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Posts Tagged ‘International Taxation’

There are many boring topics in tax policy, such as the debate between expensing and depreciation for business investment.

International tax rules also put most people to sleep, but they’re nonetheless important.

Indeed, the United States government is currently squabbling with several European governments about the appropriate tax policy for U.S.-based tech companies.

A report from the New York Times last July describes the controversy.

France is seeking a 3 percent tax on the revenues that companies earn from providing digital services to French users. It would apply to digital businesses with annual global revenue of more than 750 million euros, or about $845 million, and sales of €25 million in France. That would cover more than two dozen companies, many of them American, including Facebook, Google and Amazon. …Mr. Lighthizer said the United States was “very concerned that the digital services tax which is expected to pass the French Senate tomorrow unfairly targets American companies.” …France’s digital tax adds to the list of actions that European authorities have taken against the tech industry… And more regulation looms. Amazon and Facebook are facing antitrust inquiries from the European Commission. …Britain provided further details about its own proposal to tax tech companies. Starting in 2020, it plans to impose a 2 percent tax on revenue from companies that provide a social media platform, search engine or online marketplace to British users.

For the latest developments, here are excerpts from an article in yesterday’s New York Times.

A growing movement by foreign governments to tax American tech giants that supply internet search, online shopping and social media to their citizens has quickly emerged as the largest global economic battle of 2020. …At the core of the debate are fundamental questions about where economic activity in the digital age is generated, where it should be taxed and who should collect that revenue. …The discussions, which are expected to last months, could end with an agreement on a global minimum tax that all multinational companies must pay on their profits, regardless of where the profits are booked. The negotiations could also set a worldwide standard for how much tax companies must remit to certain countries based on their digital activity. …Mr. Mnuchin expressed frustration on Thursday in Davos that a digital sales tax had become such a focus of discussion at the World Economic Forum. …American tech firms are eager for a deal that would prevent multiple countries from imposing a wide variety of taxes on their activities.

Daniel Bunn of the Tax Foundation has an informative summary of the current debate.

In March of 2018, the European Commission advanced a proposal to tax the revenues of large digital companies at a rate of 3 percent. …The tax would apply to revenues from digital advertising, online marketplaces, and sales of user data and was expected to generate €5 billion ($5.5 billion) in revenues for EU member countries. The tax is inherently distortive and violates standard principles of tax policy. Effectively, the digital services tax is an excise tax on digital services. Additionally, the thresholds make it function effectively like a tariff since most of the businesses subject to the tax are based outside of the EU. …the European Commission was unable to find the necessary unanimous support for the proposal to be adopted. The proposal was laid aside… the French decided to design their own policy. The tax was adopted in the summer of 2019 but is retroactive to January 1, 2019. Similar to the EU proposal, the tax has a rate of 3 percent and applies to online marketplaces and online advertising services. …The United Kingdom proposed a digital services tax at 2 percent as part of its budget in the fall of 2018. The tax has already been legislated and will go into force in April of 2020. …The tax will fall on revenues of search engines, social media platforms, and online marketplaces. …The OECD has been working for most of the last decade to negotiate changes that will limit tax planning opportunities that businesses use to minimize their tax burdens. …The reforms have two general objectives (Pillars 1 and 2): 1) to require businesses to pay more taxes where they have sales, and 2) to further limit the incentives for businesses to locate profits in low-tax jurisdictions. …This week in Davos, the U.S. and France…agreed to continue work on both Pillar 1 and Pillar 2… The burden of proof is on the OECD to show that the price the U.S. and other countries may have to pay in lost revenue or higher taxes on their companies (paid to other countries) will be worth the challenge of adopting and implementing the new rules.

At the risk of over-simplifying, European politicians want the tech companies to pay tax on their revenues rather than their profits (such a digital excise tax would be sort of akin to the gross receipts taxes imposed by some American states).

And they want to use a global formula (if a country has X percent of the world’s Internet users, they would impose the tax on X percent of a company’s worldwide revenue).

Though all you really need to understand is that European politicians view American tech companies as a potential source of loot (the thresholds are designed so European companies would largely be exempt).

For background, let’s review a 2017 article from Agence France-Presse.

…are US tech giants the new robber barons of the 21st century, banking billions in profit while short-changing the public by paying only a pittance in tax? …French President Emmanuel Macron…has slammed the likes of Google, Facebook and Apple as the “freeloaders of the modern world”. …According to EU law, to operate across Europe, multinationals have almost total liberty to choose a home country of their choosing. Not surprisingly, they choose small, low tax nations such as Ireland, the Netherlands or Luxembourg. …Facebook tracks likes, comments and page views and sells the data to companies who then target consumers. But unlike the economy of old, Facebook sells its data to French companies not from France but from a great, nation-less elsewhere… It is in states like Ireland, whose official tax rate of 12.5 percent is the lowest in Europe, that the giants have parked their EU headquarters and book profits from revenues made across the bloc. …France has proposed an unusual idea that has so far divided Europe: tax the US tech giants on sales generated in each European country, rather than on the profits that are cycled through low-tax countries. …the commission wants to dust off an old project…the Common Consolidated Corporate Tax Base or CCCTB — an ambitious bid to consolidate a company’s tax base across the EU. …tax would be distributed in all the countries where the company operates, and not according to the level of booked profit in each of these states, but according to the level of activity.

This below chart from the article must cause nightmares for Europe’s politicians.

As you can see, both Google and Facebook sell the bulk of their services from their Irish subsidiaries.

When I look at this data, it tells me that other European nations should lower their corporate tax rates so they can compete with Ireland.

When European politicians look at this data, it tells them that they should come up with new ways of extracting money from the companies.

P.S. The American tech companies are so worried about digital excise taxes that they’re open to the idea of a global agreement to revamp how their profits are taxed. I suspect that strategy will backfire in the long run (see, for instance, how the OECD has used the BEPS project as an excuse to impose higher tax burdens on multinational companies).

P.P.S. As a general rule, governments should be free to impose very bad tax policy on economic activity inside their borders (just as places such as Monaco and the Cayman Islands should be free to impose very good tax policy on what happens inside their borders). That being said, it’s also true that nations like France are designing their digital taxes American companies are the sole targets. An indirect form of protectionism.

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I’m part of the small minority that thinks the big news from the United Kingdom is that “Brexit” will finally happen, thanks to Boris Johnson’s landslide victory last month.

Most everyone else seems more focused on the latest development with the royal family. The Duke and Duchess of Sussex, better known as Harry and Meghan, have decided to partially extricate themselves from the cloistered world of the monarchy – in part so they can take advantage of “the freedom to make a professional income.”

More power to them, I guess, if they can monetize their celebrity status.

The U.K.-based Economist expects that they’ll rake in lots of money.

In stepping down as “senior royals” while pronouncing that they “value the freedom to make a professional income” the Duke and Duchess threaten to unleash the spirit of capitalism on the very core of the monarchy. …The Sussexes are determined to turn themselves into a global brand. Their first move after they announced that they were stepping down from many of their royal duties was to unveil the name of their brand, Sussex Royal… Various branding experts have pronounced that Harry and Meghan have “a ready-made brand” that could earn them as much as £500m in their first year. InfluencerMarketingHub, a website, points out that, with 10m Instagram followers, they could expect $34,000 for a sponsored post. …They will need more than Prince Harry’s inheritance, which is estimated at £20m-30m, to keep up with the global super-rich.

I don’t have a rooting interest in their financial success. Indeed, I suspect they’ll wind up being annoying hypocrites like Harry’s dim-bulb father, lecturing us peasants about our carbon footprints while they fly around the world in private jets.

That being said, I am interested in the intricacies of international taxation.

And that will be a big issue for the couple according to Town and Country.

Now that Meghan and Harry intend to retreat from their royal roles, attain “financial independence,” and live part-time in North America, Meghan and Archie’s tax and citizenship plans are a little up in the air. …Meghan is still a US citizen, and therefore required to pay US taxes on her worldwide income. Prince Harry could technically elect to be treated as a US tax payer and file jointly with Meghan, but “he would never do that,” explains Dianne Mehany, a lawyer specializing in international tax planning. …When Meghan and Harry announced their engagement back in 2017, Harry’s communications team confirmed to the BBC that Meghan “intends to become a UK citizen and will go through the process of that.” …Once gaining UK citizenship, Meghan could elect to relinquish her US citizenship, and save herself the trouble and expense of filing US tax returns. “The only problem there is, she would have to pay the exit tax,” Mehany notes…regardless of what type of employment or contract work Meghan pursues, it will be taxable in the US. …”The real tricky thing,” Mehany notes, “is to make sure they don’t spend too much time in the United States, so that Harry becomes a resident of the United States, at which point his entire worldwide wealth would become subject to US taxation, which I know they want to avoid.”

For all intents and purposes, Meghan and Harry will face the same challenges as a multinational company.

  • Multinational companies have to figure out where to be “domiciled” just as Meghan and Harry have to figure out the best place to reside.
  • Multinational companies have to figure out where to conduct business, just as Meghan and Harry have to figure out where they will work.
  • Multinational companies have to figure out how to protect their income from taxes, just as Meghan and Harry will try to protect their income.

For what it’s worth, the Royal couple already is being smart.

As reported by the U.K.-based Telegraph, they’re minimizing their exposure to the rapacious California tax system.

The Duchess of Sussex has moved her business to a US state used by the super-rich to protect their interests from scrutiny. The Duchess’s company Frim Fram Inc was moved out of California in December and incorporated in Delaware, which tax experts suggest could be done to avoid being hit with tax liabilities in California. …the move was made on New Year’s Eve…”You would want to do it on New Year’s Eve simply because if you go one minute into the next year you would owe some taxes to California for the year of 2020,” said Alan Stachura, from financial services firm Wolters Kluwer. …Mr Stachura, who helps companies incorporate in Delaware, added that the state offers “a tax benefit for items like trademarks and royalties”. …Experts say there are several benefits in moving a corporation to Delaware, including the state’s flexible business laws and its low personal income tax rates. …A source said that as the Duchess is no longer resident in California it was appropriate for the registration to be moved.

I can’t resist commenting on the last line of the excerpt. The fact that Meghan is no longer a resident of California is irrelevant.

After all, she’s not becoming a resident of Delaware.

Instead, she and her husband are being rational by seeking to minimize the amount of their money that will be diverted to politicians (the same is true of everyone with any sense in the United Kingdom, whether they are on the right or on the left).

It’s a shame Meghan and Harry feel too insecure to acknowledge that reality.

P.S. The Town and Country article noted that Prince Harry “would never” allow himself to become a tax resident of the United States because he wants “to avoid” America’s worldwide tax system. That’s completely understandable. He probably learned about the nightmare of FATCA after marrying Meghan and wants to make sure he’s never ensnared by America’s awful internal revenue code.

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Ever since the bureaucrats at the Organization for Economic Cooperation and Development launched their attack on so-called harmful tax competition back in the 1990s, I’ve warned that the goal has been to create a global tax cartel.

Sort of an “OPEC for politicians.”

Supporters of the initiative said I was exaggerating, and that the OECD, acting on behalf of the high-tax nations that dominate its membership, simply wanted to reduce tax evasion. Indeed, some advocates even said that the effort could lead to lower tax rates.

That was a nonsensical claim. I actually read the various reports issued by the Paris-based bureaucracy. It was abundantly clear that the effort was based on a pro-tax harmonization theory known as “capital export neutrality.”

And, as I documented in my first study on the topic back in 2000, the OECD basically admitted the goal of the project was to enable higher taxes and bigger government.

  • Low-tax policies “unfairly erode the tax bases of other countries and distort the location of capital and services.”
  • Tax competition is “re-shaping the desired level and mix of taxes and public spending.”
  • Tax competition “may hamper the application of progressive tax rates and the achievement of redistributive goals.”

The OECD’s agenda was so radical that it even threatened low-tax jurisdiction with financial protectionism if they didn’t agree to help welfare states enforce their punitive tax laws.

At first, there was an effort to push back against the OECD’s tax imperialism – thanks in large part to the creation of the pro-competition Center for Freedom and Prosperity, which helped low-tax jurisdictions fight back (I almost got thrown in a Mexican jail as part of the fight!).

But then Obama got to the White House and sided with Europe’s big welfare states. Lacking the ability to resist the world’s most powerful nations, low-tax jurisdictions around the world were forced to weaken their human rights laws on privacy so it would be easier for high-tax countries to track and tax flight capital.

Once that happened, was the OECD satisfied?

Hardly. Any victory for statism merely serves as a springboard for the next campaign to weaken tax competition and prop up big government.

Indeed, the bureaucrats are now trying to impose minimum corporate tax rates. Let’s look at some excerpts from a report in the U.K.-based Financial Times.

…large multinationals could soon face a global minimum level of corporate taxation under new proposals from the OECD… The Paris-based organization called…for the introduction of a safety net to enable home countries to ensure their multinationals cannot escape taxation, even if other countries have offered them extremely low tax rates. …The proposals would…reduce incentives for countries to lower their tax rates… The OECD said: “A minimum tax rate on all income reduces the incentive for…tax competition among jurisdictions.”

Sadly, the Trump Administration is not fighting this pernicious effort.

Indeed, Trump’s Treasury Department is largely siding with the OECD, ostensibly because a one-size-fits-all approach is less bad than the tax increases that would be imposed by individual governments (but also because the U.S. has a bad worldwide tax system and our tax collectors also want to reach across borders to grab more money).

In any event, we can safely (and sadly) assume that this effort will lead to a net increase in the tax burden on businesses.

And that means bad news for workers, consumers, and shareholders.

Moreover, if this effort succeeds, then the OECD will move the goalposts once again and push for further forms of tax harmonization.

I’ll conclude by recycling a couple of videos produced by the Center for Freedom and Prosperity. Here’s my analysis of the OECD.

By the way, the OECD bureaucrats, who relentlessly push for higher taxes on you and me, get tax-free salaries!

And here’s my explanation of why tax competition should be celebrated rather than persecuted.

I also recommend this short speech that I delivered earlier this year in Europe, as well as this 2017 TV interview.

Last but not least, here are two visuals that help to explain why the OECD’s project is economically misguided.

First, here’s the sensible way to think about the wonky issue of “capital export neutrality.”

Yes, it would be nice if people could make economic decisions without having to worry about taxes. And sometimes people make inefficient decisions that only make sense because they don’t want governments to grab too much of their money.

But the potential inefficiencies associated with tax planning are trivial compared to the economic damage caused by higher tax rates, more double taxation, and a bigger burden of government spending.

Now let’s consider marginal tax rates. Good policy says they should be low. The OECD says they should be high.

Needless to say, people will be less prosperous if the OECD succeeds.

That’s why I fight on this issue, notwithstanding personal attacks.

P.S. Senator Rand Paul is one of the few lawmakers in Washington fighting on the right side of this issue.

P.P.S. If you want even more information, about 10 years ago, I narrated a three-part video series on tax havens, and even a video debunking some of Obama’s demagoguery on the topic.

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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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Since I consider myself the world’s biggest advocate for tax competition and tax havens (even when it’s risky), I’m always on the lookout for new material to share.

So I was delighted to see a new monograph from the London-based Institute of Economic Affairs on the benefits of “offshore” financial centers. Authored by Diego Zuluaga, it explains why low-tax jurisdictions are good news for those of us laboring in less-enlightened places.

Offshore finance serves several purposes, the most salient of which is the efficient allocation of capital. Some of this activity is tax-related, aimed at raising after-tax investment returns. If it were not for offshore jurisdictions, much foreign investment would be vulnerable to double or triple taxation. Because, under such punitive rates of tax, some of this investment would not take place, the existence of offshore centres has real positive effects on economic activity alongside the (plausibly) negative impact on the tax revenue of individual countries. These welfare gains have been amply documented… Beyond their impact on aggregate investment, research shows that the existence of an OFC is associated with better economic outcomes in neighbouring countries. Contrary to the popular narrative, these jurisdictions are well-governed and peaceful. Who, after all, would wish to use intermediaries in places where investors were regularly expropriated or harassed? …It is difficult to imagine the process of globalisation that has taken place over the last fifty years, bringing hundreds of millions of people out of poverty, happening without the robust financial and legal framework which offshore jurisdictions provide for investment. It would be counterproductive, for both the developing and the rich world, to undermine their essential functions. …Clamping down on offshore centres…would make societies less productive and prosperous, and this effect would compound over time.

He provides some fiscal history, including the fact that government used to be very small in the industrialized world (indeed, that’s one of the big reasons why today’s rich nations got that way).

And he notes that low-tax jurisdictions became more important to global commerce as governments adopted dirigiste policies.

Before World War I, governments played only a small role in economic activity, rarely taking up shares of national income in excess of 15 per cent during peacetime. After the Great War, they took upon themselves ever larger fiscal and administrative functions, notably trade restrictions and capital controls. …In a context of punitive marginal tax rates, constrained capital movements…, OFCs were vital to the revival of cross-border trade and investment after World War II. Without stable intermediary jurisdictions with robust rule of law and low taxation, much international investment would have been too costly, whether because of the associated tax burden or the risks of expropriation and inflation.

Zuluaga notes that tax competition ties the hands of politicians.

Theory and evidence suggest that countries may have any two of free capital mobility, an independent tax policy and no tax competition (Figure 2). But they cannot have all three.

And here is the aforementioned Figure 2 from the report.

I wrote about a version of the tax trilemma two years ago and noted that there’s only a problem if a country has high taxes.

So I made the following correction.

Returning to the article, Zuluaga points out that low-tax jurisdictions have a much better track record in the fight against bad behavior than high-tax nations.

OFCs are neither the original source nor the ultimate destination of illegal financial flows. So long as there remain corrupt politicians, drug users and people willing to engage in terrorist acts, history suggests that some illegal financial activity will take place to make it possible. Furthermore, as we saw above, OFCs are as a rule far more compliant and transparent in their prevention of unlawful activities than onshore jurisdictions, including the United States and the United Kingdom.

Zuluaga concludes with a warning about how the attack on tax havens is really an attack on globalization. And the global economy will suffer if the statists prevail.

…an ominous alliance of revenue-greedy politicians, ideological campaigners and rent-seekers has emerged in recent years. Gradually, but relentlessly, they aim to dismantle the liberal financial order of which free capital movement is a fundamental component. …the alliance’s real goal: to eliminate tax competition and constrain the movement of capital in order to bring it under their control. The consequences of this effort would be long-standing and go far beyond a few tiny offshore financial centres.

Excellent points. I strongly recommend reading the entire publication.

Though I’m not sure Zuluaga and I agree on everything. His article notes, seemingly with approval, that offshore jurisdictions largely have agreed to help enforce the bad tax laws of onshore nations. Yet that’s a recipe for the application of more double taxation on income that is saved and invested, which he acknowledges is a bad thing.

In other words, I think financial privacy is a good thing since predatory governments are less likely to misbehave if they know taxpayers have safe (and confidential) places to put their money. Now that privacy has been weakened, however, anti-tax competition folks at the OECD are openly chortling that there can be higher taxes on capital.

The bottom line is that tax competition without privacy is not very effective. I wonder if Zuluaga understands and agrees.

Another IEA author, Richard Teather, got that key point.

In a 2005 monograph, he explained the vital role of financial privacy.

Although the country of residence may theoretically impose taxes on foreign income, it can only do so practically if its tax authorities have knowledge of that income. It is therefore common for tax havens to have strong privacy laws that protect investors’ personal information from enquirers (including foreign tax authorities). The best-known of these was Switzerland, which introduced banking secrecy to protect Jewish customers from Nazi confiscation, and there remains a genuine strong feeling in many of these countries that privacy is about more than just tax avoidance.

But I’m digressing. Since we’ve looked at one U.K.-based defense of low-tax jurisdictions, let’s also look at some excerpts from a column by Matthew Lynn in the London-based Spectator.

He makes a very interesting point about how so-called tax havens are basically the financial equivalent of free zones for goods.

…in a globalised economy, offshore finance plays an important role, enabling money to move across borders relatively easily. Rather oddly, a lot of the media seem to have decided that while it is fine for people and goods to move around the world, having a bank account or an investment in a different country makes you virtually a criminal. …The world already has an extensive network of free ports, tax-free zones where goods in transit can be processed or temporarily stored without having to pay local tariffs. There are an estimated 3,500 of them across 135 countries, facilitating the movement of goods around the world. They have helped trade grow hugely over the past couple of decades. Offshore centres…are now mainly financial ‘free ports’ — places where cash can easily be parked and transferred as it moves around the world.

He also makes a very important observation about how the theft of data leading to the Panama Papers and Paradise Papers revealed very little illegal behavior.

…one of the interesting things about the leaks is not how much wrongdoing they expose, but how little. Take last year’s Panama Papers scandal, for example. …For all the drama, it was pretty small beer. The reason? All the data revealed might have been interesting, and made for some lurid headlines, but very few people turned out to be breaking any laws. In only a handful of cases were taxes being evaded or money-laundered.

Which is a point I’ve made as well.

And here’s his conclusion.

…it turns out that offshore centres are used by just about everyone. Most pension funds use them, including those looking after the savings of the politicians queuing up to condemn them. They are part of the infrastructure of globalisation, as much as the container ships, airports and fibre optic cables. It is ironic that many of the same people who proudly describe themselves as citizens of the world think that applies to everything except money.

Amen. Once again, this is really a fight about globalization. Or, to be more accurate, a fight between good globalism and bad globalism.

To wrap up, here’s the video I narrated for the Center for Freedom and Prosperity on the economic benefits of tax havens.

P.S. I’ve previously cited other tax haven-related research and analysis from the United Kingdom, most notably from Allister Heath, Dan Hannan, Philip Booth, Godfrey Bloom, and Mark Field.

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Back in 2013, I wrote about a gay guy adopting his long-time lover in order to escape the evil and pernicious death tax. I speculated that this would cause confusion and angst in some circles.

  • Traditional leftists would want to applaud the adoption because of their support for gay rights, but they would be conflicted because of their support for the death tax.
  • Traditional conservatives, by contrast, would dislike the way adoption laws were being used, but presumably like the fact that the reach of the death tax was being curtailed.

Now we have a somewhat similar example of the death tax leading people to take an unusual step.

Here are some excerpts from a report in the Belfast Telegraph.

Two best friends in the Republic of Ireland who have decided to get married to avoid paying inheritance tax… Michael O’Sullivan, a father of three, is set to marry his friend Matt Murphy in January. …Friends for almost 30 years they have made the decision so that Michael will inherit Matt’s home in Stoneybatter, Dublin when he dies. …Neither man is gay and say they are like brothers.

Not only will this save them money, it will be beneficial for other taxpayers as well.

Both men say they are currently on a small pension and say their idea is “saving the State money”. Michael said: “We found out from a friend of mine that she is paying €1,760 a week to stay in a nursing home, okay I could put Matt in a nursing home and then people would be paying their tax to look after him in the nursing home. “I don’t have much money and Matt can’t pay me to look after him but we tried to find out how much it would cost for a 24-hour care, you’re talking about a couple of thousand a week. “We are saving the State money.”

By the way, this story also may be an indirect example of excessive regulation.

It seems the guys could have received a subsidy from the government so that Michael could take care of Matt, but that would have triggered so much hassle and red tape that it wasn’t worth it.

“We didn’t go for the Carer’s Allowance because Matt would have to be examined, the house would have to be looked at.

Amen. Nobody welcomes a bunch of nosy bureaucrats poking through their life.

Now let’s zoom out and consider some broader policy implications.

I like and defend Ireland’s policy of aggressively using low corporate taxes to attract jobs and investment, but that doesn’t mean other policies in the country are favorable for taxpayers.

Indeed, there’s plenty of evidence that other taxes in that country are too high and it’s quite clear that the burden of government spending also is excessive.

The story doesn’t give details about the extent of the death tax, but it obviously must be punitive if two straight guys are marrying each other to dodge the levy.

In any event, it belongs in my collection of odd moments in international taxation.

It doesn’t really belong in this collection, but I think the oddest tax story I’ve ever read is that a bureaucrat from the tax-loving European Commission criticized France for excessive taxation.

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I realize that we’re in the midst of an important tax battle in Washington and that I should probably be writing about likely amendments to the Senate tax bill.

But long-time readers know that I’m bizarrely preoccupied by international tax issues (I would argue for very good reasons since global tax competition is a way to discipline greedy politicians and because I want the power of governments to be constrained by national borders).

So I can’t resist commenting on a Washington Post story about the tax implications of the upcoming wedding of Prince Harry and Meghan Markle.

It may seem like a modern fairy tale, but the upcoming wedding of Britain’s Prince Harry to American actress Meghan Markle will come with some mundane hurdles. Perhaps most inconveniently for the British royals, this transatlantic partnership could end up involving the United States’ Internal Revenue Service.

Most readers probably wonder how and why the IRS will be involved. After all, Ms. Markle no longer will be living in the United States or earning income in the United States after she marries the Prince.

But here’s the bad news (for the millions of Americans who live overseas, not just Ms. Markle): The United States imposes “worldwide taxation,” which means the IRS claims the right to tax all income earned by citizens, even if those citizens live overseas and earn all their income outside of America.

…there already has been widespread speculation that the union of Prince Harry and Markle eventually could result in some British royal children wielding American passports. But there’s a big obstacle in the way: American tax laws. …The United States’ citizenship-based taxation system is unusual: Only Eritrea has a similar system. It’s a relic of the Civil War and the Revenue Act of 1862, which called for the taxing of U.S. citizens abroad.

Here’s what this means for the royal family.

Markle’s American citizenship could open up the secretive finances of the royal family to outside scrutiny. If she remains a U.S. citizen, Markle will have to file her taxes to the IRS every year. And if she has more than $300,000 in assets at any point during the tax year — a likely scenario, given her successful acting career and her future husband — she will be expected to annually file a document called Form 8938 that will reveal the detail of these assets, which could include foreign trusts. …Although Markle’s tax information would not become public once sent to the United States, it would leave the royal family open not only to IRS review but also the risk that the information could leak, said Dianne Mehany, a tax lawyer at Caplin & Drysdale.

So what’s the solution if the royal family wants to avoid the greedy and intrusive IRS?

Ms. Markle will need to copy thousands of other overseas Americans and renounce her citizenship.

…the royal family employs some of the country’s best tax consultants. …”My guess is that she’ll be pressured by the Royal family to renounce [her U.S. citizenship], even if she’d rather not,” Spiro added. In many ways, that solution may be the simplest. And if Markle does give up her citizenship, she won’t be alone. Treasury Department data show that 5,411 people chose to expatriate in 2016 — a 26 percent year-over-year increase and potentially a historic high — and experts expect that number to keep rising because of the increasing tax burdens placed on U.S. citizens living abroad.

And it’s embarrassing to acknowledge that the United States has a very barbaric practice (used by evil regimes such as Nazi Germany and Soviet Russia) of extorting funds from Americas who are forced to give up citizenship.

She…would be subject to a potentially considerable exit tax.

This is adding injury to injury.

But Ms. Markle can be comforted by the fact that she’s not an outlier. Because of America’s bad worldwide tax regime (and especially because of FATCA, which makes enforcement of that bad system especially painful), an ever-growing number of overseas Americans have been forced to give up their citizenship.

Maybe as a wedding present to Prince Harry, American politicians can junk America’s terrible worldwide tax regime. That doesn’t require dramatic change, but why not fix a bunch of problems at once? I’ll simply point out that the flat tax is based on the common-sense approach of territorial taxation (governments only tax economic activity inside national borders).

P.S. This issue also impacts America’s Olympic athletes.

P.P.S. And Santa Claus as well!

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The Republican tax plan is based on some very attractive principles.

Unfortunately, the GOP isn’t planning to completely fix these policies, largely because there’s no commitment to control government spending. But any shift toward better tax policy will be good for the nation.

Another goal to add to the above list is that Republicans want to create a level playing field for American-based firms by replacing “worldwide taxation” of business income with “territorial taxation” of business income.

For those who have wisely avoided the topic of international business taxation, here’s all you need to know: Worldwide taxation means a company that earns income in another country is taxed both by the government where the income is earned and by the government back home. Territorial taxation, by contrast, is simply the common-sense notion that income is taxed only by the government where the income is earned.

In a column for the Wall Street Journal, two authors explain how America’s anti-competitive system of worldwide taxation undermines U.S.-domiciled companies.

…earlier this month Iconix , the U.S.-based company that owns the rights to Charles Schulz’s comic characters, announced it will sell them to Canada’s DHX Media. That makes Charlie Brown America’s latest expatriate. It’s a clear signal that U.S. corporate taxes are nudging business elsewhere. …why? In part because the U.S. corporate tax system hampers U.S.-based businesses by subjecting them to world-wide taxation. Canada’s aggregate corporate taxes are about 10 percentage points lower. …America’s high corporate tax rate and its practice of taxing international income is out of step with the rest of the world. The solution is so clear even a cartoon character should grasp it: Cut tax rates and adopt a system for taxing international income that more closely resembles those used by the country’s international competitors.

Indeed, it’s worth noting that the entire “inversion” controversy only exists because of America’s worldwide tax regime.

Simply stated, American-domiciled multinationals have a big competitive disadvantage compared to their foreign rivals. So it’s understandable that many of them try to protect shareholders, workers, and consumers by arranging (usually through a merger) to become foreign companies.

That’s the bad news.

The good news is that the Republican tax reform plan ostensibly will shift America to a territorial tax system. As explained above, this is the sensible notion of letting other nations tax income earned inside their borders while the IRS would tax the income earned by companies in the United States.

This would be good for competitiveness, particularly since the United States is one of only a handful of nations that impose a worldwide tax burden on domestic firms.

But not everybody likes the idea of territorial taxation.

One reason for opposition is that some people see corporations primarily as sources of tax revenue. So when there are discussions of international tax, their mindset is nations should compete on grabbing the most money. I’m not joking.

European Union regulators’ tax crackdown on Amazon.com Inc. — like the EU’s case against Apple Inc. — should spur U.S. policy makers to address companies’ aggressive offshore tax-avoidance strategies before it’s too late, experts said. …“Really, what we are seeing is a race by the different taxing jurisdictions to claim a share of the tax prize represented by the largely untaxed streams of income that U.S. multinationals have engineered for themselves,’’ said Ed Kleinbard, a professor at the University of Southern California and the former chief of staff for Congress’s Joint Committee on Taxation. “If the United States doesn’t join the race, it will just lose tax revenue to more aggressive host countries around the world.’’ The EU rulings “do make it clear that if we are not interested in protecting our corporate tax base, other countries will be more than happy to tax the income,’’ said Kimberly Clausing, a professor of economics at Reed College in Portland, Oregon.

Call me crazy, but I think American policymakers should be in a race to create jobs, boost investment, and increase wages. And that means doing the opposite of what these supposed experts want.

Unsurprisingly, left-wing groups also are opposed to territorial taxation. Here are some passages from a report published by the Hill.

One hundred organizations, including a number of progressive groups and labor unions, are urging Congress to reject a major international tax change proposed in Republicans’ framework for a tax overhaul. In a letter dated Monday, the groups speak out against the framework’s move toward a “territorial” tax system that would largely exempt American companies’ foreign profits from U.S. tax. …”Ending taxation of offshore profits would give multinational corporations an incentive to send jobs offshore, thereby lowering U.S. wages,” they wrote.

Both assertions in that excerpt are wrong and/or misleading.

First, territorial taxation doesn’t mean that profits are exempt from tax. It simply means that the IRS doesn’t impose an additional layer of tax on income that already has been subject to the tax system of another country.

And other countries impose plenty of tax on American firms operating overseas.

Second, the incentive to shift job overseas is caused by America’s high corporate tax rate. That’s what makes it attractive for firms to operate in other nations.

Worldwide taxation is not the way to fix that bias since foreign-domiciled companies wouldn’t be impacted and they easily can sell into the American market.

By the way, the Republican tax plan doesn’t even create a real territorial tax system. Returning to the Bloomberg story cited above, the GOP proposal basically copies a very bad idea that was being pushed a few years ago by the Obama Administration.

…the GOP tax framework contemplates a so-called “minimum foreign tax’’ on multinationals’ future earnings that would apply in cases where a company’s effective tax rate fell below a pre-determined threshold.

To be fair, the Republican approach is less punitive that what Obama wanted.

Nonetheless, I worry that if Republicans adopt some sort of global minimum tax, it will just be a matter of time before that rate increases. In which case a shift toward territoriality actually plants a seed for a more onerous worldwide system!

Without knowing what will happen in the future, there’s no right or wrong answer, but I’m wondering whether the smart approach is to simply leave the current system in place. Yet, it’s based on worldwide taxation, but at least companies have deferral, which creates de facto territoriality for firms that manage their affairs astutely.

Such a shame that the GOP isn’t capable of simply doing the right thing.

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

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

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

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

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

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

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

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

Now let’s consider specific tax-related issues.

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

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

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

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

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

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

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

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

Let’s elaborate on this issue.

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

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

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

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

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

These same fights between governments and taxpayers exist today.

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

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

The author had mixed feelings about the experience.

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

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

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

Bershidsky cites some new academic research.

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

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

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

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

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

Though his conclusion rubs me the wrong way.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

And that measure of morale naturally varies across countries.

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

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

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

Anyhow, here are the results of the study.

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

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

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

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

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

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

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

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

He then brings tax complexity into the equation.

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

Here are some of his findings.

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

Sounds to me like an argument for a flat tax.

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

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

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

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

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

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

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

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

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

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

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

But these are bad things from a statist perspective.

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

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

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

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

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

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

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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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It’s time to criticize my least-favorite international bureaucracy.

Regular readers probably know that I’m not talking about the United Nations, International Monetary Fund, or World Bank.

Those institutions all deserve mockery, but I think the Paris-based Organization for Economic Cooperation and Development is – on a per-dollar basis – the bureaucracy that is most destructive to human progress and economic prosperity.

One example of the organization’s perfidy is the OECD’s so-called Base Erosion and Profit Shifting (BEPS) initiative, which is basically a scheme to extract more money from companies (which means, of course, that the real cost is borne by workers, consumers, and shareholders).

I’ve written (several times) about the big-picture implications of this plan, but let’s focus today on some very troubling specifics of BEPS.

Doug Holtz-Eakin, in a column for the Wall Street Journal, explains why we should be very worried about a seemingly arcane development in BEPS’ tax treatment of multinationals. He starts with a very important analogy.

Suppose a group of friends agree to organize a new football league. It would make sense for them to write rules governing the gameplay, the finances of the league, and the process for drafting and trading players. But what about a rule that requires each team to hand over its playbook to the league? No team would want to do that. The playbook is a crucial internal-strategy document, laying out how the team intends to compete. Yet this is what the Organization for Economic Cooperation and Development wants: to force successful global companies, including U.S. multinationals, to hand over their “playbooks” to foreign governments.

Here’s specifically what’s troubling about BEPS.

…beginning next year the BEPS rules require U.S.-headquartered companies that have foreign subsidiaries to maintain a “master file” that provides an overview of the company’s business, the global allocation of its activities and income, and its overall transfer pricing policies—a complete picture of its global operations, profit drivers, supply chains, intangibles and financing. In effect, the master file is a U.S. multinational’s playbook.

And, notwithstanding assurances from politicians and bureaucrats, the means that sensitive and proprietary information about U.S. firms will wind up in the wrong hands.

Nothing could be more valuable to a U.S. company’s competitors than the information in its master file. But the master file isn’t subject to any confidentiality safeguards beyond those a foreign government decides to provide. A foreign government could hand the information over to any competitor or use it to develop a new one. And the file could be hacked.

Doug recommends in his column that Congress take steps to protect American companies and Andy Quinlan of the Center for Freedom and Prosperity has the same perspective.

Here’s some of what Andy wrote for The Hill.

It is…time for Congress to take a more assertive role in the ongoing efforts to rewrite global tax rules. …(BEPS) proposals drafted by the Organization for Economic Cooperation and Development…threaten the competitiveness of U.S.-based companies and the overall American economy. …We know the Paris-based OECD’s aim is to raid businesses – in particular American businesses – for more tax revenue… The fishing expeditions are being undertaken in part so that bureaucrats can later devise new and creative ways to suck even more wealth out of the private sector. …American companies forced to hand proprietary data to governments – like China’s – that are known to engage in corporate espionage and advantage their state-owned enterprises will be forced to choose between forgoing participation to vital markets or allowing competitors easy access to the knowledge and techniques which fuel their success.

You would think that the business community would be very alarmed about BEPS. And many companies are increasingly worried.

But their involvement may be a too-little-too-late story. That’s because the business group that is supposed to monitor the OECD hasn’t done a good job.

Part of the problem, as Andy explains, is that the head of the group is from a company that is notorious for favoring cronyism over free markets.

The Business and Industry Advisory Committee…has been successfully co-opted by the OECD bureaucracy. At every stage in the process, those positioned to speak on behalf of the business community told any who wished to push back against the boneheaded premise of the OECD’s work to sit down, be quiet, and let them seek to placate hungry tax collectors with soothing words of reassurance about their noble intentions and polite requests for minor accommodations. That go-along-to-get-along strategy has proven a monumental failure. Much of the blame rests with BIAC’s chair, Will Morris. Also the top tax official at General Electric – whose CEO Jeffrey Immelt served as Obama’s “job czar” and is a dependable administration ally – and a former IRS and Treasury Department official, Morris is exactly the kind of business representative tax collectors love.

Ugh, how distasteful. But hardly a surprise given that GE is a big supporter of the corrupt Export-Import Bank.

I’m not saying that GE wants to pay more tax, but I wouldn’t be surprised if the top brass at the company decided to acquiesce to BEPS as an implicit quid pro quo for all the subsidies and handouts that the firm receives.

In any event, I’m sure the bureaucrats at the OECD are happy that BIAC didn’t cause any problems, so GE probably did earn some brownie points.

And what about the companies that don’t feed at the public trough? Weren’t they poorly served by BIAC’s ineffectiveness?

Yes, but the cronyists at GE presumably don’t care.

But enough speculation about why BIAC failed to represent the business community. Let’s return to analysis of BEPS.

Jason Fichtner and Adam Michel of the Mercatus Center explain for U.S. News & World Report that the OECD is pushing for one-size-fits-all global tax rules.

The OECD proposal aims to centralize global tax rules and increase effective tax rates on international firms. U.S. technology firms such as Google, Facebook, Amazon and Apple will likely be harmed the most. …the OECD as a special interest group for tax collectors. Over the past 25 years, they have built an international tax cartel in an effort to keep global tax rates artificially high. The group persistently advocates for increased revenue collection and more centralized control. The OECD has waged a two-decade campaign against low tax rates by blacklisting sovereign countries that don’t comply with OECD directives.

Like the others, Fichtner and Michel worry about the negative consequences of the BEPS plan.

The centralization of tax information through a new international country-by-country reporting requirement will pressure some countries to artificially expand their tax base.  A country such as China could increase tax revenue by altering its definition of so-called value creation… Revenue-hungry states will be able to disproportionately extract tax revenue from global companies using the newly centralized tax information. …while a World Bank working paper suggests there is a significant threat to privacy and trade secrets. Country-by-country reporting will complicate international taxation and harm the global economy.

Instead of BEPS, they urge pro-growth reforms of America’s self-destructive corporate tax system.

…the United States should focus on fixing our domestic corporate tax code and lower the corporate tax rate. The U.S. [has] the single highest combined corporate tax rate in the OECD. …Lower tax rates will reduce incentives for U.S. businesses to shift assets overseas, grow the economy and increase investment, output and real wages. Lowering tax rates is the most effective way policymakers can encourage innovation and growth.  The United States should not engage in any coordinated attempt to increase global taxes on economic activity. …The United States would be better off rejecting the proposal to raise taxes on the global economy, and instead focus on fixing our domestic tax code by substantially lowering our corporate tax rate.

By the way, don’t forget that BEPS is just one of the bad anti-tax competition schemes being advanced by the bureaucrats in Paris.

David Burton of the Heritage Foundation has just produced a new study on the OECD’s Multilateral Convention, which would result in an Orwellian nightmare of massive data collection and promiscuous data sharing.

Read the whole thing if you want to be depressed, but this excerpt from his abstract tells you everything you need to know.

The Protocol amending the Multilateral Convention on Mutual Administrative Assistance in Tax Matters will lead to substantially more transnational identity theft, crime, industrial espionage, financial fraud, and the suppression of political opponents and religious or ethnic minorities by authoritarian and corrupt governments. It puts Americans’ private financial information at risk. The risk is highest for American businesses involved in international commerce. The Protocol is part of a contemplated new and extraordinarily complex international tax information sharing regime involving two international agreements and two Organization for Economic Co-operation and Development (OECD) intergovernmental initiatives. It will result in the automatic sharing of bulk taxpayer information among governments worldwide, including many that are hostile to the United States, corrupt, or have inadequate data safeguards.

I wrote about this topic last year, citing some of David’s other work, as well as analysis by my colleague Richard Rahn.

The bottom line is that the OECD wants this Multilateral Convention to become a World Tax Organization, with the Paris-based bureaucracy serving as judge, jury, and executioner.

That’s bad for America. Indeed, it’s bad for all nations (though it is in the interest of politicians from high-tax nations).

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What’s the best way to generate growth and prosperity for the developing world?

Looking at the incredible economic rise of jurisdictions such as Hong Kong and Singapore, it’s easy to answer that question. Simply put in place the rule of law, accompanied by free markets and small government.

But that answer, while unquestionably accurate, would mean less power and control for politicians and bureaucrats.

So you probably won’t be surprised to learn that when politicians and bureaucrats recently met to discuss this question, they decided that development could be best achieved with a policy of higher taxes and bigger government.

I’m not joking.

Reuters has a report on a new cartel-like agreement among governments to extract more money from the economy’s productive sector. Here are some key passages from the story.

Rich and poor countries agreed on Thursday to overhaul global finance for development, unlocking money for an ambitious agenda… The United Nations announced the deal on its website… Development experts estimate that it will cost over $3 trillion each year to finance the 17 new development goals… Central to the agreement is a framework for countries to generate more domestic tax revenues in order to finance their development agenda… Under the agreement, the UN Committee of Experts on International Cooperation in Tax Matters will be strengthened, the press release said.

Though there’s not total agreement within this crooks’ cartel. There’s a fight over which international bureaucracy will have the biggest role. Should it be the Organization for Economic Cooperation and Development, which is perceived as representing the interests of revenue-hungry politicians from the developed world?

Or should it be the United Nations, which is perceived as representing the interests of revenue-hungry politicians from the developing world?

Think of this battle as being somewhat akin to the fight between various socialist sects (Mensheviks, Trotskyites, Stalinists, etc) as the Soviet Union came to power.

Bloomberg has a story on this squabble.

Responsibility for tax standards should be moved to the UN from the Organization for Economic Co-operation and Development, a group of 34 rich countries, according to a position paper endorsed by 142 civil-society groups. …Tove Maria Ryding from the European Network on Debt and Development, [said] “Our global tax decision-making system is anything but democratic, excluding more than half of the world’s nations.”

I’m tempted to laugh about the notion that there’s anything remotely democratic about either the UN or OECD. Both international organizations are filled with unelected (and tax-free) bureaucrats.

But more importantly, it’s bad news for either organization to have any power over the global economy. Both bureaucracies want to replace tax competition with tax harmonization, precisely because of a desire to enable big expansion is the size and power of governments.

This greed for more revenue already has produced some bad policies, including an incredibly risky scheme to collect and share private financial information, as well as a global pact that could be the genesis of a world tax organization.

And there are more troubling developments.

Here are some excerpts from another Bloomberg report.

Step aside, Doctors Without Borders. …A team called Tax Inspectors Without Borders will be…established next week by the United Nations and the Organization for Economic Cooperation and Development. …Tax Inspectors Without Borders would take on projects or audits either by flying in to hold workshops…or embedding themselves full time in a tax agency for several months… “There is a lot of enthusiasm from developing countries” for this initiative, said John Christensen, the U.K.-based director of the nonprofit Tax Justice Network.

Gee, what a surprise. Politicians and bureaucrats have “a lot of enthusiasm” for policies that will increase their power and money.

But at the risk of repeating myself, the more serious point to make is that bigger government in the developing world is not a recipe for economic development.

The western world became rich when government was very small. As noted above, Hong Kong and Singapore more recently became rich with small government.

But can anyone name a country that became rich with big government?

I’ve posed that question over and over again to my leftist friends and they never have a good answer.

If we want the third world to converge with rich nations, they need to follow the policies that enabled rich nations to become rich in the first place.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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While the Bureaucrat Hall of Fame and Moocher Hall of Fame already exist, the Hypocrite Hall of Fame is just a concept.

But once it gets set up, Congressman Alan Grayson of Florida will definitely be a charter member.

Here are some passages from a column in the Tampa Bay Times.

U.S. Rep. Alan Grayson, the outspoken, populist Democrat who thunders against Wall Street fat cats,and used to to joke about Mitt Romney’s low tax bill, incorporated a couple hedge funds in the Cayman Islands so investors could avoid taxes. Grayson Fund Ltd. and Grayson Master Fund were incorporated in 2011 in the Cayman Islands… That was the same year he wrote in the Huffington Post that the IRS should audit every Fortune 500 company because so many appear to be “evading taxes through transfer pricing and offshore tax havens.”

But apparently Grayson only wants other people to cough up more money to Washington.

Grayson’s financial disclosure statements indicate he has between $5-million and $25-million invested in the Grayson fund, and he lists no income from it.

The above sentence frankly doesn’t make sense. How can Grayson have millions of dollars of personal wealth and not generate any income?

The only plausible answer is that he’s just as bad at managing his own money as he is at managing the money of taxpayers (he “earned” an F from the National Taxpayers Union).

In any event, Grayson has plenty of company from fellow leftists who also use tax havens.

Including Treasury Secretary Jacob Lew.

And the President’s top trade negotiator.

Along with big donors to Obama.

Joined by huge donors to Democrats.

Politicians from Massachusetts also are hypocrites. They endorse higher taxes on everyone else, but use neighboring states to protect themselves from oppressive taxation. John Kerry is a prime example, as are run-of-the-mill hacks from the state legislature.

The on-air “talent” at MSNBC also has trouble obeying tax laws. At least Bill and Hillary Clinton have figured out how to legally dodge taxes while endorsing higher burdens for the rest of us.

Though I must admit that the really smart pro-tax statists simply choose to work at places where they’re exempt from taxation. Hey, nice “work” if you can get it.

P.S. Nothing written here should be construed as criticism of tax havens, which are very admirable places.

I’m just irked when I discover that greedy pro-tax politicians are protecting their own money while pillaging our money.

P.P.S. By the way, it’s worth noting that the Cayman Islands is basically a conduit for investment in America’s economy.

Here’s a chart, prepared by the Treasury Department, showing that “Caribbean Banking Centers” are the biggest source of investment for America’s financial markets.

And the reason why the Cayman Islands are a platform for investment to the United States is that America is a tax haven for foreigners, assuming they follow certain rules.

P.P.P.S. Since today’s topic deals with international taxation, here’s an update on “FATCA,” which arguably is the worst provision in the entire tax code.

Here are some passages from a recent column in the New York Times.

…recent efforts by the United States Congress to capture tax revenues on unreported revenues and assets held in foreign accounts are having disastrous effects on a growing number of Americans living abroad. The Foreign Account Tax Compliance Act, or Fatca, signed into law in March 2010 but only now coming into full effect, has been a bipartisan lesson in the law of unintended consequences. Pressure is growing to halt its pernicious impact.

I agree the law is a disaster and that pressure is growing to ameliorate its negative effects, but we need more lawmakers like Rand Paul if we want to translate unhappiness into action.

Here are further details from the column.

The bureaucratic burden of identifying, verifying and reporting has caused many banks to regard American clients, particularly those of moderate means, as more trouble than they are worth. Middle-class Americans living abroad are losing bank accounts and home mortgages and, in some cases, having their retirement savings exposed to debilitating taxes and penalties. …Those impacted are left with the choice of uprooting their families (including foreign spouses and children), careers and businesses to re-establish a life in the United States; or to make the painful decision to renounce their citizenship.

No wonder so many Americans are put in a position where they have to give up their passports and become foreigners.

But here’s the really frightening part.

Worse yet, the law has spawned a potentially more intrusive program known as the Global Account Tax Compliance Act, or Gatca. The proposal, developed by the Organization for Economic Cooperation and Development, calls for data from accounts opened by a foreign national to be automatically reported to that person’s homeland tax authorities. While Gatca is in an early stage of negotiation and implementation, observers believe that as many as 65 countries will ultimately be involved. Fatca, and by extension Gatca, are forming more links in the chain of global government snooping into the lives of innocent individuals under the guise of identifying criminals and tax cheats. For Americans, it is a massive breach of the Fourth Amendment, which forbids unreasonable search and seizure. The repeal of Fatca is the only way to end this dangerous and growing government overreach.

I’ve been warning about this awful outcome for almost four years, so it’s good to see more people are recognizing the danger.

And if you want more details, Richard Rahn and David Burton have explained why these awful policies will lead to bigger government and more statism.

P.P.P.P.S. I’m sure nobody will be surprised to learns that Obama has played a destructive role in these debates.

After all, tax havens and tax competition inhibit government growth and Obama wants the opposite outcome.

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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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Since I’ve been in Washington for nearly three decades, I’m used to foolish demagoguery.

But the left’s reaction to corporate inversions takes political rhetoric to a new level of dishonesty.

Every study that looks at business taxation reaches the same conclusion, which is that America’s tax system is punitive and anti-competitive.

Simply stated, the combination of a very high tax rate on corporate income along with a very punitive system of worldwide taxation makes it very difficult for an American-domiciled firm to compete overseas.

Yet some politicians say companies are being “unpatriotic” for trying to protect themselves and even suggest that the tax burden on firms should be further increased!

In this CNBC interview, I say that’s akin to “blaming the victim.”

While I think this was a good interview and I assume the viewers of CNBC are an important demographic, I’m even more concerned (at least in the short run) about influencing the opinions of the folks in Washington.

And that’s why the Cato Institute held a forum yesterday for a standing-room-only crowd on Capitol Hill.

Here is a sampling of the information I shared with the congressional staffers.

We’ll start with this chart showing how the United States has fallen behind the rest of the world on corporate tax rates.

Here’s a chart showing the number of nations that have worldwide tax systems. Once again, you can see a clear trend in the right direction, with the United States getting left behind.

Next, this chart shows that American companies already pay a lot of tax on the income they earn abroad.

Last but not least, here’s a chart showing that inversions have almost no effect on corporate tax revenue in America.

The moral of the story is that the internal revenue code is a mess, which is why (as I said in the interview) companies have both a moral and fiduciary obligation to take legal steps to protect the interests of shareholders, consumers, and employees.

The anti-inversion crowd, though, is more interested in maximizing the amount of money going to politicians.

Actually, let me revise that last sentence. If they looked at the Laffer Curve evidence (here and here), they would support a lower corporate tax rate.

So we’re left with the conclusion that they’re really most interested in making the tax code punitive, regardless of what happens to revenue.

P.S. Don’t forget that your tax dollars are subsidizing a bunch of international bureaucrats in Paris that are trying to impose similar policies on a global basis.

P.P.S. Let’s end with a note on another tax-related issue.

We’ve already looked at evidence suggesting that Lois Lerner engaged in criminal behavior.

Now we have even more reasons to suspect she’s a crook. Here are some excerpts from the New York Observer.

The IRS filing in federal Judge Emmet Sullivan’s court reveals shocking new information. The IRS destroyed Lerner’s Blackberry AFTER it knew her computer had crashed and after a Congressional inquiry was well underway. As an IRS official declared under the penalty of perjury, the destroyed Blackberry would have contained the same emails (both sent and received) as Lois Lerner’s hard drive. …With incredible disregard for the law and the Congressional inquiry, the IRS admits that this Blackberry “was removed or wiped clean of any sensitive or proprietary information and removed as scrap for disposal in June 2012.” This is a year after her hard drive “crash” and months after the Congressional inquiry began. …One thing is clear: the IRS has no interest in recovering the emails. It has deliberately destroyed evidence and another direct source of the emails it claims were “lost.” It has been blatantly negligent if not criminal in faiing to preserve evidence and destroying it instead.

Utterly disgusting.

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Last month, I put together a list of six jaw-dropping examples of left-wing hypocrisy, one of which featured Treasury Secretary Jacob Lew.

He made the list for having the chutzpah to criticize corporate inversions on the basis of supposed economic patriotism, even though he invested lots of money via the Cayman Islands when he was a crony capitalist at Citigroup.

But it turns out that Lew’s hypocrisy is just the tip of the iceberg.

It seems the entire Obama Administration was in favor of inversions just a couple of years ago. Check out these excerpts from a Bloomberg story.

President Barack Obama says U.S. corporations that adopt foreign addresses to avoid taxes are unpatriotic. His own administration helped one $20 billion American company do just that. As part of the bailout of the auto industry in 2009, Obama’s Treasury Department authorized spending $1.7 billion of government funds to get a bankrupt Michigan parts-maker back on its feet — as a British company. While executives continue to run Delphi Automotive Plc (DLPH) from a Detroit suburb, the paper headquarters in England potentially reduces the company’s U.S. tax bill by as much as $110 million a year. The Obama administration’s role in aiding Delphi’s escape from the U.S. tax system may complicate the president’s new campaign against corporate expatriation.

But that’s only part of the story.

…his administration continues to award more than $1 billion annually in government business to more than a dozen corporate expats.

And since we’re on the subject of hypocrisy, there’s another Bloomberg report worth citing.

President Barack Obama has been bashing companies that pursue offshore mergers to reduce taxes. He hasn’t talked about the people behind the deals — some of whom are his biggest donors. Executives, advisers and directors involved in some of the tax-cutting transactions include Blair Effron, an investment banker who hosted Obama for a May fundraiser at his two-level, 9,000-square-foot apartment on Manhattan’s Upper East Side. Others are Jim Rogers, co-chairman of the host committee for the 2012 Democratic National Convention; Roger Altman, a former senior Treasury Department official who raised at least $200,000 for Obama’s re-election campaign; and Shantanu Narayen, who sits on the president’s management advisory board. The administration’s connections to more than 20 donors associated with the transactions are causing tensions for the president.

Gee, I’m just heartbroken when politicians have tensions.

But I’m a policy wonk rather than a political pundit, so let’s now remind ourselves why inversions are taking place so that the real solution becomes apparent.

The Wall Street Journal opines, explaining that companies are being driven to invert by the combination of worldwide taxation and a punitive tax rate.

…the U.S. has the highest corporate income tax rate in the developed world, and that’s an incentive for all companies, wherever they are based, to invest outside the U.S. But the current appetite for inversions—in which a U.S. firm buys a foreign company and adopts its legal address while keeping operational headquarters in the U.S.—results from the combination of this punitive rate with a separate problem created by Washington. The U.S. is one of only six OECD countries that imposes on its businesses the world-wide taxation of corporate profits. Every company pays taxes to the country in which profits are earned. But U.S. companies have the extra burden of also paying the IRS whenever those profits come back from the foreign country into the U.S. The tax bill is the difference between whatever the companies paid overseas and the 35% U.S. rate. The perverse result is that a foreign company can choose to invest in the U.S. without penalty, but U.S.-based Medtronic would pay hundreds of millions and perhaps billions in additional taxes if it wanted to bring overseas profits back to its home country. …Keep in mind that the money invested in corporations was once earned by someone who paid taxes on it. And it will be taxed again as dividends or capital gains.

Amen. And kudos to the WSJ for pointing out there the internal revenue code imposes multiple layers of taxation on income that is saved and invested.

That’s very bad news for workers since it means less capital formation.

Let’s close with this great cartoon from Michael Ramirez…

…and also a couple of videos on international taxation.

First we have this video on “deferral,” which is very relevant since it explains why worldwide taxation is so destructive.

And we also have this video about Obama’s anti-tax haven demagoguery.

I particularly like the reference to Ugland House since that’s where Obama’s Treasury Secretary parked money.

But it’s all okay, at least if you’re part of the political class. Just repeat over and over again that rules are for the peasants in the private sector, not the elite in Washington and their crony donors.

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It’s a bad idea when governments demand information on your bank accounts and investments so they can impose economically destructive double taxation.

It’s a worse idea when they also demand the right to tax economic activity in other jurisdictions (otherwise known as “worldwide taxation“).

And it’s the worst possible development when governments decide that they should impose a global network of data collection and dissemination as part of a scheme of worldwide double taxation.

Yet that’s exactly what’s happening. High-tax nations, working through the Paris-based Organization for Economic Cooperation and Development, want to impose a one-size-fits-all system of “automatic information exchange” that would necessitate the complete evisceration of financial privacy.

David Burton of the Heritage Foundation explains the new scheme for giving governments more access to peoples’ private financial information.

…the Organization for Economic Cooperation and Development released the full version of the global standard for automatic exchange of information. The Standard for Automatic Exchange of Financial Account Information in Tax Matters calls on governments to obtain detailed account information from their financial institutions and exchange that information automatically with other jurisdictions on an annual basis.

I think this is bad policy, regardless. It is based on imposing and enforcing bad tax policy.

But David goes one step farther. He warns that this global network of tax police includes many unsavory nations.

It is one thing to exchange financial account information with Western countries that generally respect privacy and are allied with the United States. It is an entirely different matter to exchange sensitive financial information about American citizens or corporations with countries that do not respect Western privacy norms, have systematic problems with corruption or are antagonistic to the United States. States that fall into one of these problematic categories but are participating in the OECD automatic exchange of information initiative include Colombia, China and Russia. …The Obama administration enthusiastically supports the OECD initiative.

Moreover, David wisely does not believe we should trust the Obama Administration’s hollow assurances that other nations won’t misuse the data.

…even the administration has realized important privacy issues at are stake. Robert B. Stack, Deputy Assistant Secretary of the Treasury for International Tax Affairs, has testified that “the United States will not enter into an information exchange agreement unless the Treasury Department and the IRS are satisfied that the foreign government has strict confidentiality protections…” Leaving these determinations to a tax agency with little institutional interest in anything other than raising tax revenue is dangerous. There is little doubt sensitive financial information about American citizens and businesses can and will be used by some governments for reasons that have nothing to do with tax administration, such as identifying political opponents’ financial resources or industrial espionage. In addition, individuals in corrupt governments may use the information for criminal purposes such as identity theft, to access others’ funds or to identify potential kidnapping victims. It is naïve to think otherwise. …The Senate should not ratify this protocol. The risks to American citizens and American businesses are too great.

David is exactly right, but too restrained and polite in his assessment.

Richard Rahn, my colleague at Cato, is more blunt in his analysis. Here’s some of what he wrote for the Washington Times.

Do you want the Obama administration sharing all of your financial information with the Russian, Chinese and Saudi Arabian governments? You may be thinking, not even President Obama would go that far. Not so… The rationale behind this despicable idea is to more effectively enable governments, such as that of France and the United States, to identify tax evaders. This might sound like a good idea until one realizes that every individual and business will be stripped of all of their financial privacy if this becomes the law of the land… all of the information that financial institutions now report to the U.S. government to try to ensure income-tax compliance, including your account balances, interest, dividends, proceeds from the sale of financial assets — would be shared with foreign governments. This would apply not only for individuals, but also for both financial and nonfinancial businesses, plus trust funds and foundations. 

Richard then explains that we can’t even trust the bureaucrats at the IRS.

The United States and other governments will, of course, claim that your sensitive financial information will remain confidential — and that you can trust the governments. After the recent Internal Revenue Service scandals — which recur every decade or so — why would anyone believe anything the IRS says? Remember, the IRS leaked information on some of Mitt Romney’s donors during the 2012 presidential campaign. It was blatantly illegal, and the IRS (i.e., you the taxpayer) paid a small fine, but no one went to jail. Many U.S. presidents have misused the IRS, starting at least as far back as Franklin Roosevelt, and the American people are always told “never again,” which is the beginning of the new lie.

And he logically concludes it would be even more foolish to trust foreign tax bureaucracies.

Particularly the tax authorities of the many nations that abuse human rights and persecute minorities, as well the tax police in nations that are too incompetent to be trusted with sensitive data.

…just think what is going to happen when all of those corrupt officials in foreign governments get ahold of it. Some will use the information for identity theft and to raid bank accounts, others for industrial espionage, some to identify potential kidnapping victims and some for political purposes. The potential list goes on and on. The U.S. Treasury Department says it will insist on strict confidentiality protections. (Lois Lerner, please call your office.) If you are a Ukrainian-American who donates to Ukrainian free-market and democratic causes, would you really think that Vladimir Putin’s team, having your financial information, would not misuse it? If you are an American Jew who donates to Israeli causes, do you really think that all of those in the Saudi government who now have full access to your confidential financial information are not going to misuse it? The Chinese are well known for using malware against their opponents. Just think of all the mischief they could cause if they had access to all of the sensitive financial information of human rights advocates in America.

Richard draws the appropriate conclusion. Simply stated, there’s no way we should have a global regime of automatic information exchange simply because a handful of high-tax nations want to remake global tax policy so they can prop up their decrepit welfare states.

As Lord Acton famously reminded us, governments are prone to misuse information and power. The instrument behind this information-sharing ploy is the OECD, which started out as a statistical collection and dissemination agency to promote free trade among its members. It has now morphed into an international agency promoting big government and higher taxes, and the destruction of financial freedom — while at the same time, by treaty, its staff salaries are tax-exempt. No hypocrisy there. Thinking Republicans and Democrats should unite around opposition to this terrible treaty and defund the OECD. Those who vote for it will deservedly be easy marks for their political opponents.

And kudos to Richard for urging the defunding of the OECD. It is absurd that American tax dollars are funding a Paris-based bureaucracy that constantly urges policies that would undermine the U.S. economy.

Especially when they’re insulated from the negative effects of the policies they push. Since they’re on the public teat, they don’t suffer when the private economy is battered. And they don’t even have to pay tax on their very generous salaries.

P.S. I’m very glad to report that at least one lawmaker is doing the right thing. Senator Rand Paul is leading the fight to block proposals that would put Americans at risk by requiring the inappropriate collection and sharing of private financial information.

P.P.S. By way of background, the OECD scheme is part of an effort to cripple tax competition so that high-tax nations can impose higher tax rates and finance bigger government. To learn more about tax competition (and tax havens), watch this four-part video series.

P.P.P.S. The OECD scheme is basically a multilateral version of the horrid “FATCA” legislation signed by Obama back in 2010.

P.P.P.P.S. Maybe I’m old-fashioned, but I think a global tax database is even worse than an Obamacare database on our sex lives.

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Last month, I nailed Bill and Hillary Clinton for their gross hypocrisy on the death tax.

But that’s just one example. Today, we’re going to experience a festival of statist hypocrisy. We have six different nauseating examples of political elitists wanting to subject ordinary people to bad policy while self-exempting themselves from similar burdens.

Our first three examples are from the world of taxation.

Here are some excerpts from a Washington Times report about a billionaire donor who is bankrolling candidates who support higher taxes, even though he structured his hedge fund in low-tax jurisdictions specifically to minimize the fiscal burdens of his clients.

Tom Steyer, the billionaire environmental activist who is spending $100 million to help elect Democrats this fall, is rallying support for energy taxes that could impact everyday Americans. But when he ran his own hedge fund, Mr. Steyer sought to help wealthy clients legally avoid paying taxes, confidential investor memos show. Mr. Steyer’s strategy included establishing funds in tax havens like the Cayman Islands and Mauritius… Mr. Steyer boasted to investors such as major universities that his hedge fund, Farallon Capital Management LLC, had a “desire not to earn income which would be taxable to our tax-exempt investors,” one internal memo reviewed by The Washington Times showed. Mr. Steyer also helped his firm’s wealthy clientele avoid the highest of U.S. taxes and penalties by establishing arcane tax shelters… Mr. Steyer is pushing for a variety of new taxes on the energy sector. In California, Mr. Steyer supports an oil extraction tax, and he is funding politicians who support taxing carbon, including Sen. Mark Udall, Colorado Democrat.

By the way, Steyer did nothing wrong, just as Mitt Romney did nothing wrong when he utilized so-called tax havens to manage and protect his investments.

But at least Romney wasn’t overtly urging higher taxes on everyone else, so he’s not guilty of glaring hypocrisy.

Speaking of international taxation, how about the behavior of Senator Joe Machin’s daughter? She’s the head of an American drug-making company, a position that almost surely has something to do with her father being a senator.  Particularly since the company gets a big chunk of its revenues from sales to the federal government.

In any event, her company has decided that it’s okay to benefit from sales to big government, but that it’s not a good idea to pay taxes for big government. Here are some blurbs from a National Journal report.

…this column happens to be about a Democratic senator from West Virginia, Joe Manchin, and his daughter, Heather Bresch, the chief executive of Mylan, a giant maker of generic drugs based outside Pittsburgh. Her company’s profits come largely from Medicaid and Medicare, which means her nest is feathered by U.S. taxpayers. On Monday, Bresch announced that Mylan will renounce its United States citizenship and instead become incorporated in the Netherlands – leaving this country, in part, to pay less in taxes.

By the way, I’m a big fan of companies re-domiciling overseas.

So long as our corporate tax system has high rates and punitive worldwide taxation, corporate expatriation is the best way of protecting the interests of American workers, consumers, and shareholders.

But it’s a bit hypocritical when the expatriating company is run by a major Democrat donor.

Our third example of hypocrisy also deals with corporate expatriation, and it’s probably the most odious and extreme display of two-faced political behavior. Here’s some of what was reported in the L.A. Times about the Secretary of the Treasury’s attack on corporate inversions.

Calling for “a new sense of economic patriotism,” a top Obama administration official urged Congress to take immediate action to stop U.S. companies from reorganizing as foreign firms to avoid paying taxes. …”What we need as a nation is a new sense of economic patriotism, where we all rise or fall together,” Lew wrote to the top Democrats and Republicans on the congressional tax-writing committees. “We should not be providing support for corporations that seek to shift their profits overseas to avoid paying their fair share of taxes,” he said. …Lew said such moves were unfair to U.S. taxpayers. …”Congress should enact legislation immediately — and make it retroactive to May 2014 — to shut down this abuse of our tax system,” Lew wrote.

Gee, big words from Mr. Lew. But too bad he didn’t say those words to himself when he was a crony capitalist at Citigroup. Why? Because he had big money parked in the Cayman Islands!

So he inverted his own funds but doesn’t want other taxpayers to have the right to make the same sensible choices.

Now let’s look at three non-tax related examples of hypocrisy.

First, we have a pro-Obamacare politician running for Congress. One of his main talking points is that his wife is an OB/GYN and he also trumpets his support for expansion of Medicaid (the government’s money-hemorrhaging healthcare program for lower-income people).

Here’s some of what was reported by the Free Beacon (h/t: National Review).

John Foust has made his wife the face of his campaign for Virginia’s 10th District. Dr. Marilyn Jerome is an OBGYN… Foust attacks his Republican opponent Barbara Comstock for opposing Medicaid expansion. Failure to expand Medicaid to rural hospitals could be “devastating,” he says. Dr. Jerome has also written in support of the Affordable Care Act on the Foxhall website, citing the Medicaid expansion as beneficial to low-income women.

But it seems that Medicaid expansion is only a good idea when other doctors are dealing with the government.

It turns out, however, that not all women can receive “compassionate reproductive healthcare” from Foxhall. The practice doesn’t accept Medicaid. …in public, Dr. Jerome is preaching the Affordable Care Act and praising the Medicaid expansion while, in her practice, she doesn’t accept it.

The message is that sub-standard government-run healthcare is okay for us peasants, but doctors who cater to the political elite in Washington want nothing to do with the program.

Sort of like the politicians and IRS bureaucrats who want to be exempted from Obamacare.

Second, it turns out that global warming alarmists use above-average amounts of energy.

Here are some tidbits from a column in the UK-based Telegraph.

People who claim to worry about climate change use more electricity than those who do not, a Government study has found. Those who say they are concerned about the prospect of climate change consume more energy than those who say it is “too far into the future to worry about,” the study commissioned by the Department for Energy and Climate Change found. …The findings were based on the Household Electricity Survey.

Not that this surprises me. I’ve previously shared evidence that elitist environmentalists want to dictate the energy consumption of ordinary people while suffering no cutbacks in their own extravagant living standards.

Third, we have a remarkable bit of political jujitsu from Martin O’Malley, the governor of Maryland, on the issue of illegal aliens. Here’s an amazing excerpt from a story in Politco (h/t: National Review).

Martin O’Malley says that deporting the children detained at the border would be sending them to “certain death” — but he also urged the White House not to send them to a facility in his own state.

Wow. Regardless of what you think about open borders, amnesty, and other immigration issues, O’Malley comes across as a craven politician. This is NIMBY on steroids.

In conclusion, I should point out that hypocrisy is not limited to leftists. I’m even harder on faux conservatives who pretend to favor small government when talking to voters but then aid and abet statism behind closed doors in Washington.

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I’ve always had a soft spot in my heart for Bill Clinton. In part, that’s because economic freedom increased and the burden of government spending was reduced during his time in office.

Partisans can argue whether Clinton actually deserves the credit for these good results, but I’m just happy we got better policy. Heck, Clinton was a lot more akin to Reagan that Obama, as this Michael Ramirez cartoon suggests.

Moreover, Clinton also has been the source of some very good political humor, some of which you can enjoy here, here, here, here, and here.

Most recently, he even made some constructive comments about corporate taxation and fiscal sovereignty.

Here are the relevant excerpts from a report in the Irish Examiner.

It is up to the US government to reform the country’s corporate tax system because the international trend is moving to the Irish model of low corporate rate with the burden on consumption taxes, said the former US president Bill Clinton. Moreover, …he said. “Ireland has the right to set whatever taxes you want.” …The international average is now 23% but the US tax rate has not changed. “…We need to reform our corporate tax rate, not to the same level as Ireland but it needs to come down.”

Kudos to Clinton for saying America’s corporate tax rate “needs to come down,” though you could say that’s the understatement of the year. The United States has the highest corporate tax rate among the 30-plus nations in the industrialized world. And we rank even worse – 94th out of 100 countries according to a couple of German economists – when you look at details of how corporate income is calculated.

And I applaud anyone who supports the right of low-tax nations to have competitive tax policy. This is a real issue in Europe. I noted back in 2010 that, “The European Commission originally wanted to require a minimum corporate tax rate of 45 percent. And as recently as 1992, there was an effort to require a minimum corporate tax rate of 30 percent.” And the pressure remains today, with Germany wanting to coerce Ireland into hiking its corporate rate and the OECD pushing to undermine Ireland’s corporate tax system.

All that being said – and before anyone accuses me of having a man-crush on Bill and/or of being delusional – let me now issue some very important caveats.

When Clinton says we should increase “the burden on consumption taxes,” that almost surely means he would like to see a value-added tax.

This would be a terrible idea, even if at first the revenue was used to finance a lower corporate tax rate. Simply stated, it would just be a matter of time before the politicians figured out how to use the VAT as a money machine to finance bigger government.

Indeed, it’s no coincidence that the welfare state in Europe exploded in the late 1960s/early 1970s, which was also the time when the VAT was being implemented. And it’s also worth noting that VAT rates in recent years have jumped significantly in both Europe and Japan.

Moreover, Clinton’s position on fiscal sovereignty has been very weak in the past. It was during his tenure, after all, that the OECD – with active support from the Clinton Treasury Department – launched its “harmful tax competition” attack against so-called tax havens.

In other words, he still has a long way to go if he wants to become an Adjunct Fellow at the Cato Institute.

P.S. Just in case anyone want to claim that the 1993 Clinton tax hike deserves credit for any of the good things that happened in the 1990s, look at this evidence before embarrassing yourself.

P.P.S. There’s very little reason to think that Hillary Clinton would be another Bill Clinton.

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It’s probably not an exaggeration to say that the United States has the world’s worst corporate tax system.

We definitely have the highest corporate tax rate in the developed world, and we may have the highest corporate tax rate in the entire world depending on how one chooses to classify the tax regime in an obscure oil Sheikdom.

But America’s bad policy goes far beyond the rate structure. We also have a very punitive policy of “worldwide taxation” that forces American firms to pay an extra layer of tax when competing for market share in other nations.

And then we have rampant double taxation of both dividends and capital gains, which discourages business investment.

No wonder a couple of German economists ranked America 94 out of 100 nations when measuring the overall treatment of business income.

So if you’re an American company, how do you deal with all this bad policy?

Well, one solution is to engage in a lot of clever tax planning to minimize your taxable income. Though that’s probably not a successful long-term strategy since the Obama Administration is supporting a plan by European politicians to create further disadvantages for American-based companies.

Another option is to somehow turn yourself into a foreign corporation. You won’t be surprised to learn that politicians have imposed punitive anti-expatriation laws to make that difficult, but the crowd in Washington hasn’t figured out how to stop cross-border mergers and acquisitions.

And it seems that’s a very effective way of escaping America’s worldwide tax regime. Let’s look at some excerpts from a story posted by CNBC.

Some of the biggest mergers and acquisitions so far in 2013 have involved so-called “tax inversions” – where a US acquirer shifts overseas, to Europe in particular, to pay a lower rate.

The article then lists a bunch of examples. Here’s Example #1.

Michigan-based pharmaceuticals group Perrigo has said its acquisition of Irish biotech company Elan will lead to re-domiciling in Ireland, where it has given guidance it expects to pay about 17 per cent in tax, rather than an estimated 30 per cent rate it was paying in the US. Deutsche Bank estimates Perrigo will achieve tax savings of $118m a year as a result.

And Example #2.

New Jersey-based Actavis’s acquisition of Warner Chilcott in May – will also result in a move to Ireland, where Actavis’s tax rate will fall to about 17 per cent from an effective rate of 28 per cent tax, and enable it to save an estimated $150m over the next two years.

Then Example #3.

US advertising company Omnicom has said its $35bn merger with Publicis will result in the combined group’s headquarters being located in the Netherlands, saving about $80m in US tax a year.

Last but not least, Example #4.

Liberty Global’s $23bn acquisition of Virgin Media will allow the US cable group to relocate to the UK, and pay its lower 21 per cent tax rate of corporation tax.

And we can expect more of these inversions in the future.

M&A advisers say the number of companies seeking to re-domicile outside the US after a takeover is rising. …Increased use of tax inversion has coincided with an intensifying political debate on US tax – with Democrats, Republicans and the White House agreeing that the current code, which imposes a top rate of 35 per cent but offers a plethora of tax breaks, is in need of reform.

I’ll close with a very important point.

It’s not true that the current code has a “plethora of tax breaks.” Or, to be more specific, there are lots of tax breaks, but the ones that involve lots of money are part of the personal income tax, such as the state and local tax deduction, the mortgage interest deduction, the charitable contributions deduction, the muni-bond exemption, and the fringe benefits exclusion.

There are some corrupt loopholes in the corporate income tax, to be sure, such as the ethanol credit for Big Ag and housing credits for politically well-connected developers. But if you look at the Joint Committee on Taxation’s list of so-called tax expenditures and correct for their flawed definition of income, it turns out that there’s not much room to finance a lower tax rate by getting rid of unjustified tax breaks.

So does this mean there’s no way of fixing the problems that cause tax inversions?

If lawmakers put themselves in the straitjacket of “static scoring” as practiced by the Joint Committee on Taxation, then a solution is very unlikely.

But if they choose to look at the evidence, they’ll see that there are big Laffer-Curve effects from better tax policy. A study from the American Enterprise Institute found that the revenue-maximizing corporate tax rate is about 25 percent while more recent research from the Tax Foundation puts the revenue-maximizing tax rate for companies closer to 15 percent.

I should hasten to add that the tax code shouldn’t be designed to maximize revenues. But when tax rates are punitively high, even a cranky libertarian like me won’t get too agitated if politicians wind up with more money as a result of lowering tax rates.

You might think that’s a win-win situation. Folks on the right support lower tax rates to get more growth and folks on the left support the same policy to raise more tax revenue.

But there’s at least one person on Washington who wants high tax rates even if they don’t raise additional revenue.

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President Obama promised he would unite the world…and he’s right.

Representatives from dozens of nations have bitterly complained about an awful piece of legislation, called the Foreign Account Tax Compliance Act (FATCA), that was enacted back in 2010.

They despise this unjust law because it extends the power of the IRS into the domestic affairs of other nations. That’s an understandable source of conflict, which should be easy to understand. Wouldn’t all of us get upset, after all, if the French government or Russian government wanted to impose their laws on things that take place within our borders?

But it’s not just foreign governments that are irked. The law is so bad that it is causing a big uptick in the number of Americans who are giving up their citizenship.

Here are some details from a Bloomberg report.

Americans renouncing U.S. citizenship surged sixfold in the second quarter from a year earlier… Expatriates giving up their nationality at U.S. embassies climbed to 1,131 in the three months through June from 189 in the year-earlier period, according to Federal Register figures published today. That brought the first-half total to 1,810 compared with 235 for the whole of 2008. The U.S., the only nation in the Organization for Economic Cooperation and Development that taxes citizens wherever they reside.

I’m glad that the article mentions that American law is so out of whack with the rest of the world.

We should be embarrassed that our tax system – at least with regard to the treatment of citizens living abroad and the treatment of tax exiles – is worse than what they have in nations such as France.

And while there was an increase in the number of Americans going Galt after Obama took office, the recent increase seems to be the result of the FATCA legislation.

Shunned by Swiss and German banks and facing tougher asset-disclosure rules under the Foreign Account Tax Compliance Act, more of the estimated 6 million Americans living overseas are weighing the cost of holding a U.S. passport. …Fatca…was estimated to generate $8.7 billion over 10 years, according to the congressional Joint Committee on Taxation.

I very much doubt, by the way, that the law will collect $8.7 billion over 10 years.

And it’s worth noting that President Obama initially claimed that his assault on “tax havens” would generate $100 billion every year. If you don’t believe me, click here and listen to his words at the 2;30 mark.

So we started with politicians asserting they could get $100 billion every year. Then they said only $8.7 billion over ten years, or less than $1 billion per year.

And now it’s likely that revenues will fall because so many taxpayers are leaving the country. This is yet another example of how the Laffer Curve foils the plans of greedy politicians.

You may be tempted to criticize these overseas Americans, but I’ve talked to several hundred of them in the past few years and you can’t begin to imagine how their lives are made more difficult by the illegitimate extraterritorial laws concocted by Washington. Bloomberg has a few more details.

For individuals, the costs are also rising. Getting a mortgage or acquiring life insurance is becoming almost impossible for American citizens living overseas, Ledvina said. “With increased U.S. tax reporting, U.S. accounting costs alone are around $2,000 per year for a U.S. citizen residing abroad,” the tax lawyer said. “Adding factors, such as difficulty in finding a bank to accept a U.S. citizen as a client, it is difficult to justify keeping the U.S. citizenship for those who reside permanently abroad.”

Imagine what your life would be like if you had trouble opening a bank account or conducting all sorts of other financial activities. Things that are supposed to be routine, but are now nightmares.

I collected some of the statements from these overseas Americans. I encourage you to visit this link and get a sense of what they have to endure.

And then keep in mind that all of these problems would disappear if we had the right kind of tax system, such as the flat tax, and didn’t let the tentacles of the IRS extend beyond America’s borders.

P.S. Based on people I’ve met in my international travels, I’d guess that, for every American that officially gives up their citizenship, there are probably a dozen more living overseas who simply drop off the radar screen. Many of these people can’t afford – or can’t stand – to deal with the onerous requirements imposed by hacks, bullies, and lightweights in Washington such as Barbara Boxer.

P.P.S. Remember the Facebook billionaire who moved to Singapore to escape being an American taxpayer? Many of us – including me – instinctively find this unsettling. But if we believe that folks should have the freedom to move from California to Texas to benefit from better tax policy, shouldn’t they also have the freedom to move to another nation?

The same is true for companies.

If our tax law is bad, we should lower tax rates and adopt real reform.

Unless, of course, you think it’s okay to blame the victim.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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I damned Obama with faint praise last year by asserting that he would never be able to make America as statist as France.

My main point was to explain that the French people, notwithstanding their many positive attributes, seem hopelessly statist. At least that’s how they vote, even though they supposedly support spending cuts according to public opinion polls.

More specifically, they have a bad habit of electing politicians – such as Sarkozy and Hollande – who think the answer to every question is bigger government.

As such, it’s almost surely just a matter of time before France suffers Greek-style fiscal chaos.

But perhaps I should have taken some time in that post to explain that the Obama Administration – despite its many flaws – is genuinely more market-oriented that its French counterpart.

Or perhaps less statist would be a more accurate description.

However you want to describe it, there is a genuine difference and it’s manifesting itself as France and the United States are fighting over the degree to which governments should impose international tax rules designed to seize more tax revenue from multinational companies.

Guardian Tax HeadlineHere’s some of what the UK-based Guardian is reporting.

France has failed to secure backing for tough new international tax rules specifically targeting digital companies, such as Google and Amazon, after opposition from the US forced the watering down of proposals that will be presented at this week’s G20 summit. Senior officials in Washington have made it known they will not stand for rule changes that narrowly target the activities of some of the nation’s fastest growing multinationals, according to sources with knowledge of the situation.

This is very welcome news. The United States has the highest corporate tax rate in the developed world and the overall tax system for companies ranks a lowly 94 out of 100 nations in a survey of “tax attractiveness” by German economists.

So it’s good that U.S. government representatives are resisting schemes that would further undermine the competitiveness of American multinationals.

Particularly since the French proposal also would enable governments to collect lots of sensitive personal information in order to enforce the more onerous tax regime.

…the US and French governments have been at loggerheads over how far the proposals should go. …Despite opposition from the US, the French position – which also includes a proposal to link tax to the collection of personal data – continues to be championed by the French finance minister, Pierre Moscovici.

It’s worth noting, by the way, that the Paris-based Organization for Economic Cooperation and Development (OECD) has been playing a role in this effort to increase business tax burdens.

The OECD plan has been billed as the biggest opportunity to overhaul international tax rules, closing loopholes increasingly exploited by multinational corporations in the decades since a framework for bilateral tax treaties was first established after the first world war. The OECD is expected to detail up to 15 areas on which it believes action can be taken, setting up a timetable for reform on each of between 12 months and two and a half years.

Just in case you don’t have your bureaucrat-English dictionary handy, when the OECD says “reform,” it’s safe to assume that it means “higher taxes.”

Maybe it’s because the OECD is based in France, where taxation is the national sport.

France has been among the most aggressive in responding to online businesses that target French customers but pay little or no French tax. Tax authorities have raided the Paris offices of several firms including Google, Microsoft and LinkedIn, challenging the companies’ tax structures.

But British politicians are equally hostile to the private sector. One of the senior politicians in the United Kingdom actually called a company “evil” for legally minimizing its tax burden!

In the UK, outcry at internet companies routing British sales through other countries reached a peak in May after a string of investigations by journalists and politicians laid bare the kinds of tax structures used by the likes of Google and Amazon. …Margaret Hodge, the chair of the public accounts committee, called Google’s northern Europe boss, Matt Brittin, before parliament after amassing evidence on the group’s tax arrangements from several whistleblowers. After hearing his answers, she told him: “You are a company that says you do no evil. And I think that you do do evil” – a reference to Google’s corporate motto, “Don’t be evil”.

Needless to say, Google should be applauded for protecting shareholders, consumers, and workers, all of whom would be disadvantaged if government seized a larger share of the company’s earnings.

And if Ms. Hodge really wants to criticize something evil, she should direct her ire against herself and her colleagues. They’re the ones who have put the United Kingdom on a path of bigger government and less hope.

Let’s return to the main topic, which is the squabble between France and the United States.

Does this fight show that President Obama can be reasonable in some areas?

The answer is yes…and no.

Yes, because he is resisting French demands for tax rules that would create an even more onerous system for U.S. multinationals. And it’s worth noting that the Obama Administration also opposed European demands for higher taxes on the financial sector back in 2010.

But no, because there’s little if any evidence that he’s motivated by a genuine belief in markets or small government.* Moreover, he only does the right thing when there are proposals that unambiguously would impose disproportionate damage on American firms compared to foreign companies. And it’s probably not a coincidence that the high-tech sector and financial sector have dumped lots of money into Obama’s campaigns.

Let’s close, however, on an optimistic note. Whatever his motive, President Obama is doing the right thing.

This is not a trivial matter. When the OECD started pushing for changes to the tax treatment of multinationals earlier this year, I was very worried that the President would join forces with France and other uncompetitive nations and support a “global apportionment” system for determining corporate tax burdens.

Based on the Guardian’s report, as well as some draft language I’ve seen from the soon-to-be-released report, it appears that we have dodged that bullet.

At the very least, this suggests that the White House was unwilling to embrace the more extreme components of the OECD’s radical agenda. And since you can’t impose a global tax cartel without U.S. participation (just as OPEC wouldn’t succeed without Saudi Arabia), the statists are stymied.

So two cheers for Obama. I’m not under any illusions that the President is turning into a genuine centrist like Bill Clinton, but I’ll take this small victory.

* Obama did say a few years ago that “no business wants to invest in a place where the government skims 20 percent off the top,” so maybe he does understand the danger of high tax rates. And the President also said last year that we should “let the market work on its own,” which may signal an awareness that there are limits to interventionism. But don’t get your hopes up. There’s some significant fine print and unusual context with regard to both of those statements.

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I never thought I would wind up in Costco’s monthly magazine, but I was asked to take part in a pro-con debate on “Should offshore tax havens be illegal?”

Given my fervent (and sometimes risky) support of tax competition, financial privacy, and fiscal sovereignty, regular readers won’t be surprised to learn that I jumped at the opportunity.

After all, if I’m willing to take part in a debate on tax havens for the upper-income folks who read the New York Times, I should do the same thing for the middle-class folks who patronize big-box stores.

My main argument was that we need tax havens to help control the greed of the political elite. Simply stated, politicians rarely think past the next election, so they’ll tax and spend until we suffer a catastrophic Greek-style fiscal collapse unless there’s some sort of external check and balance.

…politicians have an unfortunate tendency to over-spend and over-tax. …And if they over-tax and over-spend for a long period, then you suffer the kind of fiscal crisis that we now see in so many European nations.  That’s not what any of us want, but how can we restrain politicians? There’s no single answer, but “tax competition” is one of the most effective ways of controlling the greed of the political elite. …Nations with pro-growth tax systems, such as Switzerland and Singapore, attract jobs and investment from uncompetitive countries such as France and Germany. These “tax havens” force the politicians in Paris and Berlin to restrain their greed.  Some complain that these low-tax jurisdictions make it hard for high-tax nations to enforce their punitive tax laws. But why should the jurisdictions with good policy, such as the Cayman Islands, be responsible for enforcing the tax law of governments that impose bad policy?

Costco MitchellI also made the point that the best way to undermine tax havens is to make our tax system fair and reasonable with something like a flat tax.

…the best way to reduce tax evasion is lower tax rates and tax reform. If the United States had a flat tax, for instance, we would enjoy much faster growth and we would attract trillions of dollars of new investment.

And I concluded by pointing out that there are other very important moral reasons why people need financial privacy.

In addition to promoting good fiscal policy, tax havens also help protect human rights. …To cite just a few examples, tax havens offer secure financial services to political dissidents in Russia, ethnic Chinese in Indonesia and the Philippines, Jews in North Africa, gays in Iran, and farmers in Zimbabwe. The moral of the story is that tax havens should be celebrated, not persecuted.

And what did my opponent, Chye-Ching Huang from the Center for Budget and Policy Priorities, have to say about the issue? To her credit, she was open and honest about wanting to finance bigger government. And she recognizes that tax competition is an obstacle to the statist agenda.

It drains the United States of tax revenues that could be used to reduce deficits or invested in critical needs, including education, healthcare, and infrastructure.

Costco HuangShe also didn’t shy away from wanting to give the scandal-plagued IRS more power and money.

U.S. policymakers could and should act… Policymakers could provide the Internal Revenue Service (IRS) with the funding it needs to ensure that people pay the taxes they owe, including sufficient funds to detect filers who are using offshore accounts to avoid paying their taxes.

Her other big point was to argue against corporate tax reforms.

…a “territorial” tax system…would further drain revenues, and domestic businesses and individual taxpayers could end up shouldering the burden of making up the difference.

Given that the United States has the highest statutory tax rate for companies in the industrialized world and ranks only 94 out of 100 nations for business “tax attractiveness,” I obviously disagree with her views.

And I think she’s wildly wrong to think that tax havens lead to higher taxes for ordinary citizens. Heck, even the New York Times inadvertently admitted that’s not true.

In any event, I think both of us had a good opportunity to make our points, so kudos to Costco for exposing shoppers to the type of public finance discussion that normally is limited to pointy-headed policy wonks in sparsely attended Washington conferences.

That’s the good news.

The bad news is that I don’t think I’m going to prevail in Costco’s online poll. It’s not that I made weak arguments, but the question wound up being altered from “Should offshore tax havens be illegal?” to “Should offshore bank accounts be taxable?”

Costco Debate QuestionSo I imagine the average reader will think this is a debate on whether they should be taxed on their account at the bank down the street while some rich guy isn’t taxed on his account at a bank in Switzerland.

Heck, even I would be sorely tempted to click “Yes” if that was the issue.

In reality, I don’t think any of our bank accounts should be taxable (whether they’re in Geneva, Switzerland or Geneva, Illinois) for the simple reason that there shouldn’t be any double taxation of income that is saved and invested.

The folks at Costco should have stuck with the original question (at least the way it was phrased to me in the email they sent), or come up with something such as “Are tax havens good for the global economy?”

But just as you can’t un-ring a bell, I can’t change Costco’s question, so I’m not holding my breath expecting to win this debate.

P.S. I’m at FreedomFest in Las Vegas, where I just debated Jim Henry of the Tax Justice Network on the same topic. I should have asked him what he though of all the politically connected leftists who utilize tax havens.

P.P.S. If you like tax haven debates, here are Part I and Part II of a very civilized debate I had with a young lady from the Task Force on Financial Integrity and Economic Development.

P.P.P.S. Maybe I haven’t looked hard enough, but I don’t have any tax haven-oriented cartoons to share other than one that compares where Romney put his money to where Obama puts our money.

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

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

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

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

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

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

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

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

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

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

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

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It goes without saying that I’m always ready to defend tax havens when statists are seeking to undermine tax competition, financial privacy, and fiscal sovereignty.

So when the BBC asked if I would debate the topic, I said yes even though I’m in Paris (where supporting liberty is probably a capital crime).

I think the debate went well. Or, to be more precise, I was happy that I got to make my points.

I’ve been in debates on tax havens when I’m outnumbered 3-1, so a fair fight almost seems like a treat.

P.S. If you have a burning desire to watch me debate tax havens, you can see me cross swords with a bunch of different statists by clicking here.

P.P.S. Or if you like watching when I’m outnumbered, here’s my debate against three leftists on state-run TV.

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Whether it’s American politicians trying to extort more taxes from Apple or international bureaucrats trying to boost the tax burden on firms with a global corporate tax return, the left is aggressively seeking to impose harsher fiscal burdens on the business community.

A good (or “bad” would a more appropriate word) example of this thinking can be found in the New York Times, where Steven Rattner just wrote a column complaining that companies are using mergers to redomicile in jurisdictions with better tax law.*

He thinks the right response is higher taxes on multinationals.

While a Senate report detailing Apple’s aggressive tax sheltering of billions of dollars of overseas income grabbed headlines this week, …the American drug maker Actavis announced that it would spend $5 billion to acquire Warner Chilcott, an Irish pharmaceuticals company less than half its size. Buried in the fifth paragraph of the release was the curious tidbit that the new company would be incorporated in Ireland, even though the far larger acquirer was based in Parsippany, N.J. The reason? By escaping American shores, Actavis expects to reduce its effective tax rate from about 28 percent to 17 percent, a potential savings of tens of millions of dollars per year for the company and a still larger hit to the United States Treasury. …Eaton Corporation, a diversified power management company based for nearly a century in Cleveland, also became an “Irish company” when it acquired Cooper Industries last year. …That’s just not fair at a time of soaring corporate profits and stagnant family incomes. …President Obama has made constructive proposals to reduce the incentive to move jobs overseas by imposing a minimum tax on foreign earnings and delaying certain tax deductions related to overseas investment.

But Mr. Rattner apparently is unaware that American firms that compete in other nations also pay taxes in other nations.

Too bad he didn’t bother with some basic research. He would have discovered some new Tax Foundation research by Kyle Pomerleau, which explains that these firms already are heavily taxed on their foreign-source income.

Tax Foundation - Overseas Corporate Tax Burden…the amount U.S. multinational firms pay in taxes on their foreign income has become a common topic for the press and among politicians. Some of the more sensational press stories and claims by politicians lead people to believe that U.S. companies pay little or nothing in taxes on their foreign earnings. Last year, even the president suggested the U.S. needs a “minimum tax” on corporate foreign earnings to prevent tax avoidance. Unfortunately, such claims are either based upon a misunderstanding of how U.S. international tax rules work or are simply careless portrayals of the way in which U.S. companies pay taxes on their foreign profits. …According to the most recent IRS data for 2009, U.S. companies paid more than $104 billion in income taxes to foreign governments on foreign taxable income of $416 billion. As Table 1 indicates, companies paid an average effective tax rate of 25 percent on that income.

Unfortunately, the New York Times either is short of fact checkers or has very sloppy editors. Here are some other egregious errors.

And none of this counts Paul Krugman’s mistakes, which are in a special category (see here, here, here, here, and here for a few examples).

*There is an important lesson to be learned when American companies redomicile overseas. Unfortunately, the New York Times wants to make a bad system even worse.

P.S. Rand Paul has a must-watch video on the issue of anti-Apple demagoguery.

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

Monaco Casino

The name’s Bond….James Bond

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

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

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

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

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

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

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

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

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

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

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

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

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