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Archive for the ‘Taxation’ Category

When I write about the benefits of trade, I periodically point out that America has a trade deficit because it has a foreign investment surplus.

And since investment is a key driver of economic growth and rising wages, that’s a good outcome.

It basically means that foreigners who earn dollars by exporting to America are helping to finance America’s future prosperity by then plowing that money back into our financial markets (see this video for more details).

That’s the good news.

The bad news is that politicians are making cross-border investment more difficult.

They are using tax and regulatory policies to hinder the flow of money, just like they use protectionist policies to hinder the flow of goods and services.

A new report from the Center for Freedom and Prosperity, authored by Bruce Zagaris, explains this unfortunate development. He starts by explaining some of the bad policies imposed by Washington.

The ever-growing complexity and reach of the U.S. tax system impinges on the ability of U.S. taxpayers to live abroad, work abroad, open bank accounts abroad, or conduct business abroad. …These developments create a challenging environment, with taxpayers being subject to onerous – and sometimes conflicting – requirements. The complex array of obligations put taxpayers in legal jeopardy as governments threaten to impose sanctions on investors and businesses… The U.S. has even proactively prosecuted individuals and companies for cross-border tax activities that do not violate American laws. …The paperwork and reporting requirements for cross-border economic activity are extensive. …The icing on the cake of intrusiveness and costly compliance is the Foreign Account Tax Compliance Act.

FATCA is horrid legislation, perhaps the single worst part of the internal revenue code.

And bad policy from the U.S. has given other nations an excuse to adopt similar bad rules – aided and abetted by statist international bureaucracies such as the European Commission and Organization for Economic Cooperation and Development.

The difficulties caused by extraterritorial taxation are exacerbated by similar moves by other nations, often implemented as a response to aggressive policies by the United States. … the OECD has developed compliance and enforcement initiatives. …extraterritorial tax rules also are impinging on corporations. …The EU has taken a series of aggressive steps to impose tax on cross-border transactions. …Overly aggressive tax compliance and enforcement initiatives erode globalization, impede the ability of normal commerce and the movement of people, capital, and goods, and threaten privacy.

I especially like Bruce’s conclusion. All of the rules that stifle and hinder cross-border investment only exist because politicians have adopted bad tax laws.

Most of the policies reviewed above are only necessary because governments not only tax income, but also impose extra layers of tax on income that is saved an invested, exacerbated by decisions to impose such tax laws on income earned outside national borders. In a neutral, territorial tax system that taxes economic activity only one time, such as the Hall-Rabushka flat tax, almost all international tax conflicts disappear.

Amen. If we had a flat tax, there would be no case to be made for these bad policies.

Writing for the Washington Times, Richard Rahn of the Institute for Global Economic Growth cites this new study as he warns that an ever-expanding web of global tax rules is throwing sand in the gears of the global economy.

Global economic growth, particularly foreign investment, is slowing. One reason is likely the growing complexity of engaging in cross-border financial transactions. Major companies, banks and other financial institutions have been required to pay, in some cases, multi-billion-dollar fines to various governments for some alleged tax or other violation. The question is: Why is this occurring when virtually all of these institutions have compliance officers, tax lawyers, accountants, auditors, etc.? Much of the problem seems to stem from the ever-changing regulations and laws among countries, which are increasingly impossible to understand and comply with, even by the most sophisticated businesses. …The Center for Freedom and Prosperity Foundation has just published an important paper by the highly regarded international tax lawyer Bruce Zagaris, titled “Why the U.S. and the Worldwide Tax Systems Have Run Amok.” …Overly complex and even incomprehensible rules govern many international wealth and business transfers, as well as very onerous reporting requirements for people that have foreign interests. …In his paper, Mr. Zagaris details the problems caused by FATCA and a number of other international tax-related rules and regulations. Many of the rules and regulations would never meet basic cost-benefit analysis. They create much pain for little or no gain.

I would modify that last sentence.

The only “gain” from all these tax rules is a comparatively small amount of additional tax revenue for politicians (Obama originally promised $100 billion annually from FATCA and the actual law is projected to collect than $1 billion per year).

Yet there is great pain imposed on the private sector.

Moreover, laws to hinder cross-border capital flows are especially disadvantageous for the United States, as illustrated by this chart from Bruce’s report.

Sadly, damage to the productive sector of the economy is not something that politicians lose sleep over.

After all, they wouldn’t be imposing risky extraterritorial policies if they actually cared about what’s best for the nation.

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Germany is like the Nordic nations.

It gets a decent ranking (#20) for overall economic freedom, but mostly because a bad score for fiscal policy is offset by reasonably good scores in other policy areas.

Taking a closer look at fiscal policy, there’s a heavy burden of government spending (not as bad as France, for what it’s worth) and taxes consume a big chunk of household income.

And the Germans are big believers in enforcing onerous tax laws. Sometimes in remarkable ways.

  • Using parking meters to levy taxes on the services of prostitutes.
  • Losing 30€ for every 1€ collected by taxing online sales of coffee.
  • Imposing a new development tax for an 80-year old street
  • Levying a fine on a one-armed man for having a one-handled bicycle.

To be fair, the last example is a penalty rather than a tax, but it’s included because it captures Germany’s über-zealous approach to enforcement.

Today, we’re going to add to this list by looking at what happens to taxpayers when they can’t afford their country’s onerous tax burden.

One of the consequences, as reported by the BBC, is that you can lose the family pooch.

A town in Germany has made headlines for seizing a family’s dog over unpaid taxes – and then selling it on eBay. German media report that officials in Ahlen initially wanted to seize the wheelchair of a disabled resident as the most valuable item on the premises. Instead, they settled on a pedigree pug bitch named Edda. One of the officials then listed the dog on eBay at an apparent bargain price of €750 – half of what its new owner expected to pay. …Edda’s new owner was Michaela Jordan, a police officer, who told the newspaper she was initially suspicious of the low price. Upon calling the number listed in the advert, she spoke to an employee of Ahlen’s administration, who explained that the dog had been seized because the owner owed the city money – including for unpaid dog tax. …the former owner said…her three children miss the dog.

I feel sorry for the kids.

Though, to look on the bright side, they learned a lesson about big government. I’m guessing they are now immune to the European Commission’s attempt to brainwash children in favor of higher taxes.

And I guess we should all be happy that the tax police didn’t seize the wheelchair (maybe they were inspired by Francois the Merciful?).

In any event, I also noticed that the dog’s new owner is a bureaucrat – i.e., a net tax consumer rather than a net tax payer. There’s probably a lesson there as well.

Though even bureaucrats should be careful when dealing with government.

Edda had medical problems that were not disclosed. Since changing owners in December, she has needed four operations due to eye problems, including an emergency operation over Christmas. …totalling about €1,800.

The bottom line is that Germans are over-taxed and they have tax collectors that go above and beyond the call of duty.

Ideally, the nation’s taxpayers will get angry, have their version of the Tea Party, and elect some better politicians. Until that happens, I recommend they copy the clever tax-avoidance tactics of their French, Spanish, Irish, and Austrian neighbors.

P.S. You won’t be surprised to learn that Germany’s surtax to finance reunification is still being imposed even though East Germany was aborbed almost three decades ago (though it took more than 100 years for Washington to repeal the “temporary” telephone tax to finance the Spanish-American War).

P.P.S. Germany needs another Ludwig Erhard.

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Much to the consternation of some Republicans, I periodically explain that the Trump Administration is – at best – a mixed blessing for supporters of limited government.

It’s not just that Trump is the most protectionist president since Herbert Hoover, though that’s certainly a damning indictment.

The Trump White House also has been very weak on government spending, and the track record on that issue could get even worse since the President supports a new entitlement for childcare.

Yes, there are issues where Trump has been a net plus for economic liberty.

The overall regulatory burden is declining (though the Administration’s record is far from perfect when looking at anti-market interventions).

And the President gets a good mark on tax policy thanks to the Tax Cut and Jobs Act.

But Trump’s grade on that issue may be about to drop thanks to horribly misguided actions by his Treasury Secretary, Steven Mnuchin. Here are some excerpts from a report by France 24.

US Treasury Secretary Steven Mnuchin said Wednesday that the US supported a push by France for a minimum corporate tax rate for developed countries worldwide… “It’s something we absolutely support, that there’s not a chase to the bottom on taxation,” Mnuchin said in Paris after talks with Finance Minister Bruno Le Maire. Le Maire said last month a minimum tax rate would be a priority for France during its presidency of the G7 nations this year. …France in particular has railed against Amazon, Google and other technology giants that declare their European income in low-tax countries like Ireland or Luxembourg.

Needless to say, it’s utterly depressing that a Republican (in name only?) Treasury Secretary explicitly condemns tax competition.

Politicians and their flunkies grouse about a “race to the bottom” when tax competition exists, not because tax rates would ever drop to zero (we should be so lucky), but because they don’t like it when the geese with the golden eggs have the ability to fly away.

They like having the option of ever-higher taxes.

In reality, the world desperately needs tax competition to reduce the danger of “goldfish government,” which occurs when vote-seeking politicians can’t resist the temptation to destroy an economy with too much government (see Greece, Venezuela, Zimbabwe, etc).

I’ll close with a remarkable observation.

The Obama Administration supported a scheme that would have required American companies to pay a tax of at least 19 percent on income earned in other jurisdictions, even if tax rates were lower (as in Ireland) or zero (as in Cayman).

This was very bad policy, completely contrary to the principle of “territorial taxation” that is part of all market-friendly tax reforms such as the flat tax.

Yet Trump’s Treasury Secretary, by prioritizing tax revenue over prosperity, is supporting a proposal for global minimum tax rates that is much worse than what the Obama Administration wanted.

And even further to the left compared to the policy supported by Bill Clinton.

P.S. I’m sure the bureaucrats at the European Commission and Organization for Economic Cooperation and Development are delighted with Mnuchin’s policy, especially since American companies will be the ones most disadvantaged.

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I’m currently in the Cayman Islands, which is one of my favorite places since – like Bermuda, Monaco, Vanuatu, Antigua and Barbuda, and a few other lucky places in the world – it has no income tax.

At the risk of stating the obvious, the absence of an income tax has helped make the Cayman Islands very prosperous, 14th-richest in the world according to the latest data from the World Bank on per-capita economic output (top 10 in the world if you exclude oil-rich jurisdictions).

This does not mean, incidentally, that economic policy is perfect in the Cayman Islands.

There is a overly large and excessively compensated government bureaucracy. Indeed, financing the civil service is becoming such a burden that the Cayman Islands almost made a suicidal decision to impose an income tax earlier this decade.

And the absence of an income tax doesn’t mean an absence of taxes. Here’s a chart from a 2010 report on the jurisdiction’s fiscal challenges. Yes, the tax burden is low compared to many nations, but the government nonetheless collects plenty of revenue from import duties, fees on financial services, and tourism.

But the key thing to understand is that not all taxes are created equal. Some levies impose much more damage than others.

Richard Rahn, a fellow member of the Cayman Financial Review editorial board, explained this insight a few years ago in a column for the Washington Times.

Cayman is prosperous… Critics of Cayman and other offshore financial centers call them “tax havens,” ignoring the fact that they all have many taxes, particularly on consumption — which is good tax policy — rather than on productive labor and capital — which is bad tax policy. The statist political actors in the high-tax jurisdictions will not admit that people do not work, save and invest if they are going to be overly taxed and otherwise abused by their own governments.

And it’s also worth noting that the Cayman Islands are a role model for racial tranquility.

There are people from 135 nations and “mixed” is the largest racial category.

Here are some excerpts from a column published by Forbes about the progressive social structure of the Cayman Islands.

Somebody recently said to me “The Cayman Islands is just a mailbox.”  I started wondering if that was fair. The Cayman Islands are a real places where people live.  And they are not all attorneys and accountants, although they do have more than their fair share.  …a big upside to the Caymans. …Mr. Leung, who is of Asian descent, noticed a whiff of it in Scotland, but finds the Caymans utterly devoid of racism.  Pirates, refugees, shipwrecked sailors and enslaved people might not seem to be the best material to start a country to some, but clearly there is an upside.

I’ll close by noting that there is some trouble in paradise.

The Cayman Islands faces unrelenting pressure from international bureaucracies and high-tax nations. There is a lot of resentment because the jurisdiction is so successful.

The Cayman Islands will not be bullied by countries that cannot compete with this jurisdiction on a level playing field, Premier Alden McLaughlin told an audience… He said that despite the Cayman government’s cooperation on international standards, the Netherlands and others are more concerned about the zero tax rate here. …“But we will not be bullied by those who are jealous of our success, resentful of our tax policies and unable to compete with us on a level playing field,” McLaughlin said.

What makes these attacks so ironic and unfair is that the Cayman Islands actually has much tougher standards than “onshore” nations such as the United States and United Kingdom.

Since I began this column by looking at World Bank data on the most prosperous, let’s wrap up by perusing the U.N.’s numbers.

Hmmm…, lots of so-called tax havens are on this list. I wonder if we can draw any conclusions?

Folks on the left have accused me of “trading with the enemy” for supporting these jurisdictions, but the real story is that we should emulate rather than prosecute these low-tax jurisdictions.

P.S. My affection for the Cayman Islands is mutual.

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I recently appeared on CNBC to talk about everyone’s favorite government agency, those warm and cuddly folks at the IRS.

Our tax system is a dysfunctional mess, but you’ll notice that I mostly blamed politicians. After all, they are the ones who have unceasingly made the internal revenue code more complex, starting on that dark day in 1913 when the income tax was approved.

But I don’t want to give the IRS a free pass.

I’ve cited IRS incompetence and misbehavior in the past, most notably when discussing political bias, targeted harassment, and other shenanigans.

And, as illustrated by these five examples, we can always cite new evidence.

Such as lack of accountability.

…a new report from the Cause of Action Institute reveals that the IRS has been evading numerous oversight mechanisms, and it refuses to comply with laws requiring it to measure the economic impact of its rules. Congress has passed several laws, including the Regulatory Flexibility Act and the Congressional Review Act, that require agencies to report on their rules’ economic impact to lawmakers and the public. …These good-government measures are meant to ensure unelected bureaucrats can be checked by the public. …the IRS has made up a series of exemptions that allow it to avoid basic scrutiny. The agency takes the position that its rules have no economic effect because any impact is attributable to the underlying law that authorized the rule.

Such as inefficiency.

Private debt collectors cost the Internal Revenue Service $20 million in the last fiscal year, but brought in only $6.7 million in back taxes, the agency’s taxpayer advocate reported Wednesday. That was less than 1 percent of the amount assigned for collection. What’s more, private contractors in some cases were paid 25 percent commissions on collections that the I.R.S. made without their help…the report stated, “the I.R.S. has implemented the program in a manner that causes excessive financial harm to taxpayers and constitutes an end run around taxpayer rights protections.”

Such as rewarding scandal.

The Internal Revenue Service (IRS) issued more than $1.7 million in awards in fiscal 2016 and early fiscal 2017 to employees who had been disciplined by the agency, a Treasury Department watchdog said. “Some of these employees had serious misconduct, such as unauthorized access to tax return information, substance abuse and sexual misconduct,” the Treasury Inspector General for Tax Administration (TIGTA) said in a report made public this week. …in fiscal 2016 and early fiscal 2017, the IRS had given awards to nearly 2,000 employees who were disciplined in the 12 months prior to receiving the bonus.

By the way, the IRS has a pattern of rewarding bad behavior.

Such as pursuing bad policy.

…for 35 years the Internal Revenue Service has exempted itself from the most basic regulatory oversight. …Tax regulations (like all regulations) have exploded in recent decades, and of course IRS bureaucrats impose their own policy judgments. The IRS has in recent years unilaterally decided when and how to enforce ObamaCare tax provisions, often dependent on political winds. In 2016 it proposed a rule to force more business owners to pay estate and gift taxes via a complicated new reading of the law. …Secretary Steve Mnuchin’s Treasury…department is inexplicably backing IRS lawlessness with a string of excuses.

Again, this is not the first time the IRS has interfered with congressional policy.

Such as stifling political speech.

The Internal Revenue Service infamously targeted dissenters during President Obama’s re-election campaign. Now the IRS is at it again. Earlier this year it issued a rule suppressing huge swaths of First Amendment protected speech. …The innocuously named Revenue Procedure 2018-5 contains a well-hidden provision enabling the Service to withhold tax-exempt status from organizations seeking to improve “business conditions . . . relating to an activity involving controlled substances…” The rule does not apply to all speech dealing with the listed substances, only that involving an “improvement” in “business conditions,” such as legalization or deregulation. …This is constitutionally pernicious viewpoint discrimination.

In other words, the bureaucrats didn’t learn from the Lois Lerner scandal.

Now that I’ve hopefully convinced people that I’m not going soft on IRS malfeasance, let’s look at the budgetary issue that was the focus of the CNBC interview.

Is the IRS budget too small? Should it be increased so that more agents can conduct more audits and extract more money?

Both the host and my fellow guest started from the assumption that the IRS budget has been gutted. But that relies on cherry-picked data, starting when the IRS budget was at a peak level in 2011 thanks in part to all the money sloshing around Washington following Obama’s failed stimulus legislation.

Here are the more relevant numbers, taken from lines 2564-2609 of this massive database in the OMB’s supplemental materials on the budget. As you can see, IRS spending – adjusted for inflation – has nearly doubled since the early 1980s.

In other words, we shouldn’t feel sorry for the IRS and give it more money.

To augment these numbers, I made two simple points in the above interview.

  • First, we should demand more efficiency from the bureaucracy.
  • Second, we should reform the tax code to eliminate complexity.

The latter point is especially important because we could dramatically improve compliance while also shrinking the IRS if we had a simple and fair system such as the flat tax.

Last but not least, here’s a clip from another recent interview. I explained that the recent shutdown will be used as an excuse for any problems that occur in the near future.

Standard operating procedure for any bureaucracy.

P.S. My archive of IRS humor features a new Obama 1040 form, a death tax cartoon, a list of tax day tips from David Letterman, a Reason video, a cartoon of how GPS would work if operated by the IRS, an IRS-designed pencil sharpener, two Obamacare/IRS cartoons (here and here), a collection of IRS jokes, a sale on 1040-form toilet paper (a real product), a song about the tax agency, the IRS’s version of the quadratic formula, and (my favorite) a joke about a Rabbi and an IRS agent.

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I’m not an optimist about the future of Europe, mostly because welfare states are unaffordable in nations suffering from demographic decline.

Given the grim trends on the continent, I expect many other nations (probably led by Italy) will experience the fiscal and economic mess that we’ve seen in Greece.

Let’s dig into this issue by reviewing a story in the New York Times about economic stagnation in Europe, focused mostly on Spain.

After decades of living comfortably in Spain’s upper middle class, the middle-aged couple are struggling with their decline. Spain’s economy, like the rest of Europe’s, is growing faster than before the 2008 financial crisis and creating jobs. But the work they could find pays a fraction of the combined 80,000-euro annual income they once earned. …Since the recession of the late 2000s, the middle class has shrunk in over two-thirds of the European Union…they face unprecedented levels of vulnerability.

So why are middle-class workers in such bad shape?

As you read the article, you find references to factors such as the “financial crisis” and “weakened social protections,” but no coherent explanation for why the private sector is languishing.

Unless you read all the way down to the 22nd paragraph, where you finally get an interesting detail that probably explains much of Spain’s economic malaise. Taxes are so absurdly high that a guy with a modest income only gets to keep one-third of the money he earns! This is such a jaw-dropping factoid that I’ve made it an image rather than an indented excerpt.

Wow, the confiscatory tax rates that Alexandria Ocasio-Cortez and Bernie Sanders want to impose on “rich” people in the United States already are already being imposed on low-income taxpayers in Spain.

No wonder Spaniards are so inventive about avoiding taxes.

And this story is a perfect example of why I constantly warn that European-type redistribution policies in the United States would result in much higher taxes for lower-income and middle-class taxpayers.

By the way, you probably won’t be surprised to learn that the current Spanish government (just like a previous Spanish government) wants to make a bad situation even worse.

Prime Minister Pedro Sánchez… The Socialist leader grabbed power last summer with the fragile backing of Podemos, the left-wing anti-austerity party. Warning of middle-class frustrations, his embattled government ordered a 22 percent rise in the minimum wage in January, and has vowed to reverse some labor laws, increase social spending and raise taxes on companies and the rich.

There’s an election in April, so we’ll see whether Sánchez’s plan to impoverish his country actually gets adopted.

My only prediction, based on what’s happened in the past, is that tax increases will not be successful.

P.S. The story has two additional excerpts that help to explain Spain’s anemic performance. We have very strong evidence in the United States that unemployment benefits subsidize joblessness. Spain appears to be learning the same lesson, though the government still pays people to be unemployed for 1-1/2 years.

Unemployment benefits…that state money, with budget cuts, now lasts 18 months, down from 24.

I’ve also written about how so-called labor-protection laws discourage hiring. Well, seems like Spain is a very grim example of how this type of intervention backfires on intended beneficiaries.

…temporary and part-time contracts…can lead to steady work and better incomes. But companies and Europe’s public sector have mostly used them to dodge protections for permanent employees. In Spain alone, 90 percent of new jobs in 2017 were temporary.

P.P.S. Spain has a member of the Bureaucrat Hall of Fame, though the guy who “put a decimal point in the wrong place” probably also deserves induction.

P.P.P.S. Here’s a sobering look at pre- and post-1990 growth in Spain and Poland.

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According to Freedom in the 50 States, which we reviewed a couple of days ago, New Jersey is in the bottom 10 and has been moving in the wrong direction.

This dismal ranking is not an anomaly. New Jersey also is in the bottom 10 of states according to Economic Freedom of North America, and the Garden State is dead last according the State Business Tax Climate Index and State Fiscal Condition.

In a perverse way, I admire New Jersey’s politicians. They’re not satisfied with the state’s low scores. They want to become even less competitive. If that’s even possible.

As I noted in the interview, the latest proposal for a “rain tax” isn’t necessarily objectionable if examined in isolation.

But in the context of New Jersey’s fiscal deterioration, it’s almost as if politicians are writing another passage in a very long suicide note for the state.

Consider what happened recently with the gas tax, as explained by the Wall Street Journal.

…a silver lining used to be the Garden State’s relatively low gasoline tax of 14.5 cents a gallon—second lowest in the U.S. No more, and therein lies a tale of why taxing the rich to finance government is an illusion. In October 2016, then-Gov. Chris Christie signed a bill raising the gas tax by 22.6 cents to 37.1 cents a gallon…the bill also included a clause that automatically raises the gas tax if it doesn’t produce the expected revenue each year. This is a self-fulfilling economic prophesy. A higher gas tax causes people to drive less, which in turn has meant that revenues have fallen short of the expected $2 billion target. So on Oct. 1 the gas tax will rise another 4.3 cents to 41.4 cents per gallon, which will be the ninth highest in the U.S. …This will be the state’s third tax increase in four months, following June’s increase in income and corporate tax rates. …The larger lesson is that sooner or later the middle class always gets the bill for bigger government. Higher income and corporate taxes drive the affluent out of the state, which means less revenue. That leaves the middle class to pay in higher sales, property and now gasoline taxes.

Needless to say, New Jersey’s taxaholic lawmakers want even more revenue.

Here are some excerpts from a report by Politico.

Gov. Phil Murphy said Wednesday he may propose new tax increases when he unveils his budget in March, saying he’s worried that the state has not done enough to achieve what he called “tax fairness.” …The governor…had sought some $1.7 billion in new taxes… Murphy was met with fierce resistance from fellow Democrats in the Legislature… Murphy ultimately agreed to…$1.6 billion in annual revenue. …Murphy, speaking at a church in Newark where he delivered a speech on his first-year accomplishments, said he needs to leave his options open as he starts to prepare a budget… “I would say everything is on the table. Period, full stop,” he added when pressed again about the idea of new tax increases.

If all this sound worrisome, that’s because it is.

But it gets even worse. As I warned at the end of the interview, the 2017 tax law restricts the ability of federal taxpayers to deduct taxes paid to state and local governments.

And that means the full burden of those taxes is now much more explicit, which means more and more taxpayers in high tax rates are going to “vote with their feet” and move to states with less onerous fiscal regimes.

In other words, New Jersey politicians are making their tax system worse at precisely the moment that the geese with the golden eggs have more incentive to fly away.

Insane.

P.S. Given this grim news, I’m surprised that fewer than 9 percent of people picked New Jersey to be the first state that will suffer fiscal collapse.

P.P.S. What’s really remarkable – albeit in a very sad and tragic sense – is that New Jersey in my lifetime used to be like New Hampshire, with no state income tax and no state sales tax.

P.P.P.S. There is a Jersey with good tax policy, but it’s far away from the American version.

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