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Archive for the ‘Tax Compliance’ Category

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Who benefits most from the death tax?

There are two obvious answers.

First, politicians presumably benefit since they get more money to spend. Yes, it’s true that the tax discourages capital formation and may actually lose revenue in the long run, but politicians aren’t exactly famous for thinking past the next election cycle.

Second, there are some statists who are motivated by envy and resentment. These are the folks who make class-warfare arguments about the death tax being necessary to prevent the “rich” from accumulating more wealth, even though evidence shows large family fortunes dissipate over time.

Both of those answers are correct, but they don’t fully explain why this pernicious levy still exists.

Tim Carney of the Washington Examiner has a must-read piece for the American Enterprise Institute. He reveals the groups that actually are spending time and money to defend this odious version of double taxation.

…about two-thirds of Americans tell pollsters that they oppose the death tax. …But some segments of the population feel differently — most notably, the estate-planning industry. A survey by an industry magazine in 2011 found that 63 percent of estate-planning attorneys opposed repeal of the estate tax. That’s fitting. The death tax forces people to engage in complex and expensive estate planning. Lobbying disclosure forms show that the insurance industry is lobbying on the issue these days. The Association for Advanced Life Underwriting, which represents companies that sell estate-planning products, lobbied on the issue last year, as it has for years. Last decade, AALU funded a group called the Coalition for America’s Priorities, which attacked estate tax repeal as a tax break for Paris Hilton. …When the estate tax was last before Congress, the life insurance industry revved up the troops, spending $10 million a month on lobbying in the first half of 2010. In that stretch, only three industries spent more, according to data from the Center for Responsive Politics.

I concur with Tim.

Indeed, I remember giving a speech back in the 1990s to a group of estate-planning professionals. In my youthful naiveté, I expected that these folks would very much appreciate my arguments against the death tax.

Instead, the reception was somewhat frosty.

Though not nearly as hostile, I must confess, as the treatment I got when speaking about the flat tax to a group of tax lobbyists for big corporations.

In both cases, I was surprised because I mistakenly assumed that my audiences actually cared about the best interests of their clients or employers.

In reality, they cared about what made them rich instead (economists and other social scientists call this the principal-agent problem).

But I’m digressing. Let’s look at more of Tim’s article. He cites the Clintons to make a key point about rich people being able to avoid the tax so long as they cough up enough money to the estate-planning industry.

Those same techniques, however, often are not available to farmers, small business owners, and others who are victimized by the levy.

The Clintons may be stupid-rich, but they aren’t stupid — they’re using estate-planning techniques to avoid the estate tax. Bloomberg News reported in 2014 that the Clinton family home has been divided, for tax purposes, into two shares, and those shares have been placed in a special trust that will shield Chelsea from having to pay the estate tax on the full value of the home when she inherits it. Also, the Clintons have created a life insurance trust — a common tool wealthy people use to provide liquidity for heirs to pay the estate tax. The Clintons’ games, and the estate-planning industry’s interest in the tax, highlights how the tax fails at its stated aims of preventing the inheritance of wealth and privilege. Instead, the estate tax forces the wealthy to play games in order to pass on their wealth. These games don’t add anything to the economy, they just enrich the estate-planning industry. Those whose wealth is tied up in a small or medium-sized business, on the other hand, aren’t always capable of playing the estate planning games. They’re the victims.

The bottom line is that the tax should be abolished for reasons of growth.

But it also should be repealed because it’s unfair to newly successful entrepreneurs, investors, and business owners, all of whom generally lack access to the clever tax-planning tools of those with established wealth.

And it should be repealed simply because it would be morally satisfying to reduce the income of those who benefit from – and lobby for – bad government policy.

P.S. The U.S. death tax is more punitive than the ones imposed by even France and Venezuela.

P.P.S. It’s particularly hypocritical for the Clintons to support the death tax on others while taking steps to make sure it doesn’t apply to them.

P.P.P.S. In a truly repugnant development, there are efforts in the U.K. to apply the death tax while people are still alive.

P.P.P.P.S. On a more positive note, a gay “adoption” in Pennsylvania helped one couple reduce exposure to that state’s death tax.

P.P.P.P.P.S. If you live in New Jersey, by contrast, the best choice is to move before you die.

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Last September, I wrote that America’s business tax system is a nightmare that simultaneously undermines the competitiveness of American companies while also causing lots of irritation in other nations.

Both of those bad things happen because politicians in Washington think the IRS should be able to tax income that is earned (and already subject to tax) in other countries. This approach, known as “worldwide taxation,” is contrary to good tax policy.

Indeed, all good tax reform plans, such as the flat tax, are based on “territorial taxation,” which is the common-sense principle that governments should only tax activity inside national borders.

Given the self-inflicted wound of worldwide taxation, particularly when combined with the world’s highest corporate tax rate, it’s easy to understand why some companies engage in “inversions” and become foreign-domiciled firms. Simply stated, that’s their best option if they care about the best interests of their workers, customers, and shareholders.

Well, the same problem exists for households. And it exists for the same reason. The United States also imposes “worldwide taxation” on individual taxpayers. But it’s even worse, because there are specific laws, such as the infamous Foreign Account Tax Compliance Act, that impose absurdly high costs on Americans with cross-border economic activity, particularly those who live and work in other nations.

And just as our senselessly punitive corporate tax system drives corporations to re-domicile, the same is true for the personal tax code. As CNN reports, record numbers of Americans are officially giving up their citizenship.

The number of Americans choosing to give up their passports hit a record 3,415 last year, up 14% from 2013, and 15 times more than in 2008, when only 231 people renounced their citizenship. Experts say the recent surge is coming from expats who no longer want to deal with complicated tax paperwork, a burden that has only gotten worse in recent years. Unlike most countries, the U.S. taxes all citizens on income, no matter where it is earned or where they live. The mountain of paperwork can be so complicated that expats are often forced to fork over high fees to hire an accountant… “More and more are considering renouncing,” said Vincenzo Villamena of Online Taxman, an accountant who specializes in expat taxes. “There are a lot of uncertainties about FATCA…I don’t think we’ve seen the full effect that FATCA can have on people’s lives.” As both expats and financial institutions rush to understand the new law, some banks have chosen to kick out their Americans clients rather than comply. If a bank mistakenly fails to report accounts held by Americans outside the U.S. — even checking and savings accounts — they can face steep penalties.

Here’s a chart from the CNN article.

As you can see, there was a pause in 2012, perhaps because people were waiting to see what happened in the election.

But ever since, the number of people escaping U.S. citizenship has jumped dramatically.

To better understand how bad tax law is hurting people with U.S. passports, let’s look at the plight of Americans in Canada, as reported by the Vancouver Sun.

…many Ameri-Canadians are feeling rising anger, fear and even hatred toward their powerful country of origin. …The U.S. is the only major country to tax based on citizenship, not residency. …open displays of American pride in Canada are becoming even less likely as Ameri-Canadians seek shelter from the long reach of FATCA. …In addition, the flow of Americans leaving the U.S. for Canada more than doubled in the decade up until 2011, according to Statistics Canada. …Now — with FATCA causing investigators to scour the globe to hunt down more than seven million broadly defined “U.S. persons” it claims should be paying taxes to Uncle Sam — even more people in Canada with U.S. connections are finding another reason to bury their American identities.

Now let’s be even more focused and look at the impact on a single Englishman who happens to be the Mayor of London.

Johnson was characteristically forthright, describing FATCA as “outrageous”, and a “terrible doctrine of taxation.” Born in New York and having never given up his US citizenship, the London mayor cannot escape the clutches of FATCA, which requires that foreign financial institutions report the financial information of Americans. Those affected include many so-called “accidental Americans” like Johnson… What has seemingly brought FATCA to the front of Boris’s mind is the sale of his UK home, on which he is liable to pay tax in America. …What it does do – because of its host of serious, unintended, adverse consequences – is brand Americans, and accidental Americans choosing to live or work overseas, as financial pariahs. …Similarly, American businesses working in international markets are now often branded with a leprosy-like status. Clearly, this can only be detrimental to the country’s global competitiveness, and could, in turn, hit American jobs and the long-term growth of the economy. Questions should be asked about the imperialist characteristics of FATCA. Governments and foreign financial institutions have been coerced into complying with its expensive, burdensome, privacy-infringing, sovereignty-violating regulations by the US – or they have to face heavy penalties and the prospect of being effectively frozen out of US markets. And all this to “recover” an estimated $1bn (£637m) per year, which is enough, according to reports, to run the federal government for less than two hours.

As you can see, FATCA is a major problem.

And not just for specific taxpayers. The law is also bad for economic growth since it throws sand in the gears of global commerce.

Here are some excerpts from another news report, which includes some of my thoughts on the FATCA issue.

Critics say the FATCA has gone too far, is too draconian and is imposing an undue hardship on Americans living overseas. So says Dan Mitchell of the Cato Institute, a libertarian think tank in Washington. He says the law is “causing lots of headaches and heartaches around the world, not only for foreign financial institutions but also for overseas Americans, who are now being treated as Pyrrhus because financial institutions view them as too costly to service.” The U.S. is one of the few countries that tax its citizen on the basis of nationality, not residency. And faced with a larger tax bill, thousands of Americans living overseas would rather give up their passports then pay a new tax to Uncle Sam. The Taxpayer Advocate’s Office of the IRS has reported that the FATCA “has the potential to be burdensome, overly broad and detrimental to taxpayer rights.” Mitchell says, “An American living and working in some other country is required to not only pay tax to that country where they live but also file a tax return to the U.S. No other civilized country does that.”

By the way, I didn’t say that the law was causing overseas Americans to be treated as “Pyrrhus.” I said they were being viewed as “pariahs.” But that’s the risk you take when doing oral interviews.

Returning to matters of substance, you’ll also be happy to know that FATCA is making people more vulnerable to identity theft. It’s gotten so bad that even the IRS was forced to issue an official warning.

The Internal Revenue Service today issued a fraud alert for international financial institutions complying with the Foreign Account Tax Compliance Act (FATCA). Scam artists posing as the IRS have fraudulently solicited financial institutions seeking account holder identity and financial account information. …These fraudulent solicitations are known as “phishing” scams. These types of scams are typically carried out through the use of unsolicited emails and/or websites that pose as legitimate contacts in order to deceptively obtain personal or financial information. Financial institutions or their representatives that suspect they are the subject of a “phishing” scam should report the matter to the Treasury Inspector General for Tax Administration (TIGTA) at 800-366-4484, or through TIGTA’s secure website. Any suspicious emails that contain attachments or links in the message should not be opened.

Gee, nice of them to be so concerned about potential victims.

Though perhaps it would be better if we didn’t have intrusive laws in the first place.

The law is even so destructive that the Associated Press reported that it might be used as a weapon against the Russians!

As the United States attempts to punish Russia for its actions in Ukraine, the Treasury Department is deploying an economic weapon that could prove more costly than sanctions: the Internal Revenue Service. This summer, the U.S. plans to start using a new law that will make it more expensive for Russian banks to do business in America. “It’s a huge deal,” says Mark E. Matthews, a former IRS deputy commissioner. “It would throw enormous uncertainty into the Russian banking community.” …beginning in July, U.S. banks will be required to start withholding a 30 percent tax on certain payments to financial institutions in other countries — unless those foreign banks have agreements in place… But after Russia annexed Crimea and was seen as stoking separatist movements in eastern Ukraine, the Treasury Department quietly suspended negotiations in March. With the July 1 deadline approaching, Russian banks are now concerned that the price of investing in the United States is about to go up. …For Russia, the penalties could be more damaging to its economy than U.S. sanctions, said Brian L. Zimbler, managing partner of the Moscow office of Morgan Lewis, an international law firm. …The 2010 law is known as FATCA.

So what’s the bottom line?

As you can see, America’s worldwide tax system is bad policy, and it’s a nightmare for millions of innocent people thanks to ill-considered laws such as FATCA.

What’s really remarkable – in a bad way – is the complete lack of proportionality.

Back during the 2008 campaign, Obama claimed that laws like FATCA would generate $100 billion per year. From the perspective of tax collectors, that amount of money may have justified an onerous law.

But when the dust settled, the revenue estimators predicted that FATCA would bring in less than $1 billion per year.

In other words, the amount of money the IRS will collect is dwarfed by the damage to the overall economy and the harm to millions of taxpayers. Not to mention all the negative feelings against America that have been generated by this absurd law.

Yet very few politicians are willing to fight FATCA because they’re afraid that their opponents will engage in demagoguery and accuse them of being in favor of tax evasion. Senator Rand Paul is an admirable exception.

P.S. Since this has been such a depressing discussion, here is some good IRS humor to lighten the mood.

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When people figure out ways to keep the money they earn in their own pockets, rather than having it confiscated by government, I’m almost always happy.

That’s because governments tend to waste money (should any of us pay for corrupt pork-barrel spending?).

And it’s because government impose bad tax policy (is it fair to have governments tax us more than one time?).

I also object to oppressive tax collection tactics (why do murderers have a presumption of innocence, but not taxpayers?).

With this bit of background, you can understand why I cheer when greedy politicians fail in their efforts to grab more money.

Here are three stories about tax avoidance. The first and third stories should make you smile, while the middle story is a tragic reminder of what happens when you mix bad tax policy with bad enforcement tactics.

Our first story is from the U.K.-based Times, which reports that English shoppers will travel all the way to Belgium to buy cigarettes.

Smokers — and smugglers — are flocking to a small village on the Belgian coast in search of cheap tobacco to beat the taxman. …The savings are substantial. A sleeve of 200 Benson & Hedges Gold costs £45 in Belgium, compared with £90 at a British newsagent; a 50g pouch of Amber Leaf tobacco is on sale for £5.65, about £11 cheaper than at home. Sticking to the recommended allowance of 1kg of tobacco and 800 cigarettes will save a smoker about £400 per trip. However, as there are no limits on the amount of tobacco and alcohol that a person can bring back from an EU country, some day-trippers are pushing that to 3kg of tobacco and 3,000 cigarettes, for combined savings of £1,350.

The folks making the trip resent the way their government (often using Orwellian tactics) is trying to pillage them.

Many smokers are angry at high UK prices and annual rises in duty. A grandmother from the West Midlands tweeted to the Conservative party: “I saved £3,000 for a holiday this year. I won’t pay UK tax to be bullied. Much cheaper to buy abroad.” …An estimated 80 coaches make the trip each week from different parts of the UK. The Times joined a service run by Excalibur Coaches, starting at Elephant and Castle in south London at 5.55am and joining a P&O ferry crossing at Dover. …“There are a lot of English here but the government has made cigarettes so expensive that, with this price difference, people are bound to be tempted.”

I’m glad for these people. The U.K. government has gone way overboard in their efforts to grab more tax. Notwithstanding what the politicians say, it’s not immoral to protect your income from rapacious and untrustworthy government.

There was no suggestion that anyone on the Excalibur coach broke any rules, but trippers are reluctant to speak openly for fear that they will draw the attention of Border Force officers, who are cracking down on the illicit traders.

The same thing happens in the United States, by the way. Excessive tobacco taxes by some state and local governments create big incentives for consumers to seek out cigarettes that are more affordable.

And our second story is about how government over-reaction can lead to horrifying consequences.

First, some background from A. Barton Hinkle, writing for Reason.

Thanks to New York’s laughably high cigarette taxes ($4.35 state plus another $1.60 in the city) and higher prices generally, a pack of smokes in New York City costs $14 or more. That creates a powerful incentive to smuggle smokes in from states such as Virginia, where you can buy a pack for a third of that price. …The robust cigarette smuggling irritates officials in New York, because they miss out on a lot of tax revenue.

And because politicians deploy resources to capture some of that foregone revenue, it leads to enforcement efforts that, in the tragic case of Eric Garner, led to a man’s death.

The writers at National Review have done a superb job of addressing this issue. Let’s start with some observations from Kevin Williamson.

…one must have a permit to sell cigarettes in New York, and New York bans the sale of so-called loosies, single cigarettes sold to those who lack either the means or the desire to purchase an entire pack at the going New York City rate of $12 to $14. …In a sane world, selling cigarettes would not be a crime. …That isn’t an argument for anything-goes lawlessness, but it is an argument that we have too many criminal offenses, and an argument that not everything that is a crime is a danger.

David Harsanyi has some similar thoughts.

Garner wasn’t targeted for death because he was avoiding taxes, but nonetheless, prohibitive cigarette taxes unnecessarily generate situations that make events such as this possible. …In the case of Garner, police were enforcing a law that has nothing to do with violence, not in the short or long term. …New York has by far the highest cigarette taxes in the nation: more than five bucks a pack. Unsurprisingly, the policy has spurred a black market. …The more profitable it becomes to circumvent taxes, the more dangerous this mini-prohibition will be. Garner was selling single cigarettes, incidentally. Does anyone believe that isn’t a waste of time for police and prosecutors?

Another National Review contribution is from Jonah Goldberg.

…you know what reasonable people can’t dispute? New York’s cigarette taxes are partly to blame for Eric Garner’s death. Senator Rand Paul of Kentucky made this point Wednesday night on MSNBC’s Hardball with Chris Matthews, and liberals have been freaking out about it ever since. …anyone with a level head should understand — and agree with — Paul’s point. When you pass a law, you authorize law enforcement to enforce it. …Without laws making cigarettes more expensive, Eric Garner would be alive today, period. …In the war on tobacco, like the war on drugs, if politicians will the ends, they must will the means. This is something that libertarians understand better than everyone else: The state is about violence. You can talk all day about how “government is just another word for those things we do together,” but what makes government work is force, not hugs. If you sell raw-milk cheese even after the state tells you to stop, eventually people with guns will show up at your home or office and arrest you. If you resist arrest, something very bad might happen. You might even die for selling bootleg cheese.

Heck, we’ve even gotten to the point that the bureaucrats at the Food and Drug Administration are conducting raids on dairies for the horrible crime of selling to consumers who prefer unpasteurized milk.

But let’s focus on what Jonah wrote about the state and violence. Charles C. W. Cooke also addressed that issue in his NR column.

Ultimately, “the State” is a synonym for “organized violence.” “If you refuse to pay your taxes,” Representative David Brat recently noted, “you will lose. You will go to jail, and if you fight, you will lose. The government holds a monopoly on violence. Any law that we vote for is ultimately backed by the full force of our government and military.” In consequence, Brat proposed, we should be careful about when and how that violence is utilized. Certainly, civilized nations need laws. But it is one thing to recruit armed men to prevent murder and rape and grievous bodily harm, and it is quite another to do so in order to regulate the manner in which cigarettes may be sold. …Was Garner killed deliberately? No, of course he was not. …Nevertheless, we should all be willing to acknowledge that Garner would never have been so much as approached had the city not wanted its pound of flesh in the first instance. Because there are consequences to all laws — however minor — it is incumbent upon us to ask if those laws are worth the risks that they yield. What, I wonder, would the anti-tax rebels who threw off the British Empire make of the news that a man had lost his life for peacefully selling a “loosie”?

By the way, the National Review writers openly state that the Eric Garner case involves a lot more than taxes. They point out that there are very big issues about race, the proper use of force, and the integrity of the justice system.

But everything they wrote about misguided tobacco taxation is also right on the mark.

Now let’s look at our third story, which is fortunately amusing rather than tragic. It was sent to me from the Public Secrets blog, and it deals with a Spanish theater is taking a rather unusual step to avoid that nation’s crippling value-added tax.

Crippled by colossal tax rates and falling ticket sales, the Spanish cultural sector is taking creative action to cut its tax bill, including one theatre which has changed its main business to pornography to avoid having to pay high taxes. …Theatre director Karina Garantivá said: “It’s scandalous when cultural heritage is being taxed at 21 percent and porn at only at 4 percent. Something is wrong”. Her company, which performs works by the “Spanish Shakespeare” Pedro Calderón de la Barca has decided to circumvent the new, punitive taxes by registering as a distributor of pornographic magazines – and is offering free performances. Punters buying €16 worth of hardcore-swingers magazine Gente Libre from the company receive a ‘free’ ticket to a performance of the highly regarded 17th century comic drama El Mágico Prodigioso.

You have to give them credit for creativity. I previously wrote about a Spanish theater that gave “free” tickets to customers who purchased low-taxed carrots for absurd prices, but I’m guessing the porn angle will be more successful.

Heck, I’m a cultural rube, and even I might be tempted to patronize the theater.

But not because of the porn. Instead, I admire the philosophical approach. Unlike a lot of artists, these folks in Spain apparently aren’t looking for handouts.

Garantivá said: “We don’t want subsidies, we are a private initiative. The best subsidies are fiscal measures that don’t prevent me from doing my work”. …Although the company is presently selling second-hand pornography to escape tax, they may produce their own to sell in future, as their present stock is only 300 magazines. Doing so would be “a stand against the government”, said the director.

And they’re even willing to produce their own porn as a way of saying “bugger off” to government. Given my libertarian principles, maybe I should…um…volunteer to help? Viva la libertad!

Though I won’t be waiting by my phone expecting a call.

All kidding aside, the common theme in all these stories is that people don’t like paying excessive taxes.

We may not all agree about when taxation becomes excessive, but I assume just about everyone will agree that it’s perfectly legitimate to avoid or evade the French tax laws that require some people to pay more than 100 percent of their income to government.

On the other hand, most of us also will have little sympathy for folks who try to avoid or evade when they live in jurisdictions – such as Hong Kong, Bermuda, and Switzerland – that are honest, well-run, and lightly taxed.

My proposal is that we have a simple and fair system like the flat tax so that people have much less reason to evade or avoid.

In the meantime, I’ll continue rooting for taxpayers who thwart the greed of the political class.

So three cheers for French entrepreneurs, American companies, Italian boat owners, California citizens, Greek shop owners, Facebook millionaires, Norwegian butter buyers, New York taxpayers, Bulgarian smokers, foreign cab drivers, New Jersey residents, Australian film stars, and everyone else who does their part to limit the amount of tax revenue flowing to governments.

P.S. There’s at least one tax avoider who doesn’t deserve any support. Actually, there are at least two of them. Make that three. Oops, four and five. Wait, we have six. Seven. Eight…and an entire building of them…well, I think you get the point I’m trying to make.

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

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

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

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

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

That’s corrupt cronyism, not proper tax competition.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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What do cigarettes and capital gains have in common?

Well, they both start with the same letter, so maybe the Cookie Monster could incorporate them into his favorite song, but I’m thinking about something else. Specifically, both cigarettes and capital gains tell us something important about tax policy, the Laffer Curve, and the limits of political bullying.

In both cases, there are folks on the left who disapprove of these two “c” words and want to penalize them with high tax rates.

But it turns out that both cigarettes and capital gains are moving targets, so the politicians are grossly mistaken if they think that punitive taxation will generate a windfall of revenue.

I’ve already discussed why it’s senseless to impose high tax rates on capital gains. Simply stated, people can avoid the tax by not selling assets.

This might not be an ideal way of managing one’s investments, and it certainly isn’t good for the economy if it discourages new investment and prevents people from shifting existing investments into more productive uses, but it’s very effective as a strategy for individuals to protect against excessive taxation.

We see something quite similar with cigarettes. People can simply choose to buy fewer smokes.

Michel Kelly-Gagnon of Canada’s Montreal Economic Institute explains why higher tobacco taxes are not a guaranteed source of revenue for the political class.

Tax increases do not in each and every case lead to increases in government revenues. …When taxes on the consumption of a good are too high, you can get to a point where taxable consumption decreases and government revenues diminish rather than increase. Or at any rate, they don’t increase as much as what would be expected given the tax increase. This phenomenon constrains government’s ability to levy taxes. …There have been numerous examples in Canada of excessive taxes having a negative impact on government revenues. As shown by my colleagues Jean-François Minardi and Francis Pouliot in a study published last January ., there’s been three “Laffer moments” when it comes to tobacco tax revenues in Quebec since 1976. Whenever the level of taxation exceeded $15 per carton, the proceeds of the tobacco taxes eventually diminished. These are no isolated incidents. Laffer shows that the theory is confirmed by the experience of Cyprus, Denmark, Germany, Great Britain, Greece, Ireland, Latvia, Portugal, and Sweden.

Here’s a chart from his column showing how tax revenue has dropped in Quebec when the tax burden became too onerous.

Michel then acknowledges that some people will be happy about falling revenue because it presumably means fewer smokers.

But that’s not necessarily true.

While it is true that some people are deterred from smoking by tax increases, this is not the case of all smokers. Some avoid taxes by buying contraband cigarettes. Tax increases have no effect on the health of these smokers.

And because the tax burden is so severe, the underground economy for cigarettes is booming.

The folks at Michigan’s Mackinac Center have some remarkable and thorough estimates.

Since 2008, Mackinac Center for Public Policy analysts have periodically published estimates of cigarette smuggling in 47 of the 48 contiguous states. The numbers are quite shocking. In 2012, more than 27 percent of all Michigan in-state consumption was smuggled. In New York, almost 57 percent of all cigarettes consumed in the state were also illicit. This has profound effects on the revenue generated by state (and sometimes local) government. …We estimate nationwide revenue losses due to cigarette smuggling at $5.5 billion, a statistic consistent with the Bureau of Alcohol, Tobacco, Firearms and Explosives’ $5 billion estimate for 2009.

Here are the numbers for each state.

If all this evidence isn’t enough for you, I also encourage a look at the impact of higher tobacco taxes in Ireland, the United States, and Bulgaria and Romania.

Heck, even the city of Washington, DC, serves as a perverse role model on the foolishness of over-taxation.

P.S. Since this column focuses on the Laffer Curve and tobacco taxation, I would be remiss if I didn’t point out that Art Laffer recently put together a Handbook of Tobacco Taxation – Theory and Practice.

P.P.S. Art implies, at least indirectly, that policy makers should set the tax rate on tobacco at the revenue-maximizing level. That is far better than having the rate above the revenue-maximizing level, to be sure, but it rubs me the wrong way. I will repeat to my final day on earth that the growth-maximizing tax rate is far superior to the revenue-maximizing tax rate.

P.P.P.S. I’m currently in Australia for a series of speeches on fiscal policy. But as you can see from this photo, the PotL and I managed to find time to act like shameless tourists.

Tourists in Oz

P.P.P.P.S. Since I’m imitating Crocodile Dundee in the photo, I should close by noting that Paul Hogan (the actor who played Crocodile Dundee) has been harassed by the Australian tax police.

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I don’t like international bureaucracies because they generally push for policies that expand the burden of government and undermine economic growth.

But I recognize that there are some good people who work at these institutions and I’m always willing to acknowledge when they publish good research.

The IMF said that Greece had reached the tipping point where taxes were too high.

The World Bank put together a report showing how anti-money laundering regulations hurt the poor.

The United Nations acknowledged the Laffer-Curve insight that taxes can be too high.

The OECD admitted that income taxes undermine growth and that tax competition restrains the greed of the political class.

The European Central Bank found excessive government spending undermines economic performance.

We can now add some new research to that list. The World Bank has just published a new study highlighting the link between tax complexity and tax corruption.

You can peruse the entire report if you’re so inclined, but here are the key details from the abstract.

This paper seeks to find empirical evidence of a link between tax simplification and corruption in tax administration. …The study includes 104 countries from different income groups and regions of the world. The time period is 2002–12. The empirical findings support the existence of a significant link between the measure of tax corruption and tax simplicity, so a less complex tax system is shown to be associated with lower corruption in tax administration. It is predicted that the combined effect of a 10 percent reduction in both the number of payments and the time to comply with tax requirements can lower tax corruption by 9.64 percent….The positive link between tax simplicity and lower tax corruption has useful policy implications.

There are a few caveats. While people have a greater incentive to rig the system when tax rates are high, the report only addresses this issue tangentially. This is a very unfortunate oversight.

Also, the data show that corruption is higher in developing nations, which is not terribly surprising. Though I think this might be unfair because corruption is narrowly defined so that it’s simply a measure of lawbreaking.

I suspect there are similar amounts of corruption in developed nations, but it takes the form of influence peddling and legislative favors. That’s definitely the mother’s milk of Washington’s sleazy insiders.

And if you look at this chart, this chart, or this chart, there’s no doubt that the internal revenue code is riddled with loopholes.

This video elaborates on the connection between bloated government and legal corruption.

And this video shows how our corrupt tax code could be fixed.

P.S. Just so you don’t think I’m getting soft-hearted about the World Bank, just remember that this is the bureaucracy that put together a tax “report card” that gave nations higher grades for having more punitive fiscal policy.

P.P.S. In the interests of fairness, I am a fan of the World Bank’s Doing Business Index.

P.P.P.S. I’ve written several times about overpaid bureaucrats and fat-cat lobbyists.

Well, here’s a look at per capita personal income in Washington, DC, compared to the rest of America.

You’ll notice that Washington got substantially richer during both Bush Administrations.

But it’s not just the District of Columbia. If you click on this map, you’ll see that a majority of America’s richest communities are the suburbs of Washington.

A lot of fat and happy people living directly or indirectly off your tax dollars.

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