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Archive for the ‘Worldwide Taxation’ Category

Imagine if you had the chance to play basketball against a superstar from the NBA like Stephen Curry.

No matter how hard you practiced beforehand, you surely would lose.

For most people, that would be fine. We would console ourselves with the knowledge that we tried our best and relish he fact that we even got the chance to be on the same court as a professional player.

But some people would want to cheat to make things “equal” and “fair.” So they would say that the NBA player should have to play blindfolded, or while wearing high-heeled shoes.

And perhaps they could impose enough restrictions on the NBA player that they could prevail in a contest.

But most of us wouldn’t feel good about “winning” that kind of battle. We would be ashamed that our “victory” only occurred because we curtailed the talents of our opponent.

Now let’s think about this unseemly tactic in the context of corporate taxation and international competitiveness.

The United States has the highest corporate tax rate in the industrialized world, combined with having the most onerous “worldwide” tax system among all developed nations.

This greatly undermines the ability of U.S.-domiciled companies to compete in world markets and it’s the main reason why so many companies feel the need to engage in inversions.

So how does the Obama Administration want to address these problems? What’s their plan to reform the system to that American-based firms can better compete with companies from other countries?

Unfortunately, there’s no desire to make the tax code more competitive. Instead, the Obama Administration wants to change the laws to make it less attractive to do business in other nations. Sort of the tax version of hobbling the NBA basketball player in the above example.

Here are some of the details from the Treasury Department’s legislative wish list.

The Administration proposes to supplement the existing subpart F regime with a per-country minimum tax on the foreign earnings of entities taxed as domestic C corporations (U.S. corporations) and their CFCs. …Under the proposal, the foreign earnings of a CFC or branch or from the performance of services would be subject to current U.S. taxation at a rate (not below zero) of 19 percent less 85 percent of the per-country foreign effective tax rate (the residual minimum tax rate). …The minimum tax would be imposed on current foreign earnings regardless of whether they are repatriated to the United States.

There’s a lot of jargon in those passages, and even more if you click on the underlying link.

So let’s augment by excerpting some of the remarks, at a recent Brookings Institution event, by the Treasury Department’s Deputy Assistant Secretary for International Tax Affairs. Robert Stack was pushing the President’s agenda, which would undermine American companies by making it difficult for them to benefit from good tax policy in other jurisdictions.

He actually argued, for instance, that business tax reform should be “more than a cry to join the race to the bottom.”

In other words, he doesn’t (or, to be more accurate, his boss doesn’t) want to fix what’s wrong with the American tax code.

So he doesn’t seem to care that other nations are achieving good results with lower corporate tax rates.

I do not buy into the notion that the U.S. must willy-nilly do what everyone else is doing.

And he also criticizes the policy of “deferral,” which is a provision of the tax code that enables American-based companies to delay the second layer of tax that the IRS imposes on income that is earned (and already subject to tax) in other jurisdictions.

I don’t think it’s open to debate that the ability of US multinationals to defer income has been a dramatic contributor to global tax instability.

He doesn’t really explain why it is destabilizing for companies to protect themselves against a second layer of tax that shouldn’t exist.

But he does acknowledge that there are big supply-side responses to high tax rates.

…large disparity in income tax rates…will inevitably drive behavior.

Too bad he doesn’t draw the obvious lesson about the benefits of low tax rates.

Anyhow, here’s what he says about the President’s tax scheme.

The President’s global minimum tax proposal…permits tax-free repatriation of amounts earned in countries taxed at rates above the global minimum rate. …the global minimum tax plan also takes the benefit out of shifting income into low and no-tax jurisdictions by requiring that the multinational pay to the US the difference between the tax haven rate and the U.S. rate.

The bottom line is that American companies would be taxed by the IRS for doing business in low-tax jurisdictions such as Ireland, Hong Kong, Switzerland, and Bermuda.

But if they do business in high-tax nations such as France, there’s no extra layer of tax.

The bottom line is that the U.S. tax code would be used to encourage bad policy in other countries.

Though Mr. Stack sees that as a feature rather than a bug, based on the preposterous assertion that other counties will grow faster if the burden of government spending is increased.

…the global minimum tax concept has an added benefit as well…protecting developing and low-income countries…so they can mobilize the necessary resources to grow their economies.

And he seems to think that support from the IMF is a good thing rather than (given that bureaucracy’s statist orientation) a sign of bad policy.

At a recent IMF symposium, the minimum tax was identified as something that could be of great help.

The bottom line is that the White House and the Treasury Department are fixated at hobbling competitors by encouraging higher tax rates around the world and making sure that American-based companies are penalized with an extra layer of tax if they do business in low-tax jurisdictions

For what it’s worth, the right approach, both ethically and economically, is for American policy makers to focus on fixing what’s wrong with the American tax system.

P.S. When I debunked Jeffrey Sachs on the “race to the bottom,” I showed that lower tax rates do not mean lower tax revenue.

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I wrote recently about the Pfizer-Allergan merger and made the case that it was a very sensible way to protect the interests of workers, consumers, and shareholders.

That’s the good news.

Why? Because companies should be allowed to engage in a do-it-yourself form of territorial taxation to minimize the damage caused by bad tax policy coming out of Washington.

The bad news is that the White House, with its characteristic disregard of the rule of law, promulgated a regulation that retroactively changed existing tax law and derailed the merger.

Now the White House has produced an infographic designed to bolster its case against inversions, which I have reprinted to the right.

You can click on this link to see the full-sized version, but I thought the best approach would be to provide a “corrected” version.

So if you look below, you’ll find my version, featuring the original White House document on the left and my editorial commentary on the right.

But if you don’t want to read the document and my corrections, all you need to know is that the Obama Administration makes several dodgy assumptions and engages in several sins of omission. Here are the two biggest problems.

  1. No acknowledgement that the U.S. corporate tax regime drives inversions because of high rates and worldwide taxation.
  2. A bizarre and anti-empirical assertion that money is spent more productively by governments compared to the private sector.

And here’s the entire “corrected” infographic.

The bottom line is there aren’t any “loopholes” being exploited by inverting companies.

Instead, there’s a very anti-growth American tax system that makes it very difficult for American-domiciled firms to compete in global markets.

The solution is a simple, low rate flat tax.

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What’s the difference between Bernie Sanders and Hillary Clinton?

I suspect that most people would cite differences in personal ethics, but I’m a policy wonk so I actually think the leading candidates for the Democratic presidential nomination are two peas in a pod.

The only real difference is that Sanders is more open about his statist beliefs and is more anxious to adopt bad policies as quickly as possible.

But since I don’t want to become Greece, I have a hard time being impressed by politicians who bicker about the best route and best speed to get to the wrong destination.

Consider, for example, their views on corporate taxation. And let’s look specifically at the issue of how to deal with corporate inversions.

First, some background. The Wall Street Journal opines about the logical argument – and fiduciary obligation – for companies to escape America’s awful corporate tax system.

A major U.S. company merges with a foreign firm in part to avoid America’s punishing corporate tax code, and the politicians who refuse to reform the code denounce the company for trying to stay competitive. …Sigh. …Let’s try to explain one more time why it makes perfect business—and moral—sense… The U.S. federal corporate income tax rate is 35%. The Irish rate is 12.5%. …A CEO obliged to act in the best interests of shareholders cannot ignore this competitive reality.

All this makes great sense, and I’ve made similar arguments.

But what do Sanders and Clinton think? Well, the editorial skewers the two leading Democratic candidates for their vacuous demagoguery.

…none of this business logic impresses Hillary Clinton or Bernie Sanders, who helped to write the U.S. tax code as Senators but are now competing as presidential candidates to see who can demagogue more ferociously against American employers.Neither one wants to reform the tax code to make U.S. tax rates more competitive with the rest of the world. Instead they want to raise the costs of doing business even further. Mrs. Clinton’s solution is to raise taxes on investors with higher capital-gains taxes, block inversion deals, and apply an “exit tax” to businesses that manage to escape. Mr. Sanders would go further and perform an immediate $620 billion cashectomy on U.S. companies. The Vermonter would tax the money U.S. firms have earned overseas, even though that income has already been taxed in foreign jurisdictions.

Call me crazy, but I don’t think the ideas being peddled by Clinton and Sanders will lead to more and better jobs in the United States.

Which is why, when given the chance to  write about this topic for Fortune, I suggested that it would be best to actually fix the tax code rather than blaming the victim.

Some U.S. politicians respond to these mergers with demagoguery about “economic treason,” but that’s silly. These corporate unions are basically the business version of a couple in a long-distance relationship that decides to live where the economic outlook is brighter after getting married. So instead of blaming the victims, the folks in Washington should do what’s right for the country by trying to deal with the warts that make America’s tax system so unappealing for multinational firms.

And what are those warts?

The same ones any sensible person would identify. First, America’s corporate tax rate is absurdly anti-competitive.

With a 35% levy from Washington, augmented by smaller state corporate taxes, the combined burden is more than 39%. In Europe, by contrast, the average corporate tax rate has now dropped below 24%. And the average corporate rate for Asia’s major economies is even lower.

Second, we have a peculiarly self-destructive practice of wanting to tax income earned in other countries.

…the IRS also imposes tax on income earned in other nations. Very few nations impose a system of “worldwide taxation,” mostly for the simple reason that the income already is subject to tax in the nations where it is earned.

So here’s the bottom line.

The combination of a high rate and worldwide taxation is like a one-two punch against the competitiveness of U.S.-domiciled firms, so it’s easy to understand why inversions are so attractive. They’re a very simple step to protect the interests of workers, consumers and shareholders. …Let’s hope politicians put aside class warfare and anti-business demagoguery and fix the tax system before it’s too late.

By the way, even a columnist for the New York Times agrees with me. He has a piece on the inversion issue that is not very favorable to companies, and it certainly reads like he’s in favor of governments having more money, but he can’t help but come to the right conclusion.

Ultimately, the only way inversions will stop is when the corporate tax code changes so it becomes more attractive for American companies to be American companies.

And I can’t resist closing with a great blurb from George Will’s most recent column.

Having already paid taxes on it where it was earned, the corporations sensibly resist having it taxed again by the United States’ corporate tax, the highest in the industrial world.

Amen.

Will succinctly brings together the two most important things to understand about this issue. First, the income earned by American companies in other nations already is subject to tax, and, second, companies understandably don’t want it taxed again by the world’s highest corporate tax rate.

P.S. I’ve made the serious point that Sanders isn’t really a socialist, at least based on his voting record and what he proposes today. Instead, he’s just a conventional statist with mainstream (among leftists) views about redistribution.

Yet because he calls himself a socialist, that leads to amusing moments when other Democrats are asked to identify how he’s different. I’ve already mocked Debbie Wasserman Schultz for her inability to answer that question.

Now let’s see Hillary Clinton dance and dodge. The parts worth watching are all in the first half of the video.

Too bad Chris Matthews didn’t actually press her to answer the question. Though I’m vaguely impressed that she actually knows there are such a thing as libertarians.

P.P.S. While Hillary is clueless, there’s another Clinton that actually has some semi-sensible views about corporate taxation.

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Here we go again.

The politicians in Washington are whining and complaining that “evil” and “greedy” corporations are bring traitors by engaging in corporate inversions so they can leave America.

The issue is very simple. The United States has a very unfriendly and anti-competitive tax system. So it’s very much in the interest of multinational companies to figure out some way of switching their legal domicile to a jurisdiction with better tax law. There are two things to understand.

First, the United States has the world’s highest corporate tax rate, which undermines job creation and competitiveness in America, regardless of whether there are inversions.

Second, the United States has the most punitive “worldwide” tax system, meaning the IRS gets to tax American-domiciled companies on income that is earned (and already subject to tax) in other nations.

Unfortunately, the White House has no desire to address these problems.

This means American companies that compete in global markets are in an untenable position. If they’re passive, they’ll lose market share and be less able to compete.

And this is why so many of them have decided to re-domicile, notwithstanding childish hostility from Washington.

The Wall Street Journal is reporting, for instance, that the long-rumored inversion of Pfizer is moving forward.

Pfizer Inc. and Allergan PLC agreed on a historic merger deal worth more than $150 billion that would create the world’s biggest drug maker and move one of the top names in corporate America to a foreign country. …The takeover would be the largest so-called inversion ever. Such deals enable a U.S. company to move abroad and take advantage of a lower corporate tax rate elsewhere… In hooking up with Allergan, Pfizer would lower its tax rate below 20%, analysts estimate. Allergan, itself the product of a tax-lowering inversion deal, has a roughly 15% tax rate.

While there presumably will be some business synergies that will be achieved, tax policy played a big role. Here are some passages from a WSJ story late last month.

Pfizer Inc. Chief Executive Ian Read said Thursday he won’t let potential political fallout deter him from pursuing a tax-reducing takeover that could move the company’s legal address outside the U.S… Mr. Read…said he had a duty to increase or defend the value of his company, which he said is disadvantaged by the U.S. tax system.

And the report accurately noted that the United States has a corporate tax system that is needlessly and destructively punitive.

The U.S. has the highest corporate tax rate—35% — in the industrialized world, and companies owe taxes on all the income they earn around the world, though they can defer U.S. taxes on foreign income until they bring the money home. In other countries, companies face lower tax rates and few if any residual taxes on moving profits across borders.

And when I said America’s tax system was “needlessly and destructively punitive,” that wasn’t just empty rhetoric.

The Tax Foundation has an International Tax Competitiveness Index, which ranks the tax systems of industrialized nations. As you can see, America does get a good grade.

The United States places 32nd out of the 34 OECD countries on the ITCI. There are three main drivers behind the U.S.’s low score. First, it has the highest corporate income tax rate in the OECD at 39 percent (combined marginal federal and state rates). Second, it is one of the few countries in the OECD that does not have a territorial tax system, which would exempt foreign profits earned by domestic corporations from domestic taxation. Finally, the United States loses points for having a relatively high, progressive individual income tax (combined top rate of 48.6 percent) that taxes both dividends and capital gains, albeit at a reduced rate.

Here’s the table showing overall scores and ranking for major categories.

You’ll have to scroll to the bottom portion to find the United States. And I’ve circled (in red) America’s ranking for corporate taxation and international tax rules. So perhaps it’s now easy to understand why Pfizer will be domiciled in Ireland.

By the way, while I’m a huge admirer of the Tax Foundation, I don’t fully agree with this ranking because there’s no component score for aggregate tax burden.

I don’t say that because it would boost America’s score (though that would help bump up the United States), but rather because I think it’s important to have some measure showing the degree to which resources are being diverted from the economy’s productive sector to government.

But I’m digressing. Let’s now return to the main issue of Pfizer and corporate inversions.

Our friends on the left have a blame-the-victim approach to this issue. Here’s what the Wall Street Journal wrote in September, before the Pfizer-Allergan merger.

Remember last year when the Obama Treasury bypassed federal rule-making procedures to stop U.S. companies from moving overseas? It didn’t work. …Watching U.S. firms skedaddle, President Obama might have thought that perhaps the U.S. should stop taxing earnings generated outside its borders, since almost no one else on the planet does. Or he might have pondered whether the industrialized world’s highest corporate income tax rate is good for business. Being Barack Obama, the President naturally sought to bar companies from leaving. And his Treasury, being part of the Obama Administration, naturally skipped the normal process of proposing new rules and allowing the public to comment on them.

But even this lawless administration hasn’t been able to block inversions by regulatory edict.

…in the year since the Treasury Department “tightened its rules to reduce the tax benefits of such deals, six U.S. companies have struck inversions, compared with the nine that did so the year before.” Meanwhile, foreign takeovers of U.S. firms, which have the same effect of preventing the IRS from capturing world-wide earnings, are booming. These acquisitions exceed $379 billion so far this year, …far above any recent year before Treasury acted against inversions. So the policy won’t generate the revenue that Mr. Obama wants to collect, but it is succeeding in moving control of U.S. businesses offshore.

This should be an argument for a different approach, but Obama is too ideological to compromise on this issue.

And his leftist allies also don’t seem open to reason. Here’s some of what Jared Bernstein wrote a couple of days ago for the Washington Post.

There are three parts of his column that cry out for attention. First, he gives away his real motive by arguing that Washington should have more money.

…an eroding tax base is a bad thing. …we will need more, not less, revenue in the future.

In the context of inversions, he’s saying that it’s better for politicians to seize business earnings rather than to leave the funds in the private sector.

He then makes two assertions that simply are either untrue or misleading.

For instance, he puts forth an Elizabeth Warren-type argument that firms that engage in inversions are dodging their obligation to “contribute” to the system that allows them to earn money.

…the main thing the inverting company changes here is its tax mailbox and thus where it books its profits, not its actual location. So it’s still taking advantage of our infrastructure, our markets, and our educated workforce — it’s just significantly cutting what it contributes to them.

Utter nonsense. Every inverted company (and every foreign company of any kind) pays tax to the IRS on income earned in the United States.

All that happens with an inversion is that a company no longer pays tax to the IRS on income that is earned in other nations (and already subject to tax by governments in those nations!).

But that’s income that the United States shouldn’t be taxing in the first place.

Jared than argues that America’s corporate tax rate isn’t very high if you look at average tax rates.

…isn’t the problem that when it comes to corporate taxes, we’re the high-tax country? Not really. Our statutory corporate tax rate (35 percent) may be higher than that in many other countries, but because of all these tax avoidance schemes, the effective corporate rate is closer to 20 percent.

Once again, he’s off base. What matters most from an economic perspective is the marginal tax rate. Because that 35 percent marginal rate is what impacts incentives to earn more income, create more jobs, and expand investments.

And that marginal tax rate is what’s important for purposes of a company competing with a foreign competitor.

Here’s a briefing I gave to Capitol Hill staffers last year. The issues haven’t changed, so it’s still very appropriate for today’s debate.

Now perhaps you’ll understand why I’m a big fan of this poster.

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The United States has what is arguably the worst business tax system of any nation.

That’s bad for the shareholders who own companies, and it’s also bad for workers and consumers.

And it creates such a competitive disadvantage that many U.S.-domiciled companies are better off if they engage in an “inversion” and shift their corporate charter to a jurisdiction with better tax policy.

Unsurprisingly, the Obama White House doesn’t like inversions (with some suspicious exceptions) because the main effect is to reduce tax revenue.  But the Administration’s efforts to thwart them haven’t been very successful.

The U.K.-based Economist has just published an article on American companies re-domiciling in jurisdictions with better tax law.

A “tax inversion” is a manoeuvre in which a (usually American) firm acquires or merges with a foreign rival, then shifts its domicile abroad to reap tax benefits. A spate of such deals last year led Barack Obama to brand inversions as “unpatriotic”. …The boardroom case for inversions stems from America’s tax exceptionalism.

But this isn’t the good kind of exceptionalism.

The internal revenue code is uniquely anti-competitive.

It levies a higher corporate-tax rate than any other rich country—a combined federal-and-state rate of 39%, against an OECD average of 25%. And it spreads its tentacles worldwide, so that profits earned abroad are also subject to American taxes when they are repatriated.

And that worldwide tax system is extremely pernicious, particularly when combined with America’s punitive corporate tax rate.

Given these facts, the Economist isn’t impressed by the Obama Administration’s regulatory efforts to block inversions.

Making it hard for American firms to invert does precisely nothing to alter the comparative tax advantages of changing domicile; it just makes it more likely that foreign firms will acquire American ones. That, indeed, is precisely what is happening.

So what’s the answer?

If American policymakers really worry about losing out to lower-tax environments, they should get rid of the loopholes that infest their tax rules, drop the corporate-income tax rate and move to a territorial system. …jobs would be less likely to flow abroad.

In a companion article, the Economist lists some of the firms that are escaping from the IRS.

…companies have continued to tiptoe out of America to places where the taxman is kinder and has shorter arms. On August 6th CF Industries, a fertiliser manufacturer, and Coca-Cola Enterprises, a drinks bottler, both said they would move their domiciles to Britain after mergers with non-American firms. Five days later Terex, which makes cranes, announced a merger in which it will move to Finland. For many firms, staying in America is just too costly. Take Burger King, a fast-food chain, which last year shifted domicile to Canada after merging with Tim Horton’s, a coffee-shop operator there.

I’ve previously shared lists of inverting companies, as well as a map of where they go, and this table from the article is a good addition.

So how should Washington react to this exodus? The Economist explains once again the sensible policy response.

The logical way to stem the tide would be to bring America’s tax laws in line with international norms. Britain, Germany and Japan all have lower corporate rates and are among the majority of countries that tax firms only on profits earned on their territory.

But the Obama Administration’s response is predictably unhelpful. And may even accelerate the flight of firms.

…the US Treasury has been trying to make it harder for them to leave. …Despite such speed bumps, inversions still make enormous sense for companies with large overseas operations. If anything, the rule changes have led to more companies looking to get out before it is too late.

The Wall Street Journal opined on this issue earlier this month and reached a similar conclusion.

…a mountain of evidence that an un-competitive tax system has made the U.S. an undesirable location for corporate headquarters and investment. …high tax rates matter a great deal in determining where a company is based and where it grows.

The WSJ also pointed out that taxpayers have a right and an obligation to legally protect themselves from bad tax policy.

Shareholders deserve nothing less from management than the Warren Buffett approach of paying the lowest possible legal tax rate.

But since the White House isn’t very interested in helpful reform, expect more inversions.

Which is one more piece of evidence that punitive corporate taxation isn’t good news for workers.

…absent American tax reform will end up pushing more U.S. companies into foreign hands. …The ultimate losers in all of this aren’t so much the owners as American workers, who often lose their jobs when a company moves abroad. …It’s well past time for our government to stop creating advantages for foreign competitors.

In looking at this issue, it’s easy to be discouraged since the Obama Administration is unwilling to even consider pro-growth policy responses.

As such, the problem will fester until at least 2017.

But it’s possible that there could be pro-reform legislation once a new President takes office.

Particularly since the Senate’s Permanent Subcommittee on Investigations (which used to be chaired by the clownish Sen. Levin, infamous for the FATCA disaster) has produced a very persuasive report on how bad U.S. tax policy is causing inversions.

Here are some excerpts from the executive summary.

The United States has the highest corporate tax rate in the industrialized world, and (alone among its peers) has retained a worldwide system that taxes American companies for the privilege of repatriating their overseas earnings. Meanwhile, most other nations with advanced economies have adopted competitive tax rates and territorial-type tax systems. As a result, U.S. firms too often have a significant incentive to relocate their headquarters overseas. Corporate inversions may be the most dramatic manifestation of that incentive… The lesson policymakers should draw from our findings is straightforward: The high U.S. corporate tax rate and worldwide system of taxation are competitive disadvantages that make it easier for foreign firms to acquire American companies. Those policies also strongly incentivize cross-border merging firms, when choosing where to locate their new headquarters, not to choose the United States. The long term costs of these incentives can be measured in a loss of jobs, corporate headquarters, and revenue to the Treasury.

Those are refreshing and intelligent comments, particularly since politicians were in charge of putting out this report rather than economists.

So maybe there’s some hope for the future.

For more information on inversions and corporate tax policy, here’s a short speech I gave to an audience on Capitol Hill.

P.S. Let’s close with some political satire.

I’ve written about Bernie Sanders being a conventional statist rather than a real socialist.

But that wasn’t meant to be praise. He’s still clueless about economics, as illustrated by this amusing Venn diagram.

Though I’m sure many other politicians would occupy that same space.

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In the past week, I’ve written two columns (here and here) extolling the benefits of federalism.

So I now feel compelled to warn that my support for decentralization is not motivated by some Pollyannish view of sub-national governments.

State and local government officials are perfectly capable of adopting policies that lead to the absurd waste of taxpayer money and grotesque abuse of citizens.

And they also are just as proficient at sleaze as their cousins in Washington.

Politico has a sobering report on pervasive state-level corruption. They start with a rundown of what’s been happening with the criminal class in the Empire State.

Other states have plenty of corruption, but it’s hard to beat New York when it comes to sheer volume. The criminal complaint Monday against Dean Skelos, the state Senate majority leader, and his son Adam came just three months after charges were brought against Sheldon Silver, then the Assembly Speaker. Having the top leaders in both chambers face criminal charges in the same session is an unparalleled achievement, but Skelos is now the fifth straight Senate majority leader in Albany to face them. …Senate Republicans are standing by Skelos, but if they decide to make a change, they probably won’t turn to Thomas Libous, the chamber’s Number Two leader. He faces trial this summer on charges of lying to the FBI… All told, more than two dozen members of the New York state legislature have been indicted or resigned in disgrace over the past five years.

New York seems to breed corruption, probably because it is a profligate state and there is a well-established relationship between the size of government and the opportunities for malfeasance.

But other states are doing their best to show corruption and government go hand in hand.

Silver was one of four state House Speakers to face criminal charges over the past year (Alabama, Rhode Island and South Carolina are home to the others). In Massachusetts, three Speakers prior to current incumbent Robert DeLeo all resigned and pleaded guilty to criminal charges. When Dan Walker died last week, it was hard for obituary writers not to note that he was one of four Illinois governors over the past five decades who ended up in prison. …Give any U.S. attorney a year and 10 FBI agents and he or she can probably come back from the state capital with a passel of indictments.

At some point, even non-libertarians need to recognize that 2+2=4. In other words, the evidence is overwhelming that the public sector is a breeding ground for corruption because it is premised on buying votes with other people’s money.

Which is the basic message of my First Theorem of Government.

By the way, I’m not making a partisan point. It should be obvious from the story cited above, but I’ll reiterate that Republicans are just as capable of venal behavior as their opponents.

And don’t delude yourself into thinking that “principled” Democrats are immune to sleazy behavior.

Here’s the video I narrated explaining how bloated government enables corruption.

P.S. You can enjoy some government corruption humor here, here, here, here, and (my personal creation) here.

P.P.S. If you’re a fan of Barack Obama, you may be pleased to know that we’re setting records as a result of his policies.

We already know America has experienced a record drop in labor force participation.

And we also have a new record for weakest recovery since the Great Depression.

As well as a record for declining household income.

Now we have a new record. More Americans than ever before have decided to give up U.S. citizenship. Here are some of the details from a Bloomberg report.

More Americans living outside the U.S. gave up their citizenship in the first quarter of 2015 than ever before, according to data released Thursday by the IRS. The 1,335 expatriations topped the previous record by 18 percent, according to data compiled by Bloomberg. Those Americans are driven to turn in their passports in part because of laws that have expanded bank reporting and tax compliance requirements for expatriates. The increase in early 2015 follows an annual record in 2014, when 3,415 Americans gave up their citizenship. An estimated 6 million U.S. citizens are living abroad, and the U.S. is the only country within the Organization for Economic Cooperation and Development that taxes citizens wherever they reside.

Here’s one example from the story.

“The cost of compliance with the complex tax treatment of non-resident U.S. citizens and the potential penalties I face for incorrect filings and for holding non-U.S. securities forces me to consider whether it would be more advantageous to give up my U.S. citizenship,” Stephanos Orestis, a U.S. citizen living in Oslo, wrote in a March 23 letter to the Senate Finance Committee. “The thought of doing so is highly distressing for me since I am a born and bred American with a love for my country.”

There are two lessons from this story.

  • First, it is absurd that our tax laws are so onerous (even worse than France in this regard) that some people feel compelled to give up American citizenship.
  • Second, while there are lots of ordinary Americans who are being pushed to give up their passports (folks married to foreigners, for instance), the average expatriate presumably has above-average income and is an asset to be welcomed rather than a burden to be repelled.

But such considerations don’t matter to politicians who like to demagogue about the supposed pot of gold at the end of the rainbow of overseas Americans. So we get awful laws like FATCA.

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In my 2012 primer on fundamental tax reform, I explained that the three biggest warts in the current system.

1. High tax rates that penalize productive behavior.

2. Pervasive double taxation that discourages saving and investment.

3. Corrupt loopholes and cronyism that bribe people to make less productive choices.

These problems all need to be addressed, but I also acknowledged additional concerns with the internal revenue code, such as worldwide taxation and erosion of constitutional freedoms an civil liberties.

In a perfect world, we would shrink government to such a small size that there was no need for any sort of broad-based tax (remember, the United States prospered greatly for most of our history when there was no income tax).

In a good world, we could at least replace the corrupt internal revenue code with a simple and fair flat tax.

In today’s Washington, the best we can hope for is incremental reform.

But some incremental reforms can be very positive, and that’s the best way of describing the “Economic Growth and Family Fairness Tax Reform Plan” unveiled today by Senator Marco Rubio of Florida and Senator Mike Lee of Utah.

The two GOP senators have a column in today’s Wall Street Journal, and you can read a more detailed description of their plan by clicking here.

But here are the relevant details.

What’s wrong with Rubio-Lee

In the interest of fairness, I’ll start with the most disappointing feature of the plan. The top tax rate will be 35 percent, only a few percentage points lower than the 39.6 percent top rate that Obama imposed as a result of the fiscal cliff.

Even more troubling, that 35 percent top tax rate will be imposed on any taxable income above $75,000 for single taxpayers and $150,000 for married taxpayers.

Since the 35 percent and 39.6 percent tax rates currently apply only when income climbs above $400,000, that means a significant number of taxpayers will face higher marginal tax rates.

That’s a very disappointing feature in any tax plan, but it’s especially unfortunate in a proposal put forth my lawmakers who wrote in their WSJ column that they want to “lower rates for families and individuals.”

What’s right with Rubio-Lee

This will be a much longer section because there are several very attractive features of the Rubio-Lee plan.

Some households, for instance, will enjoy lower marginal tax rates under the new bracket structure, particularly if those households have lots of children (there’s a very big child tax credit).

But the really attractive features of the Rubio-Lee plan are those that deal with business taxation, double taxation, and international competitiveness.

Here’s a list of the most pro-growth elements of the plan.

A 25 percent tax rate on all business income – This means that the corporate tax rate is being reduced from 35 percent (the highest in the world), but also that there will be a 25 percent maximum rate on all small businesses that file using Schedule C as part of a 1040 tax return.

Sweeping reductions in double taxation – The Rubio-Lee plans eliminates the capital gains tax, the double tax on dividends, and the second layer of tax on interest.

Full expensing of business investment – The proposal gets rid of punitive “depreciation” rules that force businesses to overstate their income in ways that discourage new business investment.

Territorial taxation – Businesses no longer will have to pay a second layer of tax on income that is earned – and already subject to tax – in other nations.

No death tax – Income should not be subject to yet another layer of tax simply because someone dies. The Rubio-Lee plan eliminates this morally offensive form of double taxation.

In addition, it’s worth noting that the Rubio-Lee plan eliminate the state and local tax deduction, which is a perverse part of the tax code that enables higher taxes in states like New York and California.

Many years ago, while working at the Heritage Foundation, I created a matrix to grade competing tax reform plans. I updated that matrix last year to assess the proposal put forth by Congressman Dave Camp, the former Chairman of the House Ways & Means Committee.

Here’s another version of that matrix, this time including the Rubio-Lee plan.

As you can see, the Rubio-Lee plan gets top scores for “saving and investment” and “international competitiveness.”

And since these components have big implications for growth, the proposal would – if enacted – generate big benefits. The economy would grow faster, more jobs would be created, workers would enjoy higher wages, and American companies would be far more competitive.

By the way, if there was (and there probably should be) a “tax burden” grade in my matrix, the Rubio-Lee plan almost surely would get an “A+” score because the overall proposal is a substantial tax cut based on static scoring.

And even with dynamic scoring, this plan will reduce the amount of money going to Washington in the near future.

Of course, faster future growth will lead to more taxable income, so there will be revenue feedback. So the size of the tax cut will shrink over time, but even a curmudgeon like me doesn’t get that upset if politicians get more revenue because more Americans are working and earning higher wages.

That simply means another opportunity to push for more tax relief!

What’s missing in Rubio-Lee

There are a few features of the tax code that aren’t addressed in the plan.

The health care exclusion is left untouched, largely because the two lawmakers understand that phasing out that preference is best handled as part of a combined tax reform/health reform proposal.

Some itemized deductions are left untouched, or simply tweaked.

And I’m not aware of any changes that would strengthen the legal rights of taxpayers when dealing with the IRS.

Let’s close with a reminder of what very good tax policy looks like.

To their credit, Rubio and Lee would move the tax code in the direction of a flat tax, though sometimes in a haphazard fashion.

P.S. There is a big debate on the degree to which the tax code should provide large child credits. As I wrote in the Wall Street Journal last year, I much prefer lower tax rates since faster growth is the most effective long-run way to bolster the economic status of families.

But even the flat tax has a generous family-based allowance, so it’s largely a political judgement on how much tax relief should be dedicated to kids and how much should be used to lower tax rates.

That being said, I think the so-called reform conservatives undermine their case when they argue child-oriented tax relief is good because it might subsidize the creation of future taxpayers to prop up entitlement programs. We need to reform those programs, not give them more money.

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