to jail (or get a fake passport on the black market).
For what it’s worth, I hope this becomes a moot point. After all, once everybody who wants to get vaccinated has been vaccinated, there’s no plausible argument for maintaining any more restrictions on normal life.
P.S. But if it does become a real issue, it will probably generate new jokes, cartoons, and memes, all of which will require me to expand my collection of coronavirus-themed humor.
The bad news is that Lois Lerner didn’t get punished. She’s now enjoying a fat taxpayer-financed pension. And other IRS officials successfully stonewalled with no adverse consequences.
Heck, Republicans actually rewarded the IRS with a bigger budget. And the Trump Administration so far has been AWOL on curtailing IRS abuses.
But that may be about to change. One of the President’s appointees has expressed support for protecting donors to nonprofit organizations.
….a Congressional hearing this week offered potentially good news to nonprofits whose donors are under political threat. …Montana Republican Steve Daines asked Acting IRS Commissioner David Kautter whether the agency is considering the necessity of IRS 990 Schedule B. These are the forms that nonprofits must supply to the IRS listing donors who contribute more than $5,000. Schedule Bs are supposed to remain confidential, but AGs in New York and California have sought to require nonprofits to file them at the state level. Many Democrats see the form as a gift-wrapped list of donors to target, and a way to chill donations to conservative nonprofits. …Mr. Kautter acknowledged that he was “actively involved” along with Treasury Secretary Steve Mnuchin at offering more donor protection. …Nonprofits would still be required to keep their donor details, and if the IRS or other authorities had valid reason to suspect fraud they could demand to see the records. But requiring nonprofits to provide names each year to partisan AGs or tax bureaucrats is an invitation to repeat the scandal of the Obama years when Lois Lerner and the IRS targeted conservative nonprofits.
Brian Garst of the Center for Freedom and Prosperity also weighed in on the issue, pointing out that government has a sorry track record of persecuting political dissent.
…robust protections for speech were listed first among the Bill of Rights and have long been a cornerstone of our republic. …Like the secret ballot, respecting donor privacy and thus anonymous speech and association is essential to prevent majoritarian abuse and intimidation that subverts democracy. This was a lesson learned in the civil rights era after the shameful attacks on the NAACP and its supporters. …Lois Lerner was found to have illegally shared confidential Form 990 taxpayer information with the Federal Election Commission.
The solution is to not let the government get the information in the first place, especially since it isn’t needed to enforce any tax laws.
Unfortunately, invasive donor reporting requirements instituted by the Internal Revenue Service threaten to chill this critical democratic tool. …Schedule B requires 501(c) organizations to include certain contributors’ names and addresses with their annual Form 990 reports. Yet the IRS has acknowledged that this information has no enforcement value. Instead, its collection creates opportunities for abuse and chills speech and civic participation. …there’s good reason to question the ability of the government to protect sensitive taxpayer information given the history of inadvertent disclosures and information leaks at the IRS. …For minority viewpoints, public exposure can lead to intimidation… Several years ago, the IRS was said to be considering dropping the unnecessary Schedule B reporting requirement, which it was never required by statute to collect in the first place. Unfortunately, the agency did not follow through under President Barack Obama… The Trump administration should do what the Obama administration would not and ensure the right of Americans to participate in the political process without fear that they will be made vulnerable to targeting based on their political views.
Then there would be zero rationale for the government to know about our donations. And since there’s plenty of evidence that nonprofits would prosper without a special preference in the tax code, this would be a win-win reform.
P.S. Privacy is an under-appreciated benefit of fundamental tax reform. Not only would donors and nonprofits no longer have to share information with the IRS under a flat tax, we also wouldn’t need to tell the government anything about our homes since the mortgage interest deduction would vanish. And since the death tax and capital gains tax are abolished, the government would have no need to know about our assets. And since all capital income is taxed at the business level, we wouldn’t have to tell the government about any stocks, bonds, or bank accounts we own.
Beginning in the 1980s, money-laundering laws were enacted in hopes of discouraging criminal activity by making it harder for crooks to use the banking system. Unfortunately, this approach has been an expensive failure.
Amazingly, some politicians actually want to make these laws even worse. I wrote last year about some intrusive, expensive, and pointless legislation proposed by Senators Grassley, Feinstein, Cornyn, and Whitehouse.
Now there’s another equally misguided set of proposals from Senators Rubio and Wyden, along with Representatives Pearce, Luetkemeyer, and Maloney. They want to require complicated and needless ownership data from millions of small businesses and organizations.
David Burton of the Heritage Foundation has a comprehensive report on the legislation. Here’s some of what he wrote.
Congress is seriously considering imposing a beneficial ownership reporting regime on American businesses and other entities, including charities and churches. …the House and Senate bills…share three salient characteristics. First, they would impose a large compliance burden on the private sector, primarily on small businesses, charities, and religious organizations. Second, they create hundreds of thousands—potentially more than one million—inadvertent felons out of otherwise law-abiding citizens. Third, they do virtually nothing to achieve their stated aim of protecting society from terrorism or other forms of illicit finance. …Furthermore, the creation of this expensive and socially damaging reporting edifice is unnecessary. The vast majority of the information that the proposed beneficial ownership reporting regime would obtain is already provided to the Internal Revenue Service.
…what would you think of a member of Congress who proposes to put a new regulation on the smallest of businesses that does not meet a cost-benefit test, denies basic privacy protections and, because of its vagueness and ambiguity, is likely to cause very high numbers of otherwise law-abiding Americans to be felons? …Some bureaucrats and elected officials argue that the government needs to know who the “beneficial owners” are of even the tiniest of businesses in order to combat “money-laundering,” tax evasion or terrorism. …Should the church ladies who run the local non-profit food bank be put in jail for their failure to submit the form to the Feds that would give them the exemption from the beneficial ownership requirement? …Given how few people are actually convicted of money-laundering, the overwhelming evidence is that 99 percent of the people being forced to submit to these costly and time-consuming proposed regulations will not be guilty of money-laundering, terrorism or whatever, and thus should not be harassed by government.
Writing for the Hill, J.W. Verret, an expert in business law from George Mason University Law School, highlights some of the serious problems with this new regulatory scheme.
Legislation under consideration in Congress, the Counter Terrorism and Illicit Finance Act, risks tying entrepreneurs’ hands with even more red tape. In fact, it could destroy any benefit some small businesses stand to gain from the tax reform legislation passed last year. It would require corporations and limited liability companies with fewer than 20 employees to file a form with the Treasury Department at the time of formation, and update it annually, listing the names of all beneficial owners and individuals exercising control. …Given the substantial penalties, this will impose a massive regulatory tax on small businesses as they spend money on lawyers that should go toward workers’ pay. …It is unlikely someone on a terrorist watch list would provide their real name on the required form, and Treasury will probably never have sufficient resources to audit names in real time.
Professor Verret explains some of the practical problems and tradeoffs with these proposals.
…some individual money laundering investigations would be easier with a small business registry available. But IRS tax fraud investigations would be much easier with access to taxpayers’ bank account login information — would we tolerate the associated costs and privacy violations? …How is the term “beneficial owner” defined? How is “control” defined? As a professor of corporate law, I have given multiple lectures on those very questions. What if your company is owned, in part, by another company? Or there is a chain of ownership through multiple intermediary companies? What if a creditor of the company, though not currently a shareholder or beneficial owner, obtains the contractual right to convert their debt contract into ownership equity at some point in the future? …for the average small business owner, navigating those complexities against the backdrop of a potential three year prison sentence will often require legal counsel. Companies affected by this legislation should conservatively expect to spend at least $5,000 on a corporate lawyer to help navigate the complexities of the new filing requirements.
Needless to say, squandering $5,000 or more for some useless paperwork is not a recipe for more entrepreneurship.
So how do advocates for this type of legislation respond?
Clay Fuller of the American Enterprise Institute wants us to have faith that bad people will freely divulge their real identities and that bureaucrats will make effective use of the information.
It is time to weed out illicit financing and unfair competition from criminals and bad actors. …Passing the House Financial Services Committee’s Counter Terrorism and Illicit Finance Act should be a priority for the 115th Congress. …Dictators, terrorists and criminals have been freeriding on the prosperity and liberty of the American economy for too long. Officials at FinCEN are sure that beneficial ownership legislation will exponentially increase conviction rates. We should give law enforcement what they need to do their jobs.
Gee, all that sounds persuasive. I’m also against dictators, terrorists, and criminals.
But if you read his entire column, you’ll notice that he offers zero evidence that this costly new legislation actually would catch more bad guys.
And since we already know that anti-money laundering laws impose heavy costs and catch almost no bad guys, wouldn’t it be smart to figure out better ways of allocating law enforcement resources?
I don’t know if we should be distressed or comforted, but other parts of the world also are hamstringing their financial industries with similar policies.
…a new reportfrom Consult Hyperion, commissioned by Mitek, reveals that the average UK bank is currently wasting £5 million each year due to manual and inefficient Know Your Customer (KYC) processes, and this annual waste is expected to rise to £10 million in three years. …Key Findings…Inefficient KYC processes cost the average bank £47 million a year…Total costs for KYC processes range from £10 to £100 per check…In the UK, 25% of applications are abandoned due to KYC friction… The cost of KYC checks is much too high, placing too much reliance on inefficient and error-prone manual processes,” said Steve Pannifer, author of the report and COO at Consult Hyperion.
Anti-money laundering and know-your-customer compliance have become leading concerns at financial institutions in Asia today. … we estimate that AML compliance budgets across the six Asian markets in this study total an estimated US$1.5 billion annually for banks alone. …A majority of respondents (55%) indicated that AML compliance has a negative impact on their firms’ business productivity. …An additional 15% felt that AML compliance actually threatens their firms’ ability to do business. …Eighty-two per cent of survey respondents saw overall AML compliance costs increasing in 2016, with one third projecting that costs will rise by 20% or more.
The bottom line is that laws and regulations dealing with money laundering are introduced with high hopes of reducing crime.
And when there’s no effect on criminal activity, proponents urge ever-increasing levels of red tape. And when that doesn’t work, they propose new levels of regulation. And still nothing changes.
Lather, rinse, repeat.
Here’s the video I narrated on this topic. It’s now a bit dated, but everything I said is even more true today.
Let’s close with a surreal column in the Washington Post from Dana Milbank. He was victimized by silly anti-money laundering policies, but seems to approve.
I did not expect that my wife and I would be flagged as possible financiers of international terrorism. …The teller told me my account had been blocked. My wife went to an ATM to take out $200. Denied. Soon I discovered that checks I had written to the au pair and my daughter’s volleyball instructor had bounced. …I began making calls to the bank and eventually got an explanation: The bank was looking into whether my wife and I were laundering money, as they are required to by the Bank Secrecy Act as amended by the Patriot Act. …the bank seemed particularly suspicious that my wife was the terrorist… The bank needed answers. Did she work for the government? How much money does she make? Is she a government contractor? …a week later they came back with a new threat to freeze the account and a more peculiar question: Is my wife politically influential?
Sounds like an awful example of a bank being forced by bad laws to harass a customer.
Heck, it is an awful example of that happening.
But in a remarkable display of left-wing masochism, Milbank approves.
The people who flagged us were right to do so. …Citibank, though perhaps clumsy, was doing what it should be doing. “Know your customer” regulations are important because they prevent organized-crime networks, terrorists and assorted bad guys from moving money. Banking regulations generally are a hassle, and expensive. But they protect us — not just from terrorists such as my wife and me but from financial institutions that would otherwise exploit their customers and jeopardize economic stability the way they did before the 2008 crash.
I guess we know which way Milbank would have responded to this poll question from 2013.
But he would be wrong because money-laundering laws don’t stop terrorism.
The War against Cash is a battle that shouldn’t even exist. But politicians don’t like cash because it’s hard to control something that people can freely trade back and forth. So folks on the left are arguing that governments should ban or restrict paper money.
In Part I, we looked at the argument that cash should be banned or restricted so governments could more easily collect additional tax revenue.
In Part II, we reviewed the argument that cash should be curtailed so that governments could more easily impose Keynesian-style monetary policy.
In Part III, written back in March, we examined additional arguments by people on both sides of the issue and considered the risks of expanded government power.
In Part IV, a few months ago, there was additional discussion of the dangers that would be unleashed if politicians banned cash.
Now let’s add a fifth installment in this series, and we’ll focus on the destructive turmoil resulting from India’s decision earlier this month to ban “large” notes.
India unexpectedly scrapped all larger-denomination banknotes overnight… Prime Minister Narendra Modi said 500 and 1,000 rupee notes — worth around $7.50 and $15, respectively — would cease to be legal tender from midnight on Tuesday. The announcement stunned Indians, who were given four hours’ notice that much of their cash would be “mere paper”. RBI data suggests that the Rs500 and Rs1,000 notes account for 86 per cent of the value of all cash in circulation in India at present. …The shock move is the latest step by Mr Modi’s administration to crack down on the vast shadow economy, which remains beyond the reach of India’s tax authorities.
Before delving into why this is an unfortunate development, I can’t resist pointing out that banknotes worth $7.50 and $15 are neither large nor inappropriate for an economy at India’s level of development.
When the United States had a similar level of per-capita GDP (back in the late 1800s), there were $500 and $1000 notes. Yet America didn’t have serious problems with corruption and tax evasion. So why should the existence of far smaller bills be a problem in India today?
I’ll return to that question in the conclusion, but let’s first look at the impact of Prime Minister Modi’s unilateral attack on currency. A column in the New York Times explains why the policy does more harm than good.
On Nov. 8, the Indian government announced an immediate ban on two major bills that account for the vast majority of all currency in circulation. …In the two weeks after the measure was announced, millions of Indians stricken with small panic rushed out to banks; A.T.M.s and tellers soon ran dry. Some 98 percent of all transactions in India, measured by volume, are conducted in cash. …So far its effects have been disastrous for the middle- and lower-middle classes, as well as the poor. And the worst may be yet to come.
The ripple effect of the policy is large and unpleasant.
…demonetization is a ham-fisted move that will put only a temporary dent in corruption, if even that, and is likely to rock the entire economy. …Anyone seeking to convert more than 250,000 rupees (about $3,650) must explain why they hold so much cash, or failing that, must pay a penalty. The requirement has already spawned a new black market to service people wishing to offload: Large amounts of illicit cash are broken into smaller blocks and deposited by teams of illegal couriers. Demonetization is mostly hurting people who aren’t its intended targets. Because sellers of certain durables, such as jewelry and property, often insist on cash payments, many individuals who have no illegal money build up cash reserves over time. Relatively poor women stash away cash beyond their husbands’ reach.
As is so often the case, the bogeyman of terrorism is being used as a rationale for bad policy, even though everyone realizes that terrorists won’t be affected.
When the government announced demonetization, it also justified the measure as a way to curb terrorism financing that relies on counterfeit rupee notes… Catching fake notes already in circulation neither helps trap the terrorists who minted them nor prevents more such money from being injected into the economy. It simply inconveniences the people who use it as legal tender, the vast majority of whom had no hand in its creation.
I’m sympathetic, by the way, to the notion that the government should fight counterfeiting. Crooks printing up fake notes is even worse than central banks printing up too many real notes.
In any event, this indirect attack on the shadow economy imposes considerable costs on regular Indians.
In a country like India, where the illegal economy is so intimately intertwined with the mainstream economy, one inept government intervention against shadow activities can do a lot of harm to the vast majority, who are just trying to make a legitimate living.
India is conducting a big test of the idea that getting rid of cash can help address crime and corruption. Unfortunately, it might achieve nothing more than a lot of inconvenience. Criminals and corrupt officials often conduct business in cash, because it’s hard to trace. So in a sense it’s logical to assume that abolishing cash will help reduce criminal activity. …This rationale has led Indian Prime Minister Narendra Modi to declare a surprise cancellation of the nation’s two highest-denomination notes, effectively invalidating 86 percent of total currency in circulation. Anyone with outstanding notes must either deposit them in a bank — potentially incurring a tax — or exchange them for replacements in strictly limited sums.
Ms. Ou explains that the policy will be traumatic for the hundreds of millions of Indians who don’t have bank accounts.
In a country where most transactions are conducted in cash, many people have been unable to pay for necessities like food or medical services. Banks have had to work overtime to handle the exchange, bringing other financial services to a halt. It’s certainly likely that the sheer trauma will leave people less keen to hoard rupees, creating a big incentive to move economic activity out of cash and into banks. Except that a huge number of Indians don’t have a bank account.
In any event, she points out, banning cash won’t have much impact on corruption since politicians and public officials have plenty of ways to extort wealth from the productive sector.
…the prevalence of cash is far from a foolproof indicator of criminality and corruption. Consider Nigeria, which is perceived as one the world’s most corrupt countries and has a currency-to-GDP ratio even lower than Sweden’s… Nigerians have abandoned cash because they have so little trust in government-issued currency. Instead of using banks, they tend to transact in mobile airtime minutes. …Those with more substantial wealth put it in foreign currency. By undermining faith in its cash notes, India may go the way of Nigeria. Villagers are already resorting to barter. …corrupt public officials were believed to have their wealth in real estate and gold.
A news report highlights the real-world impact of the Indian government’s bad policy. Starting with the impact on a poor single mother.
With demonetisation, Sayyed’s family has been forced to cut costs across the board to make sure their limited cash resources don’t get exhausted faster than the banks can exchange money. “Last week it took me four hours of waiting in line to get my old notes exchanged,” said Sayyed. “And because no one had change for a Rs 2,000 note, I had to buy ration on credit for six whole days.” Vegetables and foodgrains, says Sayyed, have grown more expensive in the past 10 days, because of the impact of demonetisation on wholesalers and retailers.
And the impact on a small-business owner.
His salon, which charges Rs 40 for a haircut, used to make anywhere between Rs 1,000 to Rs 1,200 on the weekend. But now, he said, that has fallen to Rs 500. …How is he coping with this liquidity crunch? Not by going cashless. In part because he doesn’t have a bank account. “I tried to open one but they wanted too many proofs of identity,” Sharma said.
By the way, Sharma is a victim of pointless anti-money laundering laws, something even the World Bank recognizes as being particularly harmful for the poor.
A farmer also has been hit hard.
It has been three weeks since Vedagiri’s single acre of land had been tilled and paddy seedlings had been sown. …“The cooperative bank cannot lend us money now, so for the whole of last week, our crop has been standing without pesticides,” said Vedagiri. Several times last week, Vedagiri and the other farmers of Royalpattu were turned away by bank employees. New currency notes have been slow to reach most rural cooperative banks across India. While sowing the crop, Vedagiri had employed 20 labourers. But he has been unable to pay any of them since he had not still received the rest of the money…Vedagiri does not know how he will get through this cropping season without incurring a loss.
Bloombergreports on some of the bizarre unintended consequences of this bad policy.
Indian ingenuity is being stretched by Prime Minister Narendra Modi’s cash ban to crackdown on unaccounted money. India’s cash economy has been thrown into turmoil since Modi announced last week that 500 and 1,000 rupee notes would cease to be legal tender and would have to be deposited at banks by year-end, leaving about one-seventh of currency in circulation. …Here are some unintended consequences. Indian defense jets are on standby to airlift cash from mints across India to remote corners of the country. …wealthy Indians rushed to make costly purchases with unaccounted cash. One luxury watch outlet in north-west Mumbai saw 45 units of Rolex watches sold on a single day, according to a representative of a watchmaker, who was present when the sales took place. Demand matched what the shop would usually sell in a month and the store had to turn away customers… A new gold rush also emerged soon after Modi’s announcement. “Jewelers who had shut shop for the day on Nov. 8 had to reopen their stores within a couple of hours and were selling gold up to 4 a.m.,” Chirag Thakkar, a director at gold wholesaler Amrapali Group, said by phone… Customers paid as much as 52,000 rupees per 10 grams, almost double the current prices, he said. …About half of an estimated 9.3 million trucks under the All India Motor Transport Congress were off the road eight days after the announcement as drivers abandoned vehicles mid-way into their trips after running out of cash, according to Naveen Gupta, secretary general of the group. India’s roads carry about 65 percent of the country’s freight. Drivers don’t have enough money for food, truck maintenance and to make payments at border check posts. …Compounding the problem of pumping new money into the system is the need to reconfigure the country’s 220,000 cash machines so that they can dispense the new 500 and 2,000 rupee notes, which do not fit into existing ATM cash trays.
To be fair, some of these costs are transitory in nature, so it’s important to distinguish between those consequences and others that might linger.
Though the part of this story that doesn’t make sense is that the government plans on issuing new high-value banknotes. So the Prime Minister is not actually banning large banknotes (or even all non-digital currency), which is the usual goal of the war-on-cash crowd.
So why did the Modi cause so much turmoil with an overnight ban rather than allow for an orderly transition? I’m assuming that the answer has something to do with inconveniencing those with large cash holdings, some of whom will be crooks or counterfeiters or corrupt public officials.
As already noted, the battle against counterfeit currency surely is worthwhile.
But I have considerable doubts about whether this currency swap will have much impact on the shadow economy or public corruption.
And that brings me back to the rhetorical question I posed early in this column about why the United States didn’t have massive problems with crime and public corruption back in the late 1800s (when our per-capita GDP was akin to India’s today according to the Maddison data), even though we had banknotes that were far more valuable ($500 and $1000 compared to $7.50 and $15).
The answer, at least in part, is that the United States had a very tiny government. Government spending consumed at most 10 percent of economic output, with most of that spending at the state and local level. And there was no income tax.
And since people weren’t penalized for earning money and creating wealth, there was no incentive to be part of the shadow economy. And since government was small, there weren’t that many favors to distribute, so there wasn’t much need to bribe politicians or bureaucrats.
If Prime Minister Modi wants a vibrant, above-ground economy with minimal corruption, maybe that’s the path he should follow.
Let’s close with a very sage warning from Richard Fernandez’s column in PJ Media.
Money in its various forms has become the new battleground between a State that needs to reward its constituencies with and the actual economy which produces most of the real goods and services required to do it. The sad experience of command economies suggests in end the Real always wins over the Official. As Ramesh Thakur said of India’s demonitization policy: “a better solution would have been to shift the balance of economic decision-making away from the state to firms and consumers; simplify, rationalize and reduce taxes; cut regulations and curtail officials’ discretionary powers; eliminate loopholes; and widen the tax net.”
And my favorite Russian-Irish-Californian economist also has a very apt summary of this issue.
Governments killing off cash transactions is a catchy trend. Liberty & privacy being killed off for the sake of State control. https://t.co/VCY9lCQtk6
One of the big challenges for libertarians is that we understand “public choice theory.” In other words, we know that people attracted to government will have both the incentive and the power to do bad things, so our quandary is how to give government the authority to provide so-called public goods without sowing the seeds for an oppressive Leviathan state.
Our Founding Fathers thought they solved this problem by drafting and ratifying a constitution that placed firm limits on the power of government. Sadly, that system largely broke down in the 1930s and 1940s as the Supreme Court ceded its role of protecting economic liberty (with John Roberts a few years ago providing the icing on the cake of untrammeled government power).
That’s the bad news.
The good news is that the judicial branch has done a somewhat better job of protecting personal liberty. Indeed, with the courts leading the way on certain issues (such as whether governments can persecute people for being gay), we may even have more personal liberty than the Founders intended.
Speaking of personal liberty, one of the thorniest challenges is that we want government to fight crime, but we also want to make sure that it doesn’t have the power and authority to trample individual rights.
That’s one of the reasons the Founding Fathers gave us a Bill of Rights that protects our right to a speedy trial, protects us from double jeopardy, and gives us the right to remain silent. And the Bill of Rights also protects us by requiring governments to get judicial approval (search warrants) before snooping into out private property. And that’s the focus of today’s column.
And the case study for our discussion will be the way government is seeking to access electronic data without following proper procedures. Veronique de Rugy provides the background in her column for Reason.
The Electronic Communications Privacy Act was passed in 1986, when data storage was considerably more expensive and primitive. At the time, it was not common for data to be kept online for very long. As such, the ECPA considers emails held online by a third party for more than 180 days to be abandoned and thus open to access by law enforcement without a normal warrant. …Now that free online email hosts are commonplace and terabytes of cloud storage are available at little cost, the ECPA is a troubling anachronism. Today’s internet users expect their data to be protected from prying government eyes for as long as they choose to store it.
Amazingly, some politicians actually want to fix this problem.
There is a bill making its way through Congress that attempts to address these issues. It’s the International Communications Privacy Act. The bipartisan bill—introduced by Sens. Orrin Hatch, R-Utah, Chris Coons, D-Del., and Dean Heller, R-Nev.—…would codify into law a simple and clear standard: A warrant should always be required to access private information from a third party. The reforms in the ICPA would move us away from the current ’80s drama. It also seems that the package could even move through Congress during a contentious election season because it safeguards consumer data while also acknowledging that there must be legitimate and accessible law enforcement tools to pursue digital evidence across borders.
By the way, this has become an issue in part because the courts have intervened to slap down overzealous law enforcement in a cross-border investigation,
…the 2nd U.S. Circuit Court of Appeals rebuked the Justice Department after a three-year legal battle with Microsoft, which hosted data for an Irish citizen being pursued by U.S. authorities. The data was being kept in a server located in Ireland, yet the U.S. government insisted it had jurisdiction to demand access just because the company that held it is a subsidiary of Microsoft, an American corporation. …ECPA…provides no authority for access to data held overseas. The government officials most likely made this overreach rather than go through the mutual legal assistance treaty, or MLAT, process—which would have enabled them to work with the appropriate overseas authority—because of the fact that MLAT procedures are also cumbersome and outdated.
The Hatch-Coons-Heller legislation deals with these issues by both requiring warrants but also improving the MLAT process, which is a win-win situation. Innocent people have their rights protected and governments have a better system for investigating potential bad guys.
Which helps to explain why a coalition of taxpayer organizations and free-market groups have embraced the proposed legislation.
The bill contains provisions that would protect the privacy of American citizens, promote cross-border data flow, provide adequate tools for law enforcement, and enhance the nation’s global trade agenda. …S. 2986/H.R. 5323 would require U.S. law enforcement agencies to obtain a warrant for the content of electronic communications stored with electronic communications service providers and remote computing service providers. The legal framework will allow authorities to obtain the electronic communications of U.S. persons, regardless of where those communications are located. …S. 2986/H.R. 5323 reforms the MLAT process and provides greater accessibility, transparency, and accountability by requiring the attorney general to create an online docketing system for MLAT requests and publish new statistics on the number of such requests. …ICPA strikes the right balance between the legitimate needs of law enforcement and the privacy of American citizens, while enhancing international agreements.
Having looked at a specific example of how to enable effective law enforcement while also protecting civil liberties, let’s now zoom out and consider the big picture.
One of the problems in our system is that there are too many laws. Not just too many laws, but laws that are capricious and impossible to understand.
This is why Harvey Silverglate wrote Three Felonies a Day to describe how normal, law-abiding people unintentionally commit crimes (that shouldn’t be crimes).
Here’s a video interview from Reason with Mr. Silverglate.
The bottom line is that when you mix capricious and impossible-to-understand laws with capricious and vindictive bureaucrats, you get horrifying examples of government thuggery.
Remember, if we want to fight genuine crime, it’s a good idea to have just laws.
P.S. And if we have fewer bad and needless laws, we’ll have less police abuse.
P.P.S. To close on a humorous note, President Obama’s approach to the Bill of Rights leaves much to be desired.
P.P.P.S. In reference to the public-goods/Leviathan-state quandary discussed at the start of this column, the anarcho-capitalists say the solution is to abolish all government and to allow markets to provide public goods. I’m glad there are scholars pushing this idea (and I certainly had lots of interesting discussions about this concept while in grad school), but given what’s been happening over the past 100 years, I doubt this will be a practical option in my lifetime.
One example of the organization’s perfidy is the OECD’s so-called Base Erosion and Profit Shifting (BEPS) initiative, which is basically a scheme to extract more money from companies (which means, of course, that the real cost is borne by workers, consumers, and shareholders).
I’ve written (severaltimes) about the big-picture implications of this plan, but let’s focus today on some very troubling specifics of BEPS.
Doug Holtz-Eakin, in a column for the Wall Street Journal, explains why we should be very worried about a seemingly arcane development in BEPS’ tax treatment of multinationals. He starts with a very important analogy.
Suppose a group of friends agree to organize a new football league. It would make sense for them to write rules governing the gameplay, the finances of the league, and the process for drafting and trading players. But what about a rule that requires each team to hand over its playbook to the league? No team would want to do that. The playbook is a crucial internal-strategy document, laying out how the team intends to compete. Yet this is what the Organization for Economic Cooperation and Development wants: to force successful global companies, including U.S. multinationals, to hand over their “playbooks” to foreign governments.
Here’s specifically what’s troubling about BEPS.
…beginning next year the BEPS rules require U.S.-headquartered companies that have foreign subsidiaries to maintain a “master file” that provides an overview of the company’s business, the global allocation of its activities and income, and its overall transfer pricing policies—a complete picture of its global operations, profit drivers, supply chains, intangibles and financing. In effect, the master file is a U.S. multinational’s playbook.
And, notwithstanding assurances from politicians and bureaucrats, the means that sensitive and proprietary information about U.S. firms will wind up in the wrong hands.
Nothing could be more valuable to a U.S. company’s competitors than the information in its master file. But the master file isn’t subject to any confidentiality safeguards beyond those a foreign government decides to provide. A foreign government could hand the information over to any competitor or use it to develop a new one. And the file could be hacked.
Doug recommends in his column that Congress take steps to protect American companies and Andy Quinlan of the Center for Freedom and Prosperity has the same perspective.
It is…time for Congress to take a more assertive role in the ongoing efforts to rewrite global tax rules. …(BEPS) proposals drafted by the Organization for Economic Cooperation and Development…threaten the competitiveness of U.S.-based companies and the overall American economy. …We know the Paris-based OECD’s aim is to raid businesses – in particular American businesses – for more tax revenue… The fishing expeditions are being undertaken in part so that bureaucrats can later devise new and creative ways to suck even more wealth out of the private sector. …American companies forced to hand proprietary data to governments – like China’s – that are known to engage in corporate espionage and advantage their state-owned enterprises will be forced to choose between forgoing participation to vital markets or allowing competitors easy access to the knowledge and techniques which fuel their success.
You would think that the business community would be very alarmed about BEPS. And many companies are increasingly worried.
But their involvement may be a too-little-too-late story. That’s because the business group that is supposed to monitor the OECD hasn’t done a good job.
The Business and Industry Advisory Committee…has been successfully co-opted by the OECD bureaucracy. At every stage in the process, those positioned to speak on behalf of the business community told any who wished to push back against the boneheaded premise of the OECD’s work to sit down, be quiet, and let them seek to placate hungry tax collectors with soothing words of reassurance about their noble intentions and polite requests for minor accommodations. That go-along-to-get-along strategy has proven a monumental failure. Much of the blame rests with BIAC’s chair, Will Morris. Also the top tax official at General Electric – whose CEO Jeffrey Immelt served as Obama’s “job czar” and is a dependable administration ally – and a former IRS and Treasury Department official, Morris is exactly the kind of business representative tax collectors love.
I’m not saying that GE wants to pay more tax, but I wouldn’t be surprised if the top brass at the company decided to acquiesce to BEPS as an implicit quid pro quo for all the subsidies and handouts that the firm receives.
In any event, I’m sure the bureaucrats at the OECD are happy that BIAC didn’t cause any problems, so GE probably did earn some brownie points.
And what about the companies that don’t feed at the public trough? Weren’t they poorly served by BIAC’s ineffectiveness?
Yes, but the cronyists at GE presumably don’t care.
But enough speculation about why BIAC failed to represent the business community. Let’s return to analysis of BEPS.
Jason Fichtner and Adam Michel of the Mercatus Center explain for U.S. News & World Report that the OECD is pushing for one-size-fits-all global tax rules.
The OECD proposal aims to centralize global tax rules and increase effective tax rates on international firms. U.S. technology firms such as Google, Facebook, Amazon and Apple will likely be harmed the most. …the OECD as a special interest group for tax collectors. Over the past 25 years, they have built an international tax cartel in an effort to keep global tax rates artificially high. The group persistently advocates for increased revenue collection and more centralized control. The OECD has waged a two-decade campaign against low tax rates by blacklisting sovereign countries that don’t comply with OECD directives.
Like the others, Fichtner and Michel worry about the negative consequences of the BEPS plan.
The centralization of tax information through a new international country-by-country reporting requirement will pressure some countries to artificially expand their tax base. A country such as China could increase tax revenue by altering its definition of so-called value creation… Revenue-hungry states will be able to disproportionately extract tax revenue from global companies using the newly centralized tax information. …while a World Bank working paper suggests there is a significant threat to privacy and trade secrets. Country-by-country reporting will complicate international taxation and harm the global economy.
…the United States should focus on fixing our domestic corporate tax code and lower the corporate tax rate. The U.S. [has] the single highest combined corporate tax rate in the OECD. …Lower tax rates will reduce incentives for U.S. businesses to shift assets overseas, grow the economy and increase investment, output and real wages. Lowering tax rates is the most effective way policymakers can encourage innovation and growth. The United States should not engage in any coordinated attempt to increase global taxes on economic activity. …The United States would be better off rejecting the proposal to raise taxes on the global economy, and instead focus on fixing our domestic tax code by substantially lowering our corporate tax rate.
By the way, don’t forget that BEPS is just one of the bad anti-tax competition schemes being advanced by the bureaucrats in Paris.
David Burton of the Heritage Foundation has just produced a new study on the OECD’s Multilateral Convention, which would result in an Orwellian nightmare of massive data collection and promiscuous data sharing.
Read the whole thing if you want to be depressed, but this excerpt from his abstract tells you everything you need to know.
The Protocol amending the Multilateral Convention on Mutual Administrative Assistance in Tax Matters will lead to substantially more transnational identity theft, crime, industrial espionage, financial fraud, and the suppression of political opponents and religious or ethnic minorities by authoritarian and corrupt governments. It puts Americans’ private financial information at risk. The risk is highest for American businesses involved in international commerce. The Protocol is part of a contemplated new and extraordinarily complex international tax information sharing regime involving two international agreements and two Organization for Economic Co-operation and Development (OECD) intergovernmental initiatives. It will result in the automatic sharing of bulk taxpayer information among governments worldwide, including many that are hostile to the United States, corrupt, or have inadequate data safeguards.
The bottom line is that the OECD wants this Multilateral Convention to become a World Tax Organization, with the Paris-based bureaucracy serving as judge, jury, and executioner.
That’s bad for America. Indeed, it’s bad for all nations (though it is in the interest of politicians from high-tax nations).
And they hate cash because it gives consumers an anonymous payment mechanism.
Let’s explore the animosity to cash.
It’s basically because a cashless society is an easier-to-tax society, as expressed by an editorial from the U.K.-based Financial Times.
…unlike electronic money, it cannot be tracked. That means cash favours anonymous and often illicit activity; its abolition would make life easier for a government set on squeezing the informal economy out of existence. …Value added tax, for example, could be automatically levied. …Greece, in particular, could make lemonade out of lemons, using the current capital controls to push the country’s cash culture into new habits.
And some countries are actually moving in this direction.
J.D. Tuccille looks at this issue in an article for Reason.
Peter Bofinger of the German Council of Economic Experts…wants to abolish the use of cash… He frets that old-fashioned notes enable undeclared work and black markets, and stand in the way of central bank monetary policy. So rather than adjust policy to be more palatable to the public, he’d rather leave no shadows in which the public can hide from his preferred policies. The idea is to make all economic activity visible so that people have to submit to control. Denmark, which has the highest tax rates in Europe and a correspondingly booming shadow economy, is already moving in that direction. …the Danmarks Nationalbank will stop internal printing of banknotes and minting of coins in 2016. After all, why adjust tax and regulatory policy to be acceptable to constitutents when you can nag them and try to reinvent the idea of money instead?
By the way, some have proposed similar policies in the United States, starting with a ban on $100 bills.
Notwithstanding my attempt to be clever, the tide is moving in the wrong direction. Cash is beginning to vanish in Sweden, as reported by the New York Times.
…many of the country’s banks no longer accept or dispense cash. Bills and coins now represent just 2 percent of Sweden’s economy, compared with 7.7 percent in the United States and 10 percent in the euro area. This year, only a fifth of all consumer payments in Sweden have been made in cash, compared with an average of 75 percent in the rest of the world, according to Euromonitor International. …Cash machines, which are controlled by a Swedish bank consortium, are being dismantled by the hundreds
Though the article notes that there is some resistance.
Not everyone is cheering. Sweden’s embrace of electronic payments has alarmed consumer organizations and critics who warn of a rising threat to privacy and increased vulnerability to sophisticated Internet crimes. …The government has not sought to stem the cashless tide. If anything, it has benefited from more efficient tax collection, because electronic transactions leave a trail; in countries like Greece and Italy, where cash is still heavily used, tax evasion remains a big problem. Leif Trogen, an official at the Swedish Bankers’ Association, acknowledged that banks were earning substantial fee income from the cashless revolution.
What matters, by the way, is not the degree to which consumers prefer to use alternatives to cash.
That’s perfectly fine, and it explains much of what we see on this map.
The problem is when governments use coercion to limit and/or abolish cash so that politicians have more power. And (gee, what a surprise) this is why the French are trying to crack down on cash.
Writing for the U.K.-based Telegraph, Matthew Lynn mentions the new policy and France and also explores some worrisome implications of this anti-cash trend.
France is banning the use of cash for transactions worth more than €1,000…part of a growing movement among academics and now governments to gradually ban the use of cash completely. …it is a “barbarous relic”, as some publications loftily dismiss it. The trouble is, cash is also incredibly efficient. And it is a crucial part of a free society. There is no convincing case for abolition. …When it comes to creeping state control, it is no surprise to find the French out in front. …A cashless economy would be far easier to both tax and control. But hold on. Is that something we really want? In reality, cash is far too valuable to be given up lightly. In truth, the benefits of abolition are largely oversold. While terrorists and criminals may well use cash to buy weapons, or deal in drugs, it is very hard to believe that they would not find some other way of financing their operations if it was abolished. Are there really any cases of potential jihadists being foiled because they couldn’t find two utility bills (less than three months old, of course) in a false name to open an account?
Amen. Banning cash to stop terrorists is about as foolish as thinking that gun control will thwart jihadists.
In any event, we need to consider trade-offs. Chris Giles highlighted that issue in a piece for the Financial Times.
…an unfortunate rhetorical echo of Maoist China. It is illiberal… Some argue there would be beneficial side effects from abolishing notes and coins through the regularisation of illegal activities. Really? …Cash would have to be abolished everywhere and the BoE does not have those powers, thankfully. The anonymity of cash helps to free people from their governments and some criminality is a price worth paying for liberty.
Though I suppose we should grudgingly give politicians credit for cleverly trying exploit fear to expand their power.
But never forget we’re talking about a bad version of clever. If they succeed, that will be bad news for freedom. J.D. Tuccille of Reasonexplains in a second article why a growing number of people prefer to use cash.
Many Americans happily and quietly avoid banks and trendy purchasing choices in favor of old-fashioned paper money. Lots of business gets done that way…the Albuquerque Journal pointed out that over a third of households in the city either avoid banks entirely (the “unbanked”) or else keep a checking account but do much of their business through cash, check-cashing shops, pawn shops, money orders, and other “alternative financial products” (the “underbanked”). A few weeks earlier, the Kansas City Star reported a similar local situation… In both cities, the phenomenon is growing. …Twenty-six percent cite privacy as a reason for keeping clear of banks – bankers say that increased federal reporting and documentation requirements drive many customers away. “A lot of people are afraid of Uncle Sam,” Greg Levenson, president and CEO of Southwest Capital Bank, told the Albuquerque Journal. …It’s a fair bet that those who “have managed to earn income in the shadow economy” and want to keep their income unreported to the feds and undiminished by fees are heavily overrepresented among the unbanked. …most people aren’t idiots. When they avoid expensive, snoopy financial institutions, it’s because they’ve decided the benefits outweigh the costs.
Very well said, though I’d augment what he wrote by noting that some of these folks probably would like to be banked but are deterred by high costs resulting from foolish government money-laundering laws.
More on that later.
Let’s stay with the issue of whether cash should be preserved. A business writer from the U.K. is very uneasy about the notion of a society with no cash.
…tax authorities have become increasingly keen on tracking everything and everyone to make absolutely certain that no assets slip under their radars. The Greeks have been told that, come 2016, they must begin to declare all cash over €15,000 held in safes or mattresses, and all precious stones, gold and the like worth more than €30,000. Anyone else think there might be a new tax coming on all that stuff? …number-crunchers…are maddened by the fact that even as we are provided with lots of simple digital payment methods we still like to use cash: the demand for £20 and £50 notes has been rising. …They are maddened because “as untraceable bearer instruments, it is not possible to locate where banknotes are being held at any one time”… Without recourse to physical cash, we are all 100% dependent on the state-controlled digital world for our financial security. Worse, the end of cash is also the end of privacy: if you have to pay for everything digitally, every transaction you ever make (and your location when you make it) will be on record. Forever. That’s real repression.
She nails it. If politicians get access to more information, they’ll levy more taxes and impose more control.
And that won’t end well.
Last but not least, the Chairman of Signature Bank, Scott Shay, warns about the totalitarian temptations that would exist in a cash-free world. Here’s some of what he wrote in a column for CNBC.
In 2010,VisaandMasterCard, bowed to government pressure — not even federal or state law — and banned all online-betting payments from their systems. This made it virtually impossible for these gambling sites to continue operating regardless of their jurisdiction or legality. It is not too far-fetched to wonder if the day might come when the health records of an overweight individual would lead to a situation in which they find that any sugary drink purchase they make through a credit or debit card is declined. …You might think then that the person can always pay cash and remain outside the purview of these technologies. This may be the case for the moment, but we are well on the road to becoming a cashless society. …there is…a sinister risk…a cashless society would certainly give governments unprecedented access to information and power over citizens.
And, he warns, that information will lead to mischief.
Currently, we have little evidence to indicate that governments will refrain from using this power. On the contrary, the U.S. government is already using its snooping prowess and big-data manipulation in some frightening ways. …the U.S. government is becoming very fond of seizing money from citizens first and asking questions later via “civil forfeiture.” Amazingly, the government is permitted by law to do this even if it is only government staff members who have a suspicion, not proof, of wrongdoing. …In recent years, it made it increasingly difficult for companies to operate or individuals to transact by adding compliance hurdles for banks wishing to deal with certain categories of clients. By making it too expensive to deal with certain clients or sending the signal that a bank should not deal with a particular client or type of client, the government can almost assuredly keep that company or person out of the banking system. Banks are so critically dependent on government regulatory approval for their actions… It is easy to imagine a totalitarian regime using these tools to great harm.
Some folks will read Shay’s piece and downplay his concerns. They’ll say he’s making a slippery slope argument.
But there are very good reasons, when dealing with government, to fear that the slope actually is slippery.
Let’s close by sharing my video on the closely related topic of money laundering. These laws and regulations have been imposed supposedly to fight crime.
P.P.S. If politicians want to improve tax compliance in a non-totalitarian fashion, there is a very successful recipe for reducing the underground economy.
Citing the work of David Burton and Richard Rahn, I warned last July about the dangerous consequences of allowing governments to create a global tax cartel based on the collection and sharing of sensitive personal financial information.
I was focused on the danger to individuals, but it’s also risky to let governments obtain more data from businesses.
Remarkably, even the World Bank acknowledges the downside of giving more information to governments.
Here are some blurbs from the abstract of a new study looking at what happens when companies divulge more data.
Relying on a data set of more than 70,000 firms in 121 countries, the analysis finds that disclosure can be a double-edged sword. …The findings reveal the dark side of voluntary information disclosure: exposing firms to government expropriation.
And here are some additional details from the full report.
…disclosure has important costs in allowing exposure to government expropriation… We show that accounting information disclosure can be detrimental to firm development… Such disclosure allows corrupt bureaucrats to gain access to firm-level information and use it for endogenous harassment. …once firm information is disclosed, the threat of government expropriation is widespread. Information disclosure thus allows rent-seeking bureaucrats to gain access to the disclosed information and use it to extract bribes. …Our paper offers a vivid illustration that an important hindrance to institutional development—here in the form of adopting information disclosure—is government expropriation. …The results are thus supportive of Acemoglu and Johnson (2005) on the overwhelming importance of constraining government expropriation in facilitating economic development.
Yet this doesn’t seem to bother advocates of bigger government.
Their goal is to extract more money openly with tax policy rather than surreptitiously with bribes, but the net effect will be just as bad for the global economy.
A new study from the Center for Freedom and Prosperity has the disturbing details.
Under direction of the G20, the Organization for Economic Cooperation and Development (OECD) began two years ago a major initiative on “base erosion and profit shifting” (BEPS). …Through the BEPS project, the OECD is continuing its war against tax competition.
They want to rewrite international tax policy to prop up nations with uncompetitive tax systems.
[BEPS] would…lead to an overall higher tax environment as politicians freed from the pressures of global tax competition inevitably raise rates to levels last seen in the early 1980s, when reforms by Reagan and Thatcher sparked a global reduction in corporate tax rates that has continued to this day. Through tax competition, the average corporate tax rate of OECD nations declined from almost 50% in 1981 to 25% in 2015. …The [BEPS] Action Plan…considers the benefits of tax competition to be the real problem, explaining that “there is a reduction of the overall tax paid by all parties involved as a whole.” The prospect of there being less money to be spent by politicians is perceived as a problem to be solved.
Even though there’s no evidence of a problem, even from the perspective of revenue-hungry politicians.
The OECD’s BEPS Report itself undercuts the argument that there is a pressing need for a global response when it acknowledges that “revenues from corporate income taxes as a share of GDP have increased over time.” Likewise, the Action Plan admits when discussing hybrid mismatch that “it may be difficult to determine which country has in fact lost tax revenue.”
So BEPS isn’t a response to the nonexistent problem of falling revenue. Instead, the real goal is to make it easier to impose higher tax rates and change other rules to raise additional revenue.
Even if the required policies have very troubling implications. As part of this new campaign against tax competition, here’s some of what the OECD is seeking.
Proposed recommendations for transfer-pricing documentation and country-by-country reporting, for instance, feature broad reporting requirements that go far beyond what is required for purposes of tax collection. …Information contained in the local and master files are particularly vulnerable, since it would take a breach in only a single jurisdiction for it to be exposed. The OECD makes assurances for the confidentiality of these reports, but they are empty promises. Such government assurances of privacy protection are contradicted by experience and the long history of leaks of taxpayer information. In the United States alone tax data has frequently been exposed thanks to inadequate safeguards, or even released by officials to attack political opponents. …Even without malicious intent, governments are ill equipped to protect sensitive information from outside access. …As poor as the United States has proven at protecting privacy, there are likely to be nations even more vulnerable. Through the master file and other reporting mechanisms, BEPS will demand of corporations propriety information and other sensitive data that they have every right to keep private.
Requiring more information is just one part of BEPS.
There are many other elements, all of which are designed to facilitate higher tax burdens. Indeed, the Wall Street Journal warned that, “this is an attempt to limit corporate global tax competition and take more cash out of the private economy.”
But as bad as BEPS is now, the study from the Center for Freedom and Prosperity explains it will get worse over time.
Of particular relevance for understanding the BEPS initiative is the pattern demonstrated by the OECD during the course of this campaign. After each recommendation was widely adopted – typically under duress in the case of low-tax jurisdictions – the OECD immediately pushed a new requirement that was more radical and invasive than the last. First was a call to adopt a certain number of Tax Information Exchange Agreements and a standard of information exchange upon request, then a peer-review process whereby tax policies are judged according to the standards of high-tax welfare states. Then, after years of meetings and costly compliance efforts, the old standard for information exchange upon request was replaced with a call for global automatic exchange.
The OECD’s strategy of moving the goalposts is worth noting because the BEPS project almost certainly will evolve in ways that enable ever-higher tax burdens.
I predicted back in 2013 that the end result will be “global formula apportionment,” a system that would enable dramatically higher tax burdens on the business community.
And I’m sticking with that prediction, in part because that’s what would be in the interests of politicians from high-tax nations. If national governments were able to tax on the basis of what companies sold inside their borders, regardless of how much income actually was being earned, there would be very little competitive pressure to keep tax rates reasonable.
Politicians could push corporate tax rates back up to 50 percent, or even higher.
The folks on the left certainly would like that kind of system. Here are some excerpts from a CNNstory.
It’s time for a complete overhaul of the global tax system to ensure each company pays their fair share, says Nobel laureate Joseph Stiglitz. …”Multinational corporations act and therefore should be taxed as single and unified firms. It is time for our [political] leaders to be bold,” Stiglitz said. …Stiglitz said that creating a new worldwide tax system is realistic, but all nations would have to work together to agree rules and close loopholes. The group of economists said in a statement that it was critical to “curb tax competition to prevent a race to the bottom.” Developed nations should take the first step by agreeing on a minimum rate of corporate tax, possibly under the auspices of the Organisation for Economic Cooperation and Development. …The economists also suggest establishing an intergovernmental tax body within the United Nations that would combat abusive tax practices.
The bottom line is that politicians and statist interest groups both want to extract more money from the productive sector of the economy.
And OECD bureaucrats have been assigned the task of crafting rules to undermine tax competition so that companies can’t escape those higher burdens.
Developing new rules is actually the easy part. The hard part is when the bureaucrats try to rationalize how higher tax rates and bigger government are somehow good for the global economy.
Particularly since economists who work at the OECD have written that lower tax rates and tax competition result in better economic performance.
P.S. To add insult to injury, American taxpayers provide the biggest share of the OECD’s budget. This means that our tax dollars are being used to generate policies that will result in higher tax burdens. Which is why I’ve argued, on a per-dollar-spent basis, that subsidies to the OECD are the most destructively wasteful part of the federal budget.
P.P.S. And to add insult upon insult, OECD bureaucrats get tax-free salaries, so they are insulated from the negative effects of policies they’re trying to impose on the rest of the world.
It’s not uncommon for people to accuse libertarians of using “scare tactics” and “hyperbole.”
They say we present “worst-case scenarios” of what happens when government gets involved, such as when I warn that a value-added tax would become a revenue machine for big government or when I point out that advocates of gun control won’t be satisfied until they ban private ownership of weapons.
But I think these “slippery slope” concerns have merit because, well, the slope very often is slippery.
Consider the federal income tax, which started as a simple 2-page form with a top rate of 7 percent, but now has become a 75,000-page monstrosity with confiscatory rates.
Consider Medicaid, which the Washington Post reported, “was supposed to be a very small program with annual expenditures of about $1 billion,” but now costs taxpayers nearly $500 billion per year.
This list could continue for a long time, but let’s stop with old examples and now look at a new example.
After the 9-11 terrorist attacks, politicians claimed that government needed vast new powers to deal with potential threats. Given the environment that existed at the time, laws such as the PATRIOT Act were enacted.
So has the government used its new powers in a targeted way, focusing solely on bad people who want to kill Americans?
Hardly. The folks at Reason report that extraordinary laws enacted to fight terrorism are now mostly being used to enforce drug prohibition.
When the security state types pushed for passage of the Patriot Act, one of the measures on which they insisted was the inclusion of “sneak and peek” warrants. …Of course, it didn’t take long for law enforcement to discover this security state tool and start putting it to very different use—mostly in the enforcement of drug prohibition.
The article then cites some of the work of the Electronic Frontier Foundation.
Out of the 3,970 total requests from October 1, 2009 to September 30, 2010, 3,034 were for narcotics cases and only 37 for terrorism cases (about .9%). Since then, the numbers get worse. The 2011 report reveals a total of 6,775 requests. 5,093 were used for drugs, while only 31 (or .5%) were used for terrorism cases. The 2012 report follows a similar pattern: Only .6%, or 58 requests, dealt with terrorism cases. The 2013 report confirms the incredibly low numbers. Out of 11,129 reports only 51, or .5%, of requests were used for terrorism. The majority of requests were overwhelmingly for narcotics cases, which tapped out at 9,401 requests.
Wow. Less than 1 percent of these warrants are for fighting terrorism.
And notice how the number of sneak-and-peek warrants has jumped so dramatically. The government expanded its power and we were told that our rights would be protected because the new power would be used in rare circumstances for the extraordinary task of fighting terror.
Now that new power is being used promiscuously for all sorts of purposes.
By the way, it doesn’t happen only in America. Check out these excerpts from a story in the U.K.-based Times.
Sajid Javid, the culture secretary, said that the [BBC’s] use of the Regulation of Investigatory Powers Act (Ripa) will be included in a wider investigation into enforcement of the TV licence fee, which was launched in response to concerns that too many people were being prosecuted for not paying the £145.50 charge. Ripa, which was introduced to combat serious crime and terrorism, has been under scrutiny after it emerged that it was used by police to obtain journalists’ sources. Yesterday, MPs on the Commons’ culture, media and sport committee said that the BBC had used the surveillance powers against people suspected of evading the licence fee… Ministers have raised concerns that 180,000 people a year are prosecuted, while the BBC argues that removing the threat of criminal action would cost it millions of pounds a year in lost revenue. …John Whittingdale, chairman of the culture committee, said…“Most people regarded Ripa as a fairly draconian measure which was necessary to tackle organised crime and terrorism. Not paying your licence fee hardly falls into that category.” The BBC…said that it was “perfectly legal”. …A BBC spokesman said: “Legislation explicitly grants the BBC the right to use these powers to detect unlicensed use of television receivers...”
Yes, you read correctly. A “draconian” measure to fight terrorism is being used to investigate people who watch TV.
I’m not sure which example is worse, the U.S. government using anti-terror laws to go after potheads or the U.K. government using anti-terror laws to go after the horrible crime of …gasp… untaxed televisions.
Though this isn’t a laughing matter. If government bureaucrats are already misusing new powers granted last decade, just think how they’ll be abusing those powers next decade.
Senator Rand Paul is being criticized and condemned by the Washington establishment.
That’s almost certainly a sign that he’s doing the right thing. And given the recent events in Russia and Ukraine, we should say he’s doing a great thing.
This is because Senator Paul is waging a lonely battle to stop the unthinking and risky move to a world where governments – including corrupt and evil regimes – collect and share our private financial information.
I’ve written about this topic many times and warned about the risks of letting unsavory governments have access to personal information, but the Obama Administration – with the support of some Republicans who think government power is more important than individual rights – is actively pushing this agenda.
The White House has even endorsed the idea of the United States being part of a so-called Convention on Mutual Administrative Assistance in Tax Matters, even though that would require the sharing of large amounts of personal financial data with thuggish and corrupt regimes such as Argentina, Azerbaijan, China, Greece, Mexico, Nigeria, Russia, and Saudi Arabia!
I’m sure Vladimir Putin very much appreciates this insider access so he can monitor dissidents and track political opponents. His government even signed onto a recent G-20 Communique that endorsed automatic information-sharing.
Heck, there’s even a Russian heading up the Financial Action Task Force, which is endlessly pushing to give governments untrammeled access to private information. FATF even wants banks and other financial institutions to spy on customers, regardless of whether there’s the slightest evidence of any wrongdoing.
The general mindset in Washington is that we should all bury our heads in the sand and blithely allow this massive accumulation of power and information by governments. After all, Putin and other thugs would never abuse this system, right?
Senator Paul battles the statists
Fortunately, at least one lawmaker is trying to throw sand in the gears. Like Horatius at the bridge, who single-handedly thwarted an invasion of Rome in 509 BC, Senator Paul is objecting to this massive invasion of privacy.
He has this old-fashioned appreciation for the Constitution and doesn’t think government should have carte blanche to access private financial data. He even – gasp! – thinks that government power should be restrained by the 4th Amendment and that there should be due process legal protections for individuals.
No wonder the DC establishment doesn’t like him.
One example of this phenomenon is that Senator Paul has placed a “hold” on some tax treaties. Here are some excerpts from a recent article in Politico.
Paul for years has single-handedly blocked an obscure U.S.-Swiss tax treaty that lawmakers, prosecutors, diplomats and banks say makes the difference between U.S. law enforcement rooting out the names of a few hundred fat-cat tax evaders — and many thousands more. …International tax experts for years have seethed over Paul’s block on the Swiss and several other tax treaties. These sorts of mundane tax protocols used to get approved by unanimous consent without anyone batting an eyelash — until Paul came to town.
These pacts are “mundane” to officials who think there shouldn’t be any restrictions on the power of governments.
Fortunately, Senator Paul has a different perspective.
Kentucky’s tea party darling says the treaty infringes on privacy rights. …Paul, a libertarian Republican widely believed to be eyeing a 2016 presidential run, says his hold stems from concerns about Fourth Amendment protections against “unreasonable search and seizure.” “These are people that are alleged, not convicted of doing anything wrong,” Paul said a few weeks ago. “I don’t think you should have everybody’s information from their bank. There should be some process: accusations and proof that you’ve committed a crime.”
The article also notes that Senator Paul is one of the few lawmakers to fight back against the egregious FATCA legislation.
Paul’s protest is also linked to his abhorrence of the soon-to-take-effect Foreign Account Tax Compliance Act, which will force foreign banks to disclose U.S. account information to the IRS, and domestic banks to reciprocate to other nations’ revenue departments. …the senator has legislation to repeal FATCA and hesitates to support a treaty that enables a law he views as U.S. government overreach.
I don’t know how long Senator Paul can withstand the pressure in his lonely fight for individual rights, but I’m glad he’s waging the battle.
Even the Swiss government and Swiss banks have thrown in the towel, having decided that they have no choice but to weaken their nation’s human rights laws on financial privacy because of threats of financial protectionism by the United States.
So let’s give three cheers to our modern-day Horatius, a very rare elected official who is doing the right thing for the right reason.
For more information on the importance of financial privacy, here’s my video on the moral case for tax havens.
Now, via Cafe Hayek, I have a great cartoon showing the fancy equation that left-wing economists use when they tell us that the economy will grow faster if there’s a bigger burden of government spending.
Now you can see how the Congressional Budget Office puts together its silly estimates.
The next step is to find the secret equation that CBO uses when it publishes nonsensical analysis implying that growth is maximized when tax rates are 100 percent.
But to be fair, the politicians who pay their salaries want them to justify bigger government, so should we expect anything else?
People are getting increasingly agitated about being spied on by government.
The snoops at the National Security Agency have gotten the most attention, and those bureaucrats are in the challenging position of trying to justify massive invasions of our privacy when they can’t show any evidence that this voyeurism has stopped a single terrorist attack.
And let’s not forget that some politicians and bureaucrats want to track our driving habits with GPS devices. Their immediate goal is taxing us (gee, what a surprise), but does anyone doubt that the next step would be a database of our movements?
But the worst example of government spying may be the web of laws and regulations that require banks to monitor our bank accounts and to share millions of reports about our financial transactions with the Treasury Department’s Financial Crimes Enforcement Network.
Money laundering laws were adopted beginning about 30 years ago based on the theory that we could lower crime rates by making it more difficult for crooks to utilize the financial system.
As you might expect, politicians and bureaucrats have decided to double down on failure and they’re making anti-money laundering laws more onerous, imposing ever-higher costs in hopes of having some sort of positive impact. This is bad for banks, bad for the poor, and bad for the economy.
And it’s encouraging banks to treat customers like crap. Check out this ridiculous example included in a BBC report.
Stephen Cotton went to his local HSBC branch this month to withdraw £7,000 from his instant access savings account to pay back a loan from his mother. A year before, he had withdrawn a larger sum in cash from HSBC without a problem. But this time it was different, as he told Money Box: “When we presented them with the withdrawal slip, they declined to give us the money because we could not provide them with a satisfactory explanation for what the money was for. They wanted a letter from the person involved.” Mr Cotton says the staff refused to tell him how much he could have: “So I wrote out a few slips. I said, ‘Can I have £5,000?’ They said no. I said, ‘Can I have £4,000?’ They said no. And then I wrote one out for £3,000 and they said, ‘OK, we’ll give you that.’ ” He asked if he could return later that day to withdraw another £3,000, but he was told he could not do the same thing twice in one day.
Here’s another absurd story.
Peter from Wiltshire, who wanted his surname withheld, had a similar experience. He wanted to take out £10 000 cash from HSBC, some to pay to his sons and some to fund his long-haul travel plans. Peter phoned up the day before to give HSBC notice and everything seemed to be fine. The next day he got a call from his local branch asking him to pay his sons via a bank payment and to provide booking receipts for his holidays. Peter did not have any booking receipts to show.
And another.
Belinda Bell is another customer who was initially denied her cash, in her case to pay her builder. She told Money Box she had to provide the builder’s quote.
Why is the bank treating customers like dirt? Well, because they’re pressured to act that way thanks to anti-money laundering laws, which basically require them to act as if unusual transactions are criminal. In other words, customers are guilty until they prove themselves innocent.
HSBC has said…”We ask our customers about the purpose of large cash withdrawals when they are unusual and out of keeping with the normal running of their account. Since last November, in some instances we may have also asked these customers to show us evidence of what the cash is required for.” “The reason being we have an obligation to protect our customers, and to minimise the opportunity for financial crime…” Money Box asked other banks what their policy is on large cash withdrawals. They all said they reserved the right to ask questions about large cash withdrawals.
They’ve “reserved the right”?!? I think Mr. Cotton was spot on when he groused, “You shouldn’t have to explain to your bank why you want that money. It’s not theirs, it’s yours.”
A few politicians also are unhappy about pointless government-mandated spying.
Douglas Carswell, the Conservative MP for Clacton, is alarmed… “All these regulations which have been imposed on banks…infantilises the customer. In a sense your money becomes pocket money and the bank becomes your parent.”
Not let’s look at an example of how anti-money laundering laws lead to foolish intervention in the United States.
We’ll start with a feel-good story from Wired about an entrepreneur coming up with a service that’s desired by consumers.
Mike Caldwell spent years turning digital currency into physical coins. That may sound like a paradox. But it’s true. He takes bitcoins — the world’s most popular digital currency — and then he mints them here in the physical world. …by moving the digital currency into the physical realm, he also prevents hackers from stealing the stuff via an online attack. …You send him bitcoins via the internet, and he sends you back metal coins via the U.S. Postal Service. To spend bitcoins, you need a secret digital key — a string of numbers and letters — and when Caldwell makes the coins, he hides this key behind a tamper-resistant strip. …Caldwell takes a fee of about $50 on each coin he mints.
But our silver cloud has a dark lining.
…he received a letter from the Financial Crimes Enforcement Network, or FINCEN, the arm of the Treasury Department that dictates how the nation’s anti-money-laundering and financial crime regulations are interpreted. According to FINCEN, Caldwell needs to rethink his business. “They considered my activity to be money transmitting,” Caldwell says. And if you want to transmit money, you must first jump through a lot of state and federal regulatory hoops Caldwell hasn’t jumped through.
And since the hoops are very expensive, we have yet another example of foolish red tape killing a business.
Running afoul of FINCEN is a risky proposition. In the spring, the Department of Homeland Security seized two bank accounts belonging to Mt. Gox. The reasoning behind the $5 million seizure: Mt. Gox, like Caldwell, hadn’t registered itself as a money transmission business. …Because he runs a bitcoin-only business, Caldwell says there’s no Casascius bank account for authorities to seize. But he adds that he has no desire to anger the feds, whether he agrees with them or not. So he’s cranking out his last few orders.
I’m not saying, by the way, that bitcoins are necessarily a good way to hold wealth.
But I do believe that it’s good to see the evolution of private forms of money as a hedge against bad government policy. As I wrote back in 2011, “I have no way of knowing how well this system will work and how insulated it will be from government interference, but I very much hope it will be successful. Governments will never behave if they think people have no escape options.”
Unfortunately, politicians and bureaucrats are in the process of trying to shut down that escape option.
P.S. Switching to a different topic, I don’t know if there are any big policy implications, but I was fascinated to find this map in my twitter feed. It shows the first word that pops up when you ask why a country is so ____?
Here are my observations, for what it’s worth. Luxembourg and Switzerland are tax havens, so it’s no surprise that they are rich. Other nations should mimic their successful policies.
Norway, meanwhile, is rich because of oil.
I had no idea the Italians were supposed to be racist, though obviously this map merely shows what Google users are searching for, not what’s actually true.
I’m mystified that Macedonia is “important,” though I suspect Greece was similarly labeled because it is the first domino of the European debt crisis. Hardly something to be proud of.
I’m also surprised that Lithuanians are perceived as suicidal. Isn’t that a Swedish stereotype?
Croatia is beautiful, I’ll agree, at least along the coast.
The neglected people from Montenegro don’t even get a word! Heck, even the Kosovars and Moldovans have Google words.
I won’t comment on the stereotype about France, other than to say that the nation did get in the top-10 on a poll for attractiveness.
P.P.P.S. Speaking of stereotypes, here’s some polling data on how the Europeans see each other. I’m not sure how to interpret these results, other than to say that trustworthy people apparently are arrogant and lack compassion.
P.P.P.P.S. It goes without saying that I can’t resist the temptation to share these satirical maps on how the Greeks and Brits view their European neighbors.
P.P.P.P.P.S. Since the main topic of this post is money laundering, let’s end with a joke about how President Obama dealt with these foolish laws.
Last June, in response to a question about indiscriminate spying by the National Security Agency, I made two simple points about the importance of judicial oversight and cost-benefit analysis.
I want – at a minimum – there to be judicial oversight whenever the government spies on American citizens, but I also think some cost-benefit analysis is appropriate. Just because a court has the power to approve snooping, that doesn’t mean it’s a sensible use of law enforcement resources.
Nothing since then has changed my mind.
Indeed, I’m perhaps even more skeptical of untrammeled government power and ability to spy on citizens for the simple reason that I don’t trust politicians.
On the other hand, I know there are people out there who hate America. And they don’t just hate us because we’re intervening in the Middle East. I suspect many of them would want to kill us even if we had a perfect libertarian foreign policy of non-intervention and peaceful global commerce.
Now we learn from a report in the Washington Post that government has become bigger and more powerful and that our privacy has been violated as part of the NSA’s spying, yet there have been no benefits. As is zero. Nada. Zilch.
Here are some excerpts.
An analysis of 225 terrorism cases inside the United States since the Sept. 11, 2001, attacks has concluded that the bulk collection of phone records by the National Security Agency “has had no discernible impact on preventing acts of terrorism.” In the majority of cases, traditional law enforcement and investigative methods provided the tip or evidence to initiate the case, according to the study by the New America Foundation, a Washington-based nonprofit group.
But perhaps, you may be thinking, this is merely the predictable conclusion of a group that is predisposed to be skeptical. That’s a fair concern, but the article also has some very compelling corroborating evidence.
The study, to be released Monday, corroborates the findings of a White House-appointed review group, which said last month that the NSA counterterrorism program “was not essential to preventing attacks” and that much of the evidence it did turn up “could readily have been obtained in a timely manner using conventional [court] orders.”
So not only do outsiders find little to no value in NSA spying, but even hand-picked insiders couldn’t come up with any evidence to show that the program was effective.
But you won’t be surprised to learn that defenders of the NSA have come up with a can’t-miss way of defining success.
Senior administration officials…say it has been valuable in knocking down rumors of a plot and in determining that potential threats against the United States are nonexistent. Director of National Intelligence James R. Clapper Jr. calls that the “peace of mind” metric.
Yes, your eyes did not deceive you.You actually read correctly. The government wants us to acquiesce to a loss of privacy because we will learn that there are no threats and we’ll have “peace of mind.”
That has to be the lamest justification for government power that I’ve ever read.
This is even more preposterous than asserting that we should squander $1 trillion per year on anti-poverty programs, not because that redistribution will help the poor, but rather because it makes leftists feel better about themselves.
That being said, supporters do have a somewhat powerful comeback.
Michael Morell, a former acting CIA director and a member of the panel, said the program “needs to be successful only once to be invaluable.”
Indeed, I suspect this is the main reason why ordinary people might support the NSA.
But I disagree with Mr. Morell because he asserts that a single example of success would be invaluable. The article, for instance, cites one “victory” for the NSA surveillance program.
…the program provided evidence to initiate only one case, involving a San Diego cabdriver, Basaaly Moalin, who was convicted of sending money to a terrorist group in Somalia. Three co-conspirators were also convicted. The cases involved no threat of attack against the United States.
I’m glad that a foreign terrorist attack was blocked, but is that really “invaluable”? Does that “victory” justify a very expensive and very intrusive NSA monitoring regime?
As I’ve acknowledged before, I don’t know enough about terrorism to offer an informed viewpoint. But I have studied a similar issue, money laundering laws, and that research leads me to be very suspicious about the NSA.
These laws were put in place with the excuse that government would collect and analyze large amounts of data to help deter crime.
P.P.S. Keep in mind that the NSA is just one cog in the machinery of government. So if you’re worried about the NSA’s intrusion and power, then you should also worry about the power of the IRS. If you’re concerned about the IRS’s authority, then you also should fret about the Obamacare exchanges. And if you think the Obamacare exchanges give the government too much knowledge and power, then you should be agitated about “know-your-customer” laws that require banks to spy on their customers. And if you’re not happy about those money-laundering rules, then you surely should be dismayed about asset-forfeiture rules. And if you don’t approve of government stealing property, then maybe you don’t like government accumulation of power for the Drug War. And if the failed War on Drugs rubs you the wrong way, then perhaps you…I better stop now. I think you get the point.
And, if you’re subject to the death tax, they’ll want to know about everything you own. None of that would be necessary if we had a flat tax or a national sales tax.
Heck, they wouldn’t even need to know about your bank account since there’s no double taxation of interest with real tax reform.
But we’re on the other side of the pendulum, with the government wanting to know just about everything about our financial affairs. That’s good news for statists who want more redistribution…and it’s good news for other thieves who also want to take our money (but without using government as a middleman).
If you think I’m needlessly worried, check out this CNBC report. Here are some key excerpts.
Serious security weaknesses in the Internal Revenue Service’s data system have left millions of taxpayers’ sensitive financial information vulnerable to hackers. The agency claims it has fixed the problem, but its auditors beg to differ. A new report released by the Treasury Inspector General for Tax Administration (TIGTA) found that although the IRS claimed it had implemented 19 fixes to secure the system recommended by the auditor in previous years, at least eight (or 42 percent) of them “had not been fully implemented,” and should not have been checked off as completed. The auditors said the IRS never tracked its progress on the repairs, and in many cases, it closed cases without submitting documentation to prove the fix was complete. …The report also found that the agency didn’t properly scan servers—which contain taxpayer information—for “major vulnerabilities,” or properly lock user accounts, and it did not update software on databases. “When the right degree of security diligence is not applied to systems, disgruntled insiders or malicious outsiders can exploit security weaknesses and may gain unauthorized access,” Treasury Inspector General J. Russell George said.
That’s not exactly reassuring.
But it gets worse. Obamacare exchanges are a disaster waiting to happen, as explained in a USA Today column by the Chairman of the House Intelligence Committee.
Every day, personal information is the subject of hundreds of thousands of hacking attempts from all over the world. …On October 1, a major component of Obamacare made you even more vulnerable to devastating attacks on your personal information and the administration is doing too little about it. The Federal Data Services Hub (Hub), a component of the health insurance exchanges created by Obamacare, connects seven different government agencies and establish new access points to the sensitive personal information of the American public. Social Security numbers, employment information, birth dates, health records and tax returns are among the personal data that will be transmitted to this hub, consolidating an unprecedented amount of information. Every shred of data one would need to steal your identity or access your confidential credit information would be available at the fingertips of a skilled hacker, producing a staggering security threat. …These potential vulnerabilities are a dream of faceless international hackers and hostile foreign intelligence services.
Heck, you may as well put all your credit card info on your Facebook page.
More seriously, any sensible person will stay far away from Obamacare. Though if you don’t sign up on an Obamacare exchange, the White House wants you to get fined. So you lose no matter what.
Gee, isn’t big government wonderful?
P.S. I should have mentioned the huge privacy risks that will be created if politicians succeed in imposing an Internet sales tax cartel. Such a system will require a database of every online purchase and it will be accessible by bureaucrats from state and local governments.
P.P.P.S. Last but not least, we can’t have a discussion of privacy without mentioning our inquisitive friends at the NSA. Some of you may think it’s a non-story that the NSA is spying on just about all communications. The government, we are told, is merely trying to fight terrorism. Sounds okay in theory, but I’m not that sanguine for the simple reason that I don’t trust government. Indeed, all of us should worry that the NSA was just busted for spying on the web-surfing habits of its critics. Moreover, it doesn’t take much imagination to think the Obama White House would misuse that power to spy on political enemies. If you think I’m being paranoid, just consider how the IRS has been used as a partisan political tool in recent years.
P.P.P.P.S. I’ve been asked whether I’m worried that the NSA will snoop through my web history. As a matter of principle, I would object, but I’m not overly concerned because I’m a relatively boring person. That’s true even when I search for “libertarian porn” and “libertarian sex fantasies.”
And I had to reluctantly admit that even one of Karl Rove’s group produced an effective video on Obamacare harming young people.
I think all of those videos are well done and contain critical information, but I suspect the humor in this clever video may change even more minds. Or at least it will be more widely watched.
Fortunately, the creepy Uncle Sam is only symbolic at this stage. While Obama probably would prefer a single-payer system like the one in the United Kingdom, where doctors and other medical personnel actually are government bureaucrats, the immediate danger is that Obamacare will turn health care professionals into agents of the government.
And the politicians will then direct doctors and others to collect information that the government shouldn’t possess.
‘Are you sexually active? If so, with one partner, multiple partners or same-sex partners?” Be ready to answer those questions and more the next time you go to the doctor, whether it’s the dermatologist or the cardiologist and no matter if the questions are unrelated to why you’re seeking medical help. And you can thank the Obama health law. …The president’s “reforms” aim to turn doctors into government agents, pressuring them financially to ask questions they consider inappropriate and unnecessary, and to violate their Hippocratic Oath to keep patients’ records confidential. …Dr. Richard Amerling, a nephrologist and associate professor at Albert Einstein Medical College, explains that your medical record should be “a story created by you and your doctor solely for your treatment and benefit.” But the new requirements are turning it “into an interrogation, and the data will not be confidential.”
I don’t like the idea of government bureaucrats having my private information, but what’s probably most worrisome about this Obama Administration scheme is that the data won’t be confidential.
As McCaughey writes, it’s just a matter of time before hackers or incompetent bureaucrats make that information public.
Patients need to defend their own privacy by refusing to answer the intrusive social-history questions. …Are such precautions paranoid? Hardly. WikiLeaker Bradley Manning showed how incompetent the government is at keeping its own secrets; incidents where various agencies accidentally disclose personal data like Social Security numbers are legion.
Do you want details about your sex life put at risk of disclosure? That’s what this issue is all about, not to mention the fact that what we do behind closed doors is none of the government’s business.
And I’m sure you’ll be delighted to know it’s not just data about your sex life that will be available for bureaucrats and identity thieves.
Individuals signing up are required to provide personal information such as Social Security numbers, tax returns and household income information that will be entered into the Federal Data Services Hub (Data Hub) — a new information sharing network that allows other state and federal agencies, including the Internal Revenue Service (IRS) and the Department of Homeland Security, to verify a person’s information. The problem? …Last month the department of Health and Human Services Office of Inspector General (HHS-OIG) issued a report saying the federal government had failed to meet multiple deadlines for testing operations and reporting data security vulnerabilities involved with the Data Hub. …The repercussions of opening the exchanges with an unproven security system could be devastating, putting the personal and financial records of millions of Americans at the fingertips of data thieves. Other government certified systems have already proven to be less than reliable in protecting personal information. Look no further than the accidental release by the IRS this past July of thousands of taxpayer Social Security numbers on its website. …we can’t stand on the sidelines and let the Administration potentially expose the personal data of millions of Americans to more fraud.
The common theme is that we shouldn’t let government have more information about us, particularly when the politicians want that data to pursue bad tax policy or bad health policy.
If you don’t like the NSA collecting and monitoring all your communications, you probably won’t be thrilled about new technologies that will give government power to monitor where you drive and control how you drive.
Let’s look at a couple of options and then ponder which is more offensive.
…the real threat to our autonomy gathers speed. “Autonomous” vehicles are part of the threat—because they won’t be autonomous at all. This column has warned for years about plate-recognition cameras, increasingly armed with face-recognition capabilities, that will make it impossible to go anywhere or do anything in public without being monitored. …The population is aging. An older, more timid society is likely to be in favor of penning up fellow citizens in a mesh of monitoring to regulate routine behavior. The authoritarianism of the weak, always a problem in society, will find an ally in the bureaucracy’s craving for resources.
Holman cites a few examples.
Traffic cameras…overwhelmingly ring up drivers for offenses that wouldn’t trouble a cop. New Jersey is just the latest state scandalized by discovery that yellow lights are set below the state minimum in order to yield more red-light camera tickets. …In some future discrimination or hate-crime lawsuit, will vehicle records be called up to show you locked your doors in a minority neighborhood but not in a white neighborhood? Will the state decide to raise your ObamaCare copays because a face-recognition camera also recognized a cigarette dangling from your lip? When our every action in space and cyberspace can be monitored and policed, we no longer police ourselves to any meaningful extent. We become not citizens but children. The state is our parent. The real threat is that many of our fellow citizens will like it this way.
This sounds very Orwellian and very bad, but there are other ways for government to make driving an unpleasant experience.
Let’s see what the UK-based Daily Mail is reporting about an obnoxious European proposal to give government control over your gas pedal.
Drivers face having their cars fitted with devices that slam on the brakes if they go over the speed limit, under draconian new road safety measures being drawn up by officials in Brussels. All new cars would have to include camera systems that ‘read’ the limits displayed on road signs and automatically apply the brakes. And vehicles already on the road could even be sent back to garages to be fitted with the ‘Big Brother’ technology… The EC’s Mobility and Transport Department hopes to roll out the ‘Intelligent Speed Adaptation’ technology (ISA) as part of a new road safety programme.
And how will this big-brother system work?
The ISA technology works in one of two ways – either through satellites, which communicate limits automatically to cars from databases, or by using cameras to read road signs. It then deploys one of three controls to slow drivers: ‘advice’, in which the motorist is simply notified of the speed limit by an alarm, giving them the opportunity to slow down; ‘driver select’, which arrests the car’s speed but gives the driver the option of disabling the device; or ‘mandatory’, which would not let a driver breach the speed limit under any circumstances. …A spokesman for the AA said at lower speeds the new technology could actually create dangers. He said: ‘If you were overtaking a tractor and suddenly needed to accelerate to avoid a head-on collision, you would not be able to.’
I’m glad people from the Automobile Association are warning that the system poses risks, but opposition should be based on more than utilitarian arguments. How about the freedom to be left alone and not monitored and pestered while you travel?
But let’s set that issue aside and contemplate whether it’s worse to have the government track where you drive or worse to have the government control how you drive.
Maybe this makes me a bad libertarian, but I’m not overly worried about the first option. Perhaps this is because I have a relatively staid life. I drive to work and I drive to softball. Every so often, I drive to the grocery store or to an airport. The bureaucrats tracking me would go crazy with boredom. Heck, I’d probably feel some pressure to spice up my social life simply because I’d feel sympathy for them.
Maybe they’ll force us to drive green cars?
By contrast, I would be very irritated if the government got control over my accelerator. It’s already annoying that revenue-hungry local governments and anti-automobile greenies conspire to set speed limits considerably below safe and efficient levels. But at least there’s very little risk if you drive within 10 miles of the limit and you always have the choice to drive even faster if you’re willing to take a chance that some random cop will pull you over. But if the government imposes some system that forces my car to stay within the speed limit, I won’t be a happy camper.
I’ll be very curious to read the comments for this post. In the meantime, I’m going to close with a few optimistic words.
Simply stated, government may have the technology to spy on us, but that doesn’t mean they have the brains, ability, or manpower to make much use of this power.
But other than imposing high costs on the financial sector, this system doesn’t have much impact on the average person. To be sure, some poor people lose access to the financial system. And, yes, there are horror stories about people who have their accounts frozen because they’ve engaged in an unusual transaction, but most of us will live our lives without ever noticing that the government has created this Orwellian regime.
Likewise, I don’t think the monitoring and collection of traffic data will impact our lives. At least not until the point the government uses its power in some of the ways described by Holman Jenkins. But I don’t think that’s going to happen anytime soon.
I’m also somewhat hopeful that car-control technologies won’t get abused. At least not right away. Local governments, for instance, would probably oppose a system to control travel speeds for the simple reason that they want to maintain the revenue from speeding tickets.
Moreover, I bet many Americans would rise up in revolt if the government tried to take control of our gas pedals. Politicians who pushed for such a scheme would lose election and bureaucrats who tried to impose such a system via regulation would get slapped down.
We’ve lost some of our freedoms and fighting spirit, but there are some lines the government still can’t cross. Driving faster than the government allows is as American as apple pie.
P.S. Speaking of American traditions, what about the young (and not-so-young) people who sometimes do a bit of romancing while in their cars? Maybe the bureaucrats (motivated by this Obama-NSA joke) will insist that we also install internal cameras in our vehicles.
I want government to successfully and rationally fight crime and stop terrorism. That’s a perfectly appropriate libertarian sentiment since protecting life, liberty, and property are among the few legitimate roles for government.
But I don’t want to give bureaucrats carte blanche to monitor our lives and I don’t want to waste money in those cases where it is proper for the government to snoop on bad guys.
And those are some of the sentiments I expressed in this panel for Forbes on Fox.
My wonkish concern for cost-benefit analysis and corporate welfare is not empty posturing. There’s real money involved.
How much are your private conversations worth to the U.S. government? Turns out, it can be a lot, depending on the technology. …AT&T, for example, imposes a $325 “activation fee” for each wiretap and $10 a day to maintain it. Smaller carriers Cricket and U.S. Cellular charge only about $250 per wiretap. But snoop on a Verizon customer? That costs the government $775 for the first month and $500 each month after that… Industry says it doesn’t profit from the hundreds of thousands of government eavesdropping requests it receives each year… “What we don’t want is surveillance to become a profit center,” said Christopher Soghoian, the ACLU’s principal technologist. But “it’s always better to charge $1. It creates friction, and it creates transparency” because it generates a paper trail that can be tracked. …The FBI said it could not say how much it spends on industry reimbursements because payments are made through a variety of programs, field offices and case funds.
I confess that I’m not an expert – or even a novice – on the details of law enforcement, but I’m glad that my speculation on the low cost of setting up a wiretap seems to have been accurate. At least based on this excerpt from the article.
In 2009, then-New York criminal prosecutor John Prather sued several major telecommunications carriers in federal court in Northern California in 2009, including AT&T, Verizon and Sprint, for overcharging federal and state police agencies. In his complaint, Prather said phone companies have the technical ability to turn on a switch, duplicate call information and pass it along to law enforcement with little effort. Instead, Prather says his staff, while he was working as a city prosecutor, would receive convoluted bills with extraneous fees. The case is pending.
This article, as well as the Forbes on Fox debate, deal with general law enforcement, not the controversy about NSA data collection and monitoring.
But I can’t resist sharing this excellent bit of NSA-related humor that arrived in my inbox.
And if you appreciate political cartoons on this topic, here are some of my favorites. I think the one featuring Nixon and Bush is the best of the bunch.
To save readers some time, the honest answer to the question is that I don’t have many profound thoughts about the controversy surrounding Edward Snowden and snooping by the National Security Agency.
But since I’ve been asked by several people to pontificate on the matter, I won’t let trivial obstacles such as lack of knowledge or absence of expertise preclude me from giving a response. Heck, I’ve written about drone attacks, and terrorism policy, and my knowledge in those areas may be even less than the President’s understanding of the economy!
Normally, when I’m in the dark about some matter of public policy, I simply see what some of my Cato colleagues have said about an issue. But as you can see here, here, and here, those experts are split on the topic (brings to mind the joke about the politician who, when asked his position on some legislation, said “some of my friends are for the plan and some of my friends are opposed, and I always stick with my friends).
So I reckon I’ll just wing it with a couple of observations and a concluding thought about patriotism.
As I noted a couple of weeks ago, I want – at a minimum – there to be judicial oversight whenever the government spies on American citizens, but I also think some cost-benefit analysis is appropriate. Just because a court has the power to approve snooping, that doesn’t mean it’s a sensible use of law enforcement resources.
I confess I don’t know whether NSA snooping is a good use of time and energy, but I’m skeptical. Why? Because we don’t find much common sense in areas where I do know enough to run my mouth, such as money laundering laws and Transportation Security Administration rules. So why is NSA snooping any different?
It probably isn’t. As such, I side with other Americans in not wanting to give up my liberties simply because some politicians say our security is threatened.
That being said, I find myself irked by Mr. Snowden’s behavior. Some people believe he is a genuine patriot (in the proper sense of the word) motivated by libertarian principles, but the fact that he fled to Russia (perhaps en route to Cuba, Venezuela, or Ecuador) doesn’t reflect well on him.
For all its flaws, I rank the United States far above places such as Russia, China, and assorted Latin American thug regimes.
I understand that Snowden presumably wants to go someplace where he can’t be snatched by American officials, but he will cross the line and unambiguously become a traitor in my eyes if he gives sensitive material to unfriendly foreign governments.
And by sensitive, I don’t necessarily mean classified. I’m sure the federal government goes way overboard in labeling material as secret or classified. I’m talking about information that could compromise the security of the United States.
I’m guessing Edward Snowden has such information. If he shares it with hostile governments, he’s a bad person.
P.S. Here’s a humorous look at Obama-approved snooping.
P.P.S. If you think I’m being too hard on Snowden, you’ll probably beat my libertarian score on this comprehensive test.
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’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.
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.
It goes without saying that I’m always ready to defend tax havens when statists are seeking to undermine tax competition, financial privacy, and fiscal sovereignty.
So when the BBC asked if I would debate the topic, I said yes even though I’m in Paris (where supporting liberty is probably a capital crime).
I think the debate went well. Or, to be more precise, I was happy that I got to make my points.
I shared some nauseating and jaw-dropping examples of hypocrisy the other day, but the Obama Administration’s continuation (and expansion!) of Bush-style surveillance-state tactics surely must set some sort of record for double-talk.
Even by Washington standards.
So regardless of your views on the merits or demerits of collecting metadata, let’s enjoy some cartoons mocking the White House’s forked-tongue policies.
We’ll start with one from Jim McKee that doesn’t make a strong philosophical point, but I’m hokey enough that I liked the use of Santa Claus.
This next cartoon from Steve Kelley should make honest liberals cringe with embarrassment.
This Scott Stantis cartoon may be even better because it links Obama with Bush and Nixon. I knew they all shared a statist orientation on economic policy, but who knew they had the same affinity for monitoring other people’s communications?
But this second Jim McKee cartoon may be my favorite because it goes after the hypocritical statists directly. You can see why I’m glad that McKee’s work has come to my attention.
In closing, I suppose I should provide some initial thoughts on the more serious issue of whether the Obama Administration is improperly and needlessly invading our privacy.
If I understand correctly, the government did get judicial approval before collecting this data, so perhaps there’s nothing improper about this data-collection scheme.
But that doesn’t mean it’s a wise or good policy. Like most (if not all) libertarians, as well as other sensible people, I wonder whether the government will misuse the information being collected. If nothing else, the recent IRS scandals should make all of us very sensitive to that possibility.
But even if you assume that politicians and bureaucrats are angels, that still wouldn’t necessarily make this a good use of law enforcement resources. And that’s an empirical question.
I’m not qualified to give an answer, but I’m definitely in the need-to-be-convinced category. This policy reminds me of anti-money laundering laws, which also were put in place with the excuse that government would collect and analyze large amounts of data to help deter crime.
So put me in the skeptics camp. National defense is a legitimate function of government, and I fully realize that there are people out there who want to kill me and my family for no other reason that our freedoms, so I don’t automatically object to government actions in this area.
But I want their efforts to be concentrated and effective. And if our government is so big and bloated that we can’t monitor and stop known bad guys (like some of the 9-11 terrorists and at least one of the Tsarnaev brothers), then I don’t want to give the bureaucrats new powers without some sort of convincing argument that we’ll get positive results.
Art Laffer has a guaranteed spot in the liberty hall of fame because he popularized the common-sense notion that you can’t make any assumptions about tax rates and tax revenue without also figuring out what happens to taxable income.
Lot’s of people on the left try to denigrate the “Laffer Curve,” but it’s worth noting that even left-wing economists now admit that you don’t maximize revenue with a 100 percent tax rate.*
After enjoying an average growth rate above 3.5% per year between 1960 and 1999, Americans have had to make do with less than one-half that pace since 2000. The consequences are already dramatic and will become even more so over time. Overall we are 20% poorer today than we would be had the pre-2000 growth rate persisted.
That’s a great point. I’ve also tried to get people to focus on the importance of long-run growth.
In his column, Art also correctly defines good tax policy.
The principle of levying the lowest possible tax rate on the broadest possible tax base is the way to improve the incentives to work, save and produce—which are necessary to reinvigorate the American economy and cope with the nation’s fiscal problems.
But he then asserts that an Internet sales tax cartel somehow will result in better policy.
…there are reforms that can alleviate the problems associated with declining sales-tax bases and, at the same time, allow the states to move closer to a pro-growth tax system. One such reform would be to have Internet sellers collect the sales taxes that are owed by in-state consumers when they purchase goods over the Web. So-called e-fairness legislation addresses the inequitable treatment of retailers based on whether they are located in-state (either a traditional brick-and-mortar store or an Internet retailer with a physical presence in the state) or out of state (again as a brick-and-mortar establishment or on the Internet). …The exemption of Internet and out-of-state retailers from collecting state sales taxes reduced state revenues by $23.3 billion in 2012 alone, according to an estimate by the National Conference of State Legislatures. The absence of these revenues has not served to put a lid on state-government spending. Instead, it has led to higher marginal rates in the 43 states that levy income taxes.
This is a very disappointing collection of sentences. Let’s review.
1. States have declining sales-tax bases because state lawmakers treat that levy the same way that politicians in Washington treat the income tax – they put in loopholes in exchange for campaign cash and political support. For them to complain about declining sales-tax bases is sort of like the old joke about the guy who murders his parents and then asks the court for mercy because he’s an orphan.
2. Art offers zero evidence that state governments would use the additional revenue from a state sales tax cartel to reduce income tax rates. What’s next, a column saying we should have a value-added tax because the politicians may use the revenue to get rid of the income tax? Yeah, good luck with that approach.
3. Why is it “inequitable” for there to be different tax policies in different states? That’s another way of describing federalism, and it’s something we should be celebrating and promoting. Particularly since it promotes tax competition, which is one of the most effective ways of restraining the greed of the political class.
4. The Internet sales tax cartel being promoted by Art and various politicians requires that governments have the ability to tax sales that tax place outside their borders. That’s an assault of sovereignty, particularly since out-of-state merchants will be coerced into being tax collectors for a distant government. This is the same dangerous ideology that is used by high-tax governments to promote global anti-tax competition policies.
5. Art offers zero evidence that the absences of a state sales tax cartel has led to higher income tax rates. Yes, some states have raised tax rates in recent years, but others have lowered tax rates.
I reiterated these sentiments in a debate that was posted today by U.S. News & World Report. Here’s some of what I wrote.
The debate over the so-called Marketplace Fairness Act is not about a level playing field. It is an attempt by politicians to grab more tax revenue to facilitate bigger government. …they want to create an elaborate and intrusive system to force out-of-state merchants to act as tax collectors. …To understand why this is a radical step, imagine if you took a trip to Las Vegas and played blackjack, but then got arrested when you returned home because your state doesn’t allow gambling. That would be an outrage because a state only has sovereign power to enforce laws (good ones or bad ones) on things that take place within its borders. And it would be equally outrageous if state governments tried to force Las Vegas casinos to discriminate against non-Nevada residents.
I also explain why this type of system is bad news for reasons other than fiscal policy.
This legislation also has very troubling implications for privacy. It can only work by creating a massive database that matches online purchases with the state and local sales tax rates for every consumer. I don’t know about you, but I’m not confident that this type of untested system will be secure. We’ve already seen major leaks of confidential data from both government and private companies. This database will be a magnet for identity thieves and other hackers looking for credit card information.
If you agree, feel free to give me an “up” vote on this U.S. News page featuring all the debate participants.
I’ve explained before that I’m skeptical of the Fair Tax, hostile to the value-added tax, and opposed to other forms of a national sales tax for the simple reason that I don’t trust politicians to get rid of the income tax.
For the same reason, I’m inherently hostile to proposals that would create a new tax on the basis of how much we drive. As I explain in this interview for Fox Business News, the politicians would treat this tax as a new source of revenue and not get rid of gas taxes and/or property taxes on cars.
That motivated me to take the next step and unveil the madras.
P.S. Never trust politicians when they introduce a tax at a low rate and claim it won’t be a big burden. I mentioned in the interview how the first income tax in 1913 morphed into the nightmare we face today, but I also call your attention to the British tax on air travel, which has ballooned since its introduction in 1994.
State and local governments should compete with each by offering the best fiscal climate. Sadly, just as high-tax nations such as France and Germany are trying to hinder global tax competition, high-tax state governments are seeking to undermine fiscal rivalry inside the United States.
I explained this issue last week for a standing-room-only audience on Capitol Hill.
The entire discussion is posted online, including the very astute observations of my former Heritage Foundation colleague, Adam Thierer, now at the Mercatus Center.
Investor’s Business Daily also has opined on why this is a bad idea, but if you want to get really worried, the clowns at the United Nations want to power to tax and regulate the Internet.
This blurb from the IFC Review may give readers a sense of the regulatory onslaught facing financial institutions.
Banks and other financial services firms had to deal with 60 regulatory changes each working day during 2011, according to a report from Thomson Reuters Governance, Risk & Compliance, reports City AM. Regulators around the world announced 14,215 changes in 2011, a 16 per cent increase from the 12,179 announcements in 2010. The report shows that the majority of regulatory activity, 57 per cent, came from the US… Scott McCleskey, head of financial services regulation at the GRC unit, said: “This growth in activity also has an effect on the level of compliance spending leaving less to lend, invest, and do the other core activities which will be necessary to revive the global economy.”
Wow, an average of 60 regulations every single day. Great for lobbyists and politicians. Not so good for competitiveness and prosperity.
But are there some offsetting benefits? Unfortunately, the answer seems to be no. Professor Jason Sharman explains, starting with an explanation of the scope and cost of AML policies.
It is now just over 20 years since the first international anti-money agreements were concluded….Since then, the monitoring and implementation of AML standards have morphed into a global industry. …A vast array of financial institutions, from banks to brokers, insurance firms to casinos, money remitters to hedge funds, have now been conscripted into monitoring their clients for signs of suspicious financial activity. All this has imposed substantial costs on governments, private financial firms, and, indirectly, consumers, with the burden being especially significant for International Financial Centres.
He then raises a very important question, but one that everyone else seems to ignore.
…it is disconcerting how seldom the most obvious questions about this system are asked. First amongst these is whether AML standards actually work. That is to say, is there any less money laundered now than there was 20 years ago? Is there any less predicate crime that gives rise to these dirty funds in the first place? Despite all the evaluations performed by the FATF, other international organisations, national governments and the army of private AML experts that has grown up, it is striking that these sort of first-order questions are almost never asked, let alone answered.
Given the incompetence of government, you won’t be shocked to learn that the bureaucrats view the laws as an excuse for empire building and bloat.
Surprisingly, however, one can read through thousands of pages of FATF reports, covering everything from football to free-trade zones, without finding much, if any, attention devoted to these measures. Instead, the international surveillance and monitoring system that judges almost every country to see whether they have ‘the right stuff’ in AML terms has tended to foster a bureaucratic game of goal displacement: means to an end have become ends in themselves.
And what about stopping crime?
The most careful studies of effectiveness (both in absolute terms and relative to the cost) have been done by those outside the system, for example scholars like Peter Reuter, Edwin Truman, Jackie Harvey and Michael Levi. Each of these observers notes the mismatch whereby we have an incredibly extensive and intrusive policy apparatus, but very little knowledge about the results produced. On the basis of the fragmentary evidence that is available, however, it is hard to see any impact that AML rules have made on the incidence of crime. The general conclusion is that the expansion of the AML regime owes more to a political imperative to ‘do something’ in response to hot-button issues like crime or terrorism, rather than any track record of success.
Remarkable. Billions upon billions of regulatory costs. The immeasurable loss of privacy because of government-mandated snooping and spying. Yet all for naught.
Maybe the answer is less regulation? Maybe the answer is that politicians and bureaucrats should do cost-benefit tests? But those types of rules would mean less government and more freedom, so don’t hold your breath.
The bureaucrats at the Organization for Economic Cooperation and Development threatened to have me thrown in a Mexican jail for the horrible crime of standing in the public lobby of a hotel and giving advice to low-tax jurisdictions.
But if that makes it seem as if the battle is full of drama and (exaggerated) glory, that would be a gross exaggeration. More than 99 percent of my time on this issue is consumed by the difficult task of trying to convince policy makers that tax competition, fiscal sovereignty, and financial privacy should be celebrated rather than persecuted.
Sort of like convincing thieves that it’s a good idea for houses to have alarm systems.
And it means I’m also condemned to the never-ending chore of debunking left-wing attacks on tax havens. The big-government crowd viscerally despises these jurisdictions because tax competition threatens the ability of politicians to engage in class warfare/redistribution policies.
To determine whether tax havens are immoral, let’s peruse Mr. Vallely’s column. It begins with an attack on Ugland House in the Cayman Islands.
There is a building in the Cayman Islands that is home to 12,000 corporations. It must be a very big building. Or a very big tax scam.
If lying is immoral, this is a quick black mark on Mr. Vallely rather than tax havens. I’ve already explained, in a post eviscerating an empty-suit Senator from North Dakota, that a company’s home is merely the place where it is chartered for legal purposes. A firm’s legal domicile has nothing to do with where it does business or where it is headquartered.
In other words, there is nothing nefarious about Ugland House, just as there is nothing wrong with the small building in Delaware that is home to more than 200,000 companies. Obama, by the way, demagogued about Ugland House during the 2008 campaign.
Now that we’ve established that the author is a careless and know-nothing hack, let’s see what else he has to say.
Are there any legitimate reasons why anyone would want to have a secret bank account – and pay a premium to maintain their anonymity – or move their money to one of the pink dots on the map which are the final remnants of the British empire: the Caymans, Bermuda, the Turks and Caicos and the British Virgin Islands?
o Persecuted ethnic Chinese in Indonesia and the Philippines?
o Political dissidents in places such as Russia and Venezuela?
o Entrepreneurs in thug regimes such as Venezuela and Zimbabwe?
o Families threatened by kidnapping failed states such as Mexico?
o Homosexuals in murderous regimes such as Iran?
As this video explains, there are billions of people around the world that are subject to state-sanctioned (or at least state-permitted) religious, ethnic, racial, political, sexual, and economic persecution. These people are especially likely to be targeted if they have any money, so the ability to invest their assets offshore and keep that information hidden from venal governments can, in some cases, be a life-or-death matter.
And let’s not forget the residents of failed states, where crime, expropriation, kidnapping, corruption, extortion, and economic mismanagement are ubiquitous. These people also need havens where they can safely and confidentially invest their money.
The author of the column is probably oblivious to these practical, real-world concerns. Instead, he is content with sweeping proclamations.
The moral case against is clear enough. Tax havens epitomise unfairness, cheating and injustice. .
But if he is against unfairness, cheating, and injustice, why does he want to empower the institution – government – that is the source of oppression in the world?
To be fair, our left-wing friend does attempt to address the other side of the argument.
Apologists insist that tax havens protect individual liberty. They promote the accumulation of capital, fair competition between nations and better tax law elsewhere in the world. They also foster economic growth. …Yet even if all that were true – and it is not – does it outweigh the ethical harm they do? The numbered bank accounts of tax havens are notoriously sanctuaries for the spoils of theft, fraud, bribery, terrorism, drug-dealing, illegal betting, money-laundering and plunder by Arab despots such as Gaddafi, Mubarak and Ben Ali, all of whom had Swiss accounts frozen.
But he can’t resist trying to discredit the economic argument by resorting to more demagoguery, asserting that tax havens are shadowy regimes. Not surprisingly, he offers no supporting data. Moreover, you won’t be surprised to learn that the real-world evidence directly contradicts what he wrote. The most comprehensive analysis of dirty money finds 28 problem jurisdictions, and only one could be considered a tax haven.
Last but not least, the author addresses the issue that really motivates the left – the potential loss of access to other people’s money, funds that they want the government to confiscate and redistribute.
Christian Aid reckons that tax dodging costs developing countries at least $160bn a year – far more than they receive in aid. The US research centre Integrity estimated that more than $1.2trn drained out of poor countries illicitly in 2008 alone. …Some say an attack on tax havens is an attack on wealth creation. It is no such thing. It is a demand for the good functioning of capitalism, balancing the demands of efficiency and of justice, and placing a value on social harmony.
There are several problems with this passage, including the (perhaps deliberate) mixing of tax evasion and tax avoidance. But the key point is that the burden of government spending in most nations is now at record levels, undermining prosperity and reducing growth. Why should add more fuel to the fire by giving politicians even more money to waste?
Let’s now shift from the inaccurate ramblings of a left-winger to some real-world evidence. The Wall Street Journal has an article on the Canton of Zug, Switzerland’s tax haven within a tax haven. This hopefully won’t surprise anyone, but low-tax policies have been very beneficial for Zug.
Developed nations from Japan to America are desperate for growth, but this tiny lake-filled Swiss canton is wrestling with a different problem: too much of it. Zug’s history of rock-bottom tax rates, for individuals and corporations alike, has brought it an A-list of multinational businesses. Luxury shops abound, government coffers are flush, and there are so many jobs that employers sometimes have a hard time finding people to fill them. …If Switzerland is the world’s most famous tax haven, Zug amounts to a haven within a haven.
Here’s some of the evidence of how better fiscal policy promotes prosperity. This is economic data, to be sure, but isn’t the choice between growth and stagnation also a moral issue?
Zug long was a poor farming region, but in 1947 its leaders began to trim tax rates in an effort to attract companies and the well-heeled. In Switzerland, two-thirds of total taxes, including individual and corporate income taxes, are levied by the cantons, not the central government. The cantons also wield other powers that enable them compete for business, such as the authority to make residency and building permits easy to get. …businesses moved in, many establishing regional headquarters. Over the past decade, the number of companies with operations of some sort in the canton jumped to 30,000 from 19,000. The number of jobs in Zug rose 20% in six years, driven by the economic boom and foreign companies’ efforts to minimize their taxes. At a time when the unemployment rate in the European Union (to which Switzerland doesn’t belong) is 9.4%, Zug’s is 1.9%.
It turns out that Zug is growing so fast that lawmakers actually want to discourage more investment. What a nice problem to have.
Describing Zug’s development as “astonishing,” Matthias Michel, the head of the canton government, said, “We are too small for the success we have had.” …Zug has largely stopped trying to lure more multinationals, according to Mr. Michel.
…the Swiss are mostly holding fast to their fiscal beliefs. Last November, in a national referendum, they overwhelmingly rejected a proposal that would have established a minimum 22% tax rate on incomes over 250,000 francs, or about $315,000.
This global tax cartel will be akin to an OPEC for politicians, and the impact on taxpayers will be quite similar to the impact of the real OPEC on motorists.
If that’s a moral outcome, then I want to be a hedonist.
To conclude, here are two other videos on tax havens. This one looks at the economic issues.
And here’s a video debunking some of the usual attacks on low-tax jurisdictions.
I’m depressed about the global network of tax police being organized by the OECD and high-tax governments. If successful, it will lead to much bigger, more oppressive government. But maybe there’s a way of fighting back. Here’s a video from the folks at Reason TV about something that governments would hate – anonymous, digital money.
And here’s a video from the bitcoin people. I have no way of knowing how well this system will work and how insulated it will be from government interference, but I very much hope it will be successful. Governments will never behave if they think people have no escape options.
If anybody has an informed opinion about this, I’d welcome some feedback.
I commented yesterday about the silly idea, being promoted by a few politicians, to impose a tax on toilet paper. That post mostly was an opportunity to have some fun mocking greedy government because even a dour pessimist like me doesn’t expect that idea to get very far.
But there’s a new tax idea that sounds equally absurd, but actually is a much greater threat to taxpayers. The bureaucrats at the Congressional Budget Office have issued a report suggesting a tax based on the number of miles driven. Since such a tax almost surely (despite initial assertions to the contrary) would be in addition to existing gas taxes, this would be a way for politicians to grab more of our money.
But that’s not the only thing we should worry about. To impose such a tax, the government obviously would need the ability to track our vehicle usage. At the risk of stating the obvious, my driving patters are not the government’s business.
The Congressional Budget Office (CBO) this week released a report that said taxing people based on how many miles they drive is a possible option for raising new revenues and that these taxes could be used to offset the costs of highway maintenance at a time when federal funds are short. The report discussed the proposal in great detail, including the development of technology that would allow total vehicle miles traveled (VMT) to be tracked, reported and taxed, as well as the pros and cons of mandating the installation of this technology in all vehicles. …The report was requested by Senate Budget Committee Chairman Kent Conrad (D-N.D.), who held a hearing on transportation funding in early March. In that hearing, Transportation Secretary Ray LaHood said the Obama administration is hoping to spend $556 billion over the next six years, much of which would go to federal transportation improvement projects. Conrad said in response that federal funds are tight, and in asking for recommendations on how to raise that money, he noted the possibility of a VMT tax as a way to solve the problem of collecting less in taxes as people move to more fuel-efficient vehicles.
Here’s a new mini-documentary from the Center for Freedom and Prosperity, narrated by Natasha Montague of Americans for Tax Reform, that explains why the process of tax competition is a critical constraint on the propensity of governments to over-tax and over-spend.
The issue is very simple. When labor and capital have the ability to escape bad policy by moving across borders, politicians are more likely to realize that it is foolish to impose high tax rates. And they oftentimes compete for jobs and investment by lowering tax rates. This virtuous form of rivalry helps explain why so many nations in recent years have lowered tax rates and adopted simple and fair flat tax systems.
Another great feature of the video is the series of quotes from winners of the Nobel Prize. These economists all recognize competition between governments is just as desirable as competition between banks, pet stores, and supermarkets.
The issues discussed in this video generally don’t get a lot of attention, but they are critical for the long-run battle to restrain government. Please share widely.
P.S. This speech by Florida’s new Governor is a good example of how tax competition encourages governments to do the right thing.
Many people understandably are hesitant about this concept, particularly if government is involved. After all, we have many examples of seemingly innocuous ideas becoming nightmarish mistakes (such as adopting the income tax).…one of the bright lines dividing American liberals and conservatives concerns the limits of freedom of association. Conservatives, and especially those with a libertarian streak, are far more likely to be absolutists about the right to exclude anyone from your property, business, or private club or association for any reason. …If the Civil Rights Act is problematic because it infringes on freedom of association, the permissibility of discriminating against customers who might carry a fatal infection is a total no-brainer. Right? Ha! …there is no actual principle at work here. Conservatives are consistent only in their opportunistic incoherence.
DeSantis and others are loudly advertising that with COVID-19, …their version of freedom puts greater priority on right-wing cultural folkways than on rights of property and ownership. …To appease those cultural blocs, Republican politicians must be willing to sacrifice everything, including what used to be the party’s foundational principles. …to avoid contradicting the delusions of anti-vaccine paranoiacs, property rights must give way, freedom to operate a business must yield. …with COVID-19, …the new post-Trump message from the post-Trump GOP is: Private property is socialism; state expropriation is freedom. It’s a strange doctrine for a party supposedly committed to liberty and the Constitution, but here we are.
that probably increases the likelihood that politicians will try something similar.
International Liberty 
