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Posts Tagged ‘International Taxation’

I could only use 428 words, but I highlighted the main arguments for tax havens and tax competition in a “Room for Debate” piece for the New York Times.

NYT Tax Haven Room for DebateI hope that my contribution is a good addition to the powerful analysis of experts such as Allister Heath and Pierre Bessard.

I started with the economic argument.

…tax havens are very valuable because they discourage anti-growth tax policy. Simply stated, it is very difficult for governments to impose and enforce confiscatory tax rates when investors and entrepreneurs can shift their economic activity to jurisdictions with better tax policy. Particularly if those nations have strong policies on financial privacy, thus making it difficult for uncompetitive high-tax nations to track and tax flight capital. Thanks to this process of tax competition, with havens playing a key role, top personal income tax rates have dropped from an average of more than 67 percent in 1980 to about 42 percent today. Corporate tax rates also have plummeted, falling from an average of 48 percent to 24 percent. …Lawmakers also were pressured to lower or eliminate death taxes and wealth taxes, as well as to reduce the double taxation of interest, dividends and capital gains. Once again, tax havens deserve much of the credit because politicians presumably would not have implemented these pro-growth reforms if they didn’t have to worry that the geese with the golden eggs might fly away to a confidential account in a well-run nation like Luxembourg or Singapore.

Since I didn’t have much space, here’s a video that elaborates on the economic benefits of tax havens, including an explanation of why fiscal sovereignty is a big part of the debate.

My favorite part of the video is when I quote OECD economists admitting the beneficial impact of tax havens.

I also explain for readers of the New York Times that there’s a critical ethical reason to defend low-tax jurisdictions.

Tax havens also play a very valuable moral role by providing high-quality rule of law in an uncertain world, offering a financial refuge for people who live in nations where governments are incompetent and corrupt. …There are also billions of people living in nations with venal and oppressive governments. 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.

To elaborate, here’s my video making the moral case for tax havens.

By the way, many of the issues in this video may not resonate for those of us in “first world” nations, but please remember that the majority of people in the world live in countries where basic human rights are at risk or simply don’t exist.

But that doesn’t mean we shouldn’t worry about the stability of our nations. I close my contribution to the New York Times by warning that the welfare state may collapse.

With more and more nations careening toward fiscal collapse, raising the risk of social chaos and economic calamity, it is more important than ever that there are places where people can protect themselves from bad government. Tax havens should be celebrated, not persecuted.

I didn’t have space to cite the BIS and OECD data showing that most of the world’s big nations – including Germany, the United States, and the United Kingdom – face fiscal problems more significant that Greece is dealing with today. Assuming these nations don’t implement desperately needed entitlement reform, the you-know-what is going to hit the fan at some point. Folks with funds in a tax haven will be in much better shape if, or when, that happens.

For more background information on tax competition, here’s a video explaining the ABCs of the issue.

It’s galling, by the way, that the bureaucrats at the OECD pushing for a global tax cartel get tax-free salaries.

And here’s my video debunking some of the common myths about tax havens.

My favorite part of this video is the revelation that a former John Kerry staffer fabricated a number that is still being used by anti-tax haven demagogues.

And speaking of demagogues misusing numbers, you’ll notice the current resident of 1600 Pennsylvania Avenue has a starring role in this video.

I’ve probably exhausted your interest in videos, but if you’re game for one more, click here to learn more about the Paris-based Organization for Economic Cooperation and Development, a statist international bureaucracy that is active in trying to undermine tax havens as part of it’s efforts to create a global tax cartel to prop up Europe’s welfare states.

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Using data stolen from service providers in the Cook Islands and the British Virgin Islands, the Washington Post published a supposed exposé of Americans who do business in so-called tax havens.

Cayman April 2013

Another Research Trip to Cayman – One of the Sacrifices I Make in the Fight for Freedom

Since I’m the self-appointed defender of low-tax jurisdictions in Washington, this caught my attention. Thomas Jefferson wasn’t joking when he warned that “eternal vigilance is the price of liberty.” I’m constantly fighting against anti-tax haven schemes that would undermine tax competition, financial privacy, and fiscal sovereignty.

Even if it means a bunch of international bureaucrats threaten to toss me in a Mexican jail or a Treasury Department official says I’m being disloyal to America. Or, in this case, if it simply means I’m debunking demagoguery.

The supposedly earth-shattering highlight of the article is that some Americans linked to offshore companies and trusts have run afoul of the legal system.

Among the 4,000 U.S. individuals listed in the records, at least 30 are American citizens accused in lawsuits or criminal cases of fraud, money laundering or other serious financial misconduct.

But the real revelation is that people in the offshore world must be unusually honest. Fewer than 1 percent of them have been named in a lawsuit, much less been involved with a criminal case.

This is just a wild guess, but I’m quite confident that you would find far more evidence of misbehavior if you took a random sample of 4,000 Americans from just about any cross-section of the population.

We know we would find a greater propensity for bad behavior if we examined 4,000 politicians. And I assume that would be true for journalists as well. And folks on Wall Street. And realtors. And plumbers. Perhaps even think tank employees. Anyhow, you get the point.

Citing a couple of anecdotes, the reporter then tries to imply that low-tax jurisdictions somehow lend themselves to criminal activity.

 Fraud experts say offshore bank accounts and companies are vital to the operation of complex financial crimes. Allen Stanford, who ran a $7 billion Ponzi scheme, used a bank he controlled in Antigua. Bernard Madoff, who ran the largest Ponzi scheme in U.S. history, used a series of offshore “feeder funds” to fuel the growth of his multibillion-dollar house of cards.

The Allen Stanford case was a genuine black eye for the offshore world, but it’s absurd to link Madoff’s criminality to tax havens. The offshore funds that invested with Madoff were victimized in the same way that many onshore funds lost money.

Moreover, there’s no evidence in this article – or from any other source to my knowledge – suggesting that financial impropriety is more likely in low-tax jurisdictions.

We then get some “hard” numbers.

Today, there are between 50 and 60 offshore financial centers around the world holding untold billions of dollars at a time of historic U.S. deficits and forced budget cuts. Groups that monitor tax issues estimate that between $8 trillion and $32 trillion in private global wealth is parked offshore.

So we have offshore wealth of somewhere “between $8 trillion and $32 trillion”? With that level of precision, or lack thereof, perhaps you now understand why the make-believe numbers about alleged tax evasion are about as credible as a revenue estimate from the Joint Committee on Taxation.

Speaking of make-believe numbers, the article mentions one of Washington’s worst lawmakers, a Senator who pushed through a law that has united the world against the United States.

Sen. Carl M. Levin (D-Mich.) has been holding hearings and conducting investigations into the offshore world for nearly three decades. In 2010, Congress passed the Foreign Account Tax Compliance Act requiring that U.S. taxpayers report foreign assets to the government and foreign institutions alert the IRS when Americans open accounts.

He justifies bad policy by claiming that there’s a pot of gold at the end of the tax haven rainbow.

“We can’t afford to lose tens of billions of dollars a year to tax-avoidance schemes,” Levin said. “And many of these schemes involve the shift of U.S. corporate tax revenues earned here in the U.S. to offshore tax havens.”

But FATCA is predicted to collected less than $1 billion per year, and it probably will lose revenue once you include Laffer Curve effects such as lower investment in the American economy from overseas.

The most interesting part of the article, as least from a personal perspective, is that the Center for Freedom and Prosperity is listed as one of the “powerful lobbying interests” fighting to preserve tax competition.

The efforts by Levin and other lawmakers have been opposed by powerful lobbying interests, including the banking and accounting industries and a little-known nonprofit group called the Center for Freedom and Prosperity. CF&P was founded by Daniel J. Mitchell, a former Senate Finance Committee staffer who works as a tax expert for the Cato Institute, and Andrew Quinlan, who was a senior economic analyst for the Republican National Committee before helping start the center. …The center argues that unfettered access to offshore havens leads to lower taxes and more prosperity.

Having helped to start the organization, I wish CF&P was powerful. The Center has never had a budget of more than $250,000 per year, so it truly is a David vs. Goliath battle when we go up against bloated and over-funded bureaucracies such as the IRS and the Paris-based Organization for Economic Cooperation and Development.

The reporter somehow thinks it is big news that the Center has tried to raise money from the business community in low-tax jurisdictions.

According to records reviewed by The Post and ICIJ, the organization’s fundraising pleas have been circulated to offshore entities that make millions by providing anonymity for wealthy clients, many of them U.S. citizens.

Unfortunately, even though these offshore entities supposedly “make millions,” I’m embarrassed to say that CF&P has not been able to convince them that it makes sense to support an organization dedicated to protecting tax competition, financial privacy, and fiscal sovereignty.

But maybe that will change now that the OECD has launched a new attack on tax planning by multinational firms.

Let’s close by returning to the policy issue. The article quotes me defending the right of jurisdictions to determine their own fiscal affairs.

Mitchell, the co-founder of CF&P, added that nations shouldn’t be telling other countries how to conduct their affairs and noted that the United States is one of the worst offenders in the world when it comes to corporate secrecy.

My only gripe is that the reporter mischaracterizes my position. Yes, there are several states that are “tax havens” because of their efficient and confidential incorporation laws, but that means America is “one of the best providers,” not “one of the worst offenders.”

This is something to celebrate. I’m glad the United States is a safe haven for the oppressed people of the world. That’s great news for our economy. I just wish we also were a tax haven for American citizens.

“The United States is one of the biggest tax havens in the world,” Mitchell said. “In general, the United States is impervious to fishing expeditions here, and then the United States turns around and says, ‘Allow us to do fishing expeditions in your country.’”

But I’m not a hypocrite. Other nations should have the sovereign right to maintain pro-growth tax and privacy laws as well.

Other nations shouldn’t feel obliged to enforce bad American tax law, any more than we should feel obliged to enforce any of their bad laws.

P.S. You probably won’t be surprised to learn that “onshore” nations are much more susceptible to dirty money than “offshore” jurisdictions. Which is why you have a hard time finding any tax havens on this map showing the nations with the most money laundering.

P.P.S. On the topic of tax havens, you won’t be surprised to learn that Senator Levin is not the only dishonest demagogue in Washington. If you pay close attention around 1:25 and 2:25 of this video, you’ll see that the current resident of 1600 Pennsylvania Avenue also has an unfortunate tendency to play fast and loose with the truth.

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If asked to name my least-favorite international bureaucracy, the easy answer would be the Organization for Economic Cooperation and Development.

After all, it was only a few days ago that I outlined different ways that the Paris-based bureaucracy is seeking to expand statism and reduce freedom around the world.

Our tax money at the OECD, UN, and IMF

I’m particularly nauseated by the OECD’s support for value-added taxes and their ridiculous assertion that poverty is higher in America than Greece or Turkey.

But we can’t forget the United Nations, which pushes a plethora of bad policies, including a push for regulatory control over the Internet, support for global taxation, supranational gun control schemes, attacks on sovereignty of American states, and support for a “right” to taxpayer-financed birth control (though at least they had the good sense to invite me to speak at last year’s “High Level Thematic Debate on the State of the World Economy”).

For today, though, my least favorite bureaucracy is the International Monetary Fund. I recently listed many of the ways that this gold-plated institution of over-paid and un-taxed paper pushers supports bigger government, but this story from today’s Washington Post is the icing on the cake of statism.

The report on a new IMF study started on a very positive note.

Government subsidies of gasoline, electricity and other energy sources amount to about $1.9 trillion a year and should be ended.

I’m against subsidies, so what’s not to like about a proposal to end handouts?

Well, it turns out that the IMF has a very strange way of defining subsidies. For logical people, a subsidy occurs when the government takes money from Person A and gives it to Person B.

In the la-la land of the IMF, however, a “subsidy” occurs if the government doesn’t tax as much from Person A as the bureaucrats would like. I’m not joking.

In the developed world, the IMF says the subsidies are even larger but less overt, reflecting that government tax policies do not capture the costs of pollution and other externalities. Using economic models and other studies performed as part of the larger global warming debate, the IMF puts those indirect subsidies at $1.4 trillion — $25 for each ton of carbon dioxide produced — and suggests they be offset through an “efficient” tax that makes energy users pay the full cost of the product.

To be fair, private behavior can impose costs on other people (“externalities”), so there’s nothing automatically wrong with looking at these indirect costs.

The problem is that the IMF used discredited global warming ideology to concoct an absurd $1.4 trillion estimate of “subsidies.”

IMF Stick UpAnd guess what that means?

For the United States, the IMF estimated that would require a $1.40 levy per gallon of gas and other fees totaling more than $1,400 per person each year — around $500 billion in total.

Wow, that’s more than $5,500 for a family of four.

Remember that these bureaucrats get extremely generous tax-free salaries, yet they apparently don’t see any hypocrisy in recommending huge tax increases for the peasantry.

“It is time for subsidies to end and carbon taxation to be put in place,” IMF First Deputy Managing Director David Lipton said in an interview Tuesday.

Amazing. I’m sure this leech is driven around in a private limousine, flies around the world in first class, and enjoys the services of the private chefs in the IMF’s elite dining room – all at our expense. Yet he wants the rest of us to pay higher tax.

P.S. You’ll be happy to know that the IMF study deliberately “did not look at government support for the alternative energy industry.” So Obama’s corrupt “green energy” programs got a free pass. Gee, how convenient.

P.P.S. I realize that I forgot the mention the World Bank, the folks who put together a fiscal report card giving nations higher grades if they imposed harsher tax burdens.

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I’ve been very critical of the Organization for Economic Cooperation and Development. Most recently, I criticized the Paris-based bureaucracy for making the rather remarkable assertion that a value-added tax would boost growth and employment.

But that’s just the tip of the iceberg.

Now the bureaucrats have concocted another scheme to increase the size and scape of government. The OECD just published a study on “Addressing Base Erosion and Profit Shifting” that seemingly is designed to lay the groundwork for a radical rewrite of business taxation.

In a new Tax & Budget Bulletin for Cato, I outline some of my concerns with this new “BEPS” initiative.

…the BEPS report…calls for dramatic changes in corporate tax policy based on the presumption that governments are not seizing enough revenue from multinational companies. The OECD essentially argues that it is illegitimate for businesses to shift economic activity to jurisdictions that have more favorable tax laws. …The core accusation in the OECD report is that firms systematically—but legally—reduce their tax burdens by taking advantage of differences in national tax policies.

Ironically, the OECD admits in the report that revenues have been trending upwards.

…the report acknowledges that “… revenues from corporate income taxes as a share of gross domestic product have increased over time. …Other than offering anecdotes, the OECD provides no evidence that a revenue problem exists. In this sense, the BEPS report is very similar to the OECD’s 1998 “Harmful Tax Competition” report, which asserted that so-called tax havens were causing damage but did not offer any hard evidence of any actual damage.

To elaborate, the BEPS scheme should be considered Part II of the OECD’s anti-tax competition project. Part I was the attack on so-called tax havens, which began back in the mid- to late-1990s.

The OECD justified that campaign by asserting there was a need to fight illegal tax evasion (conveniently overlooking, of course, the fact that nations should not have the right to impose their laws on what happens in other countries).

The BEPS initiative is remarkable because it is going after legal tax avoidance. Even though governments already have carte blanche to change business tax policy.

…governments already have immense powers to restrict corporate tax planning through “transfer pricing” rules and other regulations. Moreover, there is barely any mention of the huge number of tax treaties between nations that further regulate multinational taxation.

So what does the OECD want?

…the OECD hints at its intended outcome when it says that the effort “will require some ‘out of the box’ thinking” and that business activity could be “identified through elements such as sales, workforce, payroll, and fixed assets.” That language suggests that the OECD intends to push global formula apportionment, which means that governments would have the power to reallocate corporate income regardless of where it is actually earned.

And what does this mean? Nothing good, unless you think governments should have more money and investment should be further penalized.

Formula apportionment is attractive to governments that have punitive tax regimes, and it would be a blow to nations with more sensible low-tax systems. …business income currently earned in tax-friendly countries, such as Ireland and the Netherlands, would be reclassified as French-source income or German-source income based on arbitrary calculations of company sales and other factors. …nations with high tax rates would likely gain revenue, while jurisdictions with pro-growth systems would be losers, including Ireland, Hong Kong, Switzerland, Estonia, Luxembourg, Singapore, and the Netherlands.

Since the United States is a high-tax nation for corporations, why should Americans care?

For several reasons, including the fact that it wouldn’t be a good idea to give politicians more revenue that will be used to increase the burden of government spending.

But most important, tax policy will get worse everywhere if tax competition is undermined.

…formula apportionment would be worse than a zero-sum game because it would create a web of regulations that would undermine tax competition and become increasingly onerous over time. Consider that tax competition has spurred OECD governments to cut their corporate tax rates from an average of 48 percent in the early 1980s to 24 percent today. If a formula apportionment system had been in place, the world would have been left with much higher tax rates, and thus less investment and economic growth. …If governments gain the power to define global taxable income, they will have incentives to rig the rules to unfairly gain more revenue. For example, governments could move toward less favorable, anti-investment depreciation schedules, which would harm global growth.

You don’t have to believe me that the BEPS project is designed to further increase the tax burden. The OECD admits that higher taxes are the intended outcome.

The OECD complains that “… governments are often under pressure to offer a competitive tax environment,” and that “failure to collaborate … could be damaging in terms of … a race to the bottom with respect to corporate income taxes.” In other words, the OECD is admitting that the BEPS project seeks higher tax burdens and the curtailment of tax competition.

Writing for Forbes, Andy Quinlan of the Center for Freedom and Prosperity highlights how the BEPS scheme will undermine tax competition and enable higher taxes.

…the OECD wants to undo taxpayer gains made in recent decades thanks to tax competition. Since the 1980′s, average global income taxes on both individuals and corporations have dropped significantly, improving incentives in the productive sector of the economy to generate economic growth. These pro-growth reforms are the result of tax competition, or the pressure to adopt competitive economic policies that is put on governments by an increasingly globalized society where both labor and capital are mobile. Tax competition is the only force working on the side of taxpayers, which explains the organized campaign by global elite to defeat it. …If taxpayers want to preserve gains made thanks to tax competition, they must be weary of the threat posed by global tax cartels though organizations such as the OECD.

Speaking of the OECD, this video tells you everything you need to know.

The final kicker is that the bureaucrats at the OECD get tax-free salaries, so they’re insulated from the negative impact of the bad policies they want to impose on everyone else.

That’s even more outrageous than the fact that the OECD tried to have me thrown in a Mexican jail for the supposed crime of standing in the public lobby of a public hotel.

Anguilla 2013P.S. I just gave a speech to the Anguilla branch of the Society for Trust and Estate Professionals, and much of my remarks focused on the dangers of the BEPS scheme.

I took this picture from my balcony. As you can see, there are some fringe benefits to being a policy wonk.

And I travel to Nevis on Sunday to give another speech.

Tough work, but somebody has to do it. Needless to say, withe possibility of late-season snow forecast for Monday in the DC area, I’m utterly bereft I won’t be there to enjoy the experience.

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Every so often, you get a “teaching moment” in Washington, and we now have an excellent opportunity to educate lawmakers about the “offshore” world because President Obama’s nominee to be Treasury Secretary has been caught with his hand in the tax haven cookie jar.

Mr. Lew not only invested some of his own money in a Cayman-based fund, he also was in charge of a Citi Bank division that had over 100 Cayman-domiciled funds.

As you can imagine, Republicans are having some fun with this issue.

Democrats used to be critical of Ugland House

Mitt Romney was subjected to a lot of class-warfare demagoguery during the 2012 campaign because he also invested  some of his wealth in a Cayman fund, so GOPers are hoisting Lew on a petard and grilling him about the obvious hypocrisy of a leftist utilizing – both personally and professionally – a jurisdiction that commits the unforgivable crime of not imposing income tax.

In a sensible world, Lew would say what everyone in the financial world already understands, which is that the Cayman Islands are an excellent, fully legal, tax-neutral platform for investment funds because 1) there’s no added layer of tax, 2) there’s good rule of law, and, 3) foreigners can invest in the American economy without creating any nexus with the IRS.

But we don’t live in a sensible world, so Lew instead wants us to believe he’s a moron and that he didn’t realize that funds were domiciled in Cayman.

And I guess all the other wealthy leftists with offshore-based investments probably think that as well, right?

Anyhow, I’m taking a glass-half-full perspective on this kerfuffle since it gives me an opportunity to educate more people about why tax havens are a liberalizing and positive force in the global economy.

Oh, what about Lew as Treasury Secretary? Well, as I explain for Real News, he’s competent but misguided.

In other words, the chances of any good reform in the next four years are asymptotically approaching zero. Based on his background (and also based on the views of the President he’ll be serving), it’s virtually impossible to envision good entitlement reform, pro-growth tax reform, and any changes to lessen the likelihood of future Greek-style fiscal collapse (as amusingly illustrated by this cartoon).

So with any luck, they’ll be some tax havens around that the rest of us can utilize when that day of reckoning occurs.

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As a taxpayer, I’m not a big fan of international bureaucracies. They consume a lot of money, pay themselves extravagant (and tax-free!) salaries, and generally promote statist policies.

The Paris-based Organization for Economic Cooperation and Development is a prime example. Originally created for benign purposes such as gathering statistics, it now is a bloated bureaucracy pursuing an anti-free market agenda.

But international bureaucracies also have a nasty habit of operating in the shadows and using thuggish behavior to thwart critics. And I have the scars to prove it from my efforts to protect fiscal sovereignty.

But it’s not just the crowd in Paris that doesn’t believe in openness and fair play. A journalist recently traveled to South Korea to report on a World Health Organization conference on tobacco.

This doesn’t sound like the type of event that would involve skullduggery, but here’s part of what the reporter wrote for the Korea Times.

A monumental session during the World Health Organization’s (WHO) convention on tobacco control turned into an alarming attack on transparency, accountability and press freedom. …delegates of the member countries of the conference stripped the media of the ability to cover the meeting and escorted public onlookers from the premises. The decision to meet behind closed doors occurred when a discussion began about efforts to decrease tobacco use by increasing the price of tobacco products. Specifically, the convention attendees were discussing the framework for an international tobacco tax. This is one of the most controversial topics for debate in Seoul this week.

This is what is called a “learning moment.” And the journalist clearly recognized both the WHO’s hypocrisy and its troubling policy agenda.

As a reporter covering this meeting, this was not only a frustrating stance, but it raises some serious questions about an organization that for years has operated largely behind the scenes and without the benefit of much public scrutiny. When is the media more necessary than when an unaccountable, shadowy organization that devours millions of tax dollars each year from people across the world debates getting in the business of issuing global taxes? This effort to silence the press is particularly chilling since it is in direct conflict with the U.N. — the WHO’s parent organization—claims to fight to advance “free, independent and pluralistic media” across the world. Apparently, U.N. and WHO leaders believe in media rights in all cases except when the media covers them.

And remember, you’re paying for this thuggish behavior.

If you want to learn more about the underlying issue, I wrote about the WHO’s push for global tobacco taxation back in both May and September.

All of which is consistent with the broader ongoing push by the United Nations to get worldwide taxing power.

Needless to say, any form of global taxation would be a terrible development, but governments are sympathetic to such schemes since they view tax competition as a constraint on their ability to pursue redistribution and thus a limit on their efforts to buy votes with other people’s money.

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I spoke at the United Nations back in May, explaining that more government was the wrong way to help the global economy.

But I guess I’m not very persuasive. The bureaucrats have just released a new report entitled, “In Search of New Development Finance.”

As you can probably guess, what they’re really searching for is more money for global redistribution.

But here’s the most worrisome part of their proposal. They want the U.N. to be in charge of collecting the taxes, sort of a permanent international bureaucracy entitlement.

I’ve written before about the U.N.’s desire for tax authority (on more than one occasion), but this new report is noteworthy for the size and scope of taxes that have been proposed.

Here’s the wish list of potential global taxes, pulled from page vi of the preface.

Here’s some of what the report had to say about a few of the various tax options. We’ll start with the carbon tax, which I recently explained was a bad idea if imposed inside the U.S. by politicians in Washington. It’s a horrible idea if imposed globally by the kleptocrats at the United Nations.

…a tax of $25 per ton of CO2 emitted by developed countries is expected to raise $250 billion per year in global tax revenues. Such a tax would be in addition to taxes already imposed at the national level, as many Governments (of developing as well as developed countries) already tax carbon emissions, in some cases explicitly, and in other cases, indirectly through taxes on specific fuels.

Notice that the tax would apply only to “developed countries,” so this scheme is best characterized as discriminatory taxation. If Obama is genuinely worried about jobs being “outsourced” to nations such as China (as he implies in his recent attack on Romney), then he should announce his strong opposition to this potential tax.

But don’t hold your breath waiting for that to happen.

Next, here’s what the U.N. says about a financial transactions tax.

A small tax of half a “basis point” (0.005 per cent) on all trading in the four major currencies (the dollar, euro, yen and pound sterling) might yield an estimated $40 billion per year. …even a low tax rate would limit high-frequency trading to some extent. It would thus result in the earning of a “double dividend” by helping reduce currency volatility and raising revenue for development. While a higher rate would limit trading to a greater extent, this might be at the expense of revenue.

This is an issue that already has attracted my attention, and I also mentioned that it was a topic in my meeting with the E.U.’s Tax Commissioner.

But rather than reiterate some of my concerns about taxing financial consumers, I want to give a back-handed compliment the United Nations. The bureaucrats, by writing that “a higher rate…might be at the expense of revenue,” deserve credit for openly acknowledging the Laffer Curve.

By the way, this is an issue where both the United States and Canada have basically been on the right side, though the Obama Administration blows hot and cold on the topic.

Now let’s turn to the worst idea in the U.N. report. The clowns want to steal wealth from rich people. But even more remarkable, they want us to think this won’t have any negative economic impact.

…the least distorting, most fair and most efficient tax is a “lump sum” payment, such as a levy on the accumulated wealth of the world’s richest individuals (assuming the wealthy could not evade the tax). In particular, it is estimated that in early 2012, there were 1,226 individuals in the world worth $1 billion or more, 425 of whom lived in the United States, 90 in other countries of the Americas, 315 in the Asia-Pacific region, 310 in Europe and 86 in Africa and the Middle East. Together, they owned $4.6 trillion in assets, for an average of $3.75 billion in wealth per person.21 A 1 per cent tax on the wealth of these individuals would raise $46 billion in 2012.

I’ll be the first to admit that you can’t change people’s incentives to produce in the past. So if you steal wealth accumulated as the result of a lifetime of work, that kind of “lump sum” tax isn’t very “distorting.”

But here’s a news flash for the nitwits at the United Nations. Rich people aren’t stupid (or at least their financial advisers aren’t stupid). So you might be able to engage in a one-time act of plunder, but it is deliberate naiveté to think that this would be a successful long-run source of revenue.

For more information, I addressed wealth taxes in this post, and the argument I was making applies to a global wealth tax just as much as it applies to a national wealth tax.

Now let’s conclude with a very important warning. Some people doubtlessly will dismiss the U.N. report as a preposterous wish list. In part, they’re right. There is virtually no likelihood of these bad policies getting implemented at any point in the near future.

But the statists have been relentless in their push for global taxation, and I’m worried they eventually will find a way to impose the first global tax. And if you’ll forgive me for going overboard on metaphors, once the camel’s nose is under the tent, it’s just a matter of time before the floodgates open.

The greatest threat is the World Health Organization’s scheme for a global tobacco tax. I wrote about this issue back in May, and it seems my concerns were very warranted. The bureaucrats recently unveiled a proposal – to be discussed at a conference in South Korea in November – that would look at schemes to harmonize tobacco taxes and/or impose global taxes.

Here’s some of what the Washington Free Beacon wrote.

The World Health Organization (WHO) is considering a global excise tax of up to 70 percent on cigarettes at an upcoming November conference, raising concerns among free market tax policy analysts about fiscal sovereignty and bureaucratic mission creep. In draft guidelines published this September, the WHO Framework Convention on Tobacco Control indicated it may put a cigarette tax on the table at its November conference in Seoul, Korea. …it is considering two proposals on cigarette taxes to present to member countries. The first would be an excise tax of up to 70 percent. …The second proposal is a tiered earmark on packs of cigarettes: 5 cents for high-income countries, 3 cents for middle-income countries, and 1 cent for low-income countries. WHO has estimated that such a tax in 43 selected high-/middle-/low-income countries would generate $5.46 billion in tax revenue. …Whichever option the WHO ends up backing, “they’re both two big, bad ideas,” said Daniel Mitchell, a senior tax policy fellow at the Cato Institute. …Critics also argue such a tax increase will not generate more revenue, but push more sales to the black market and counterfeit cigarette producers. “It’s already huge problem,” Mitchell said. “In many countries, a substantial share of cigarettes are black market or counterfeit. They put it in a Marlboro packet, but it’s not a Marlboro cigarette. Obviously it’s a big thing for organized crime.” …The other concern is mission creep. Tobacco, Mitchell says, is easy to vilify, making it an attractive beachhead from which to launch future vice tax initiatives.

It’s my final comment that has me most worried. The politicians and bureaucrats are going after tobacco because it’s low-hanging fruit. They may not even care that their schemes will boost organized crime and may not raise much revenue.

They’re more concerned about establishing a precedent that international bureaucracies can impose global taxes.

I wrote the other day about whether Americans should escape to Canada, Australia, Chile, or some other nation when the entitlement crisis causes a Greek-style fiscal collapse.

But if the statists get the power to impose global taxes, then what choice will we have?

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Very few people are willing to admit that they favor protectionism. After all, who wants to embrace a policy associated with the Great Depression?

But people sometimes say “I want free trade so long as it’s fair trade.” In most cases, they’re simply protectionists who are too clever to admit their true agenda

In the Belly of the Beast at the European Commission

There’s a similar bit of wordplay that happens in the world of international taxation, and a good example of this phenomenon took place on my recent swing through Brussels.

While in town, I met with Algirdas Šemeta, the European Union’s Tax Commissioner, as part of a meeting arranged by some of his countrymen from the Lithuanian Free Market Institute.

Mr. Šemeta was a gracious host and very knowledgeable about all the issues we discussed, but when I was pontificating about the benefits of tax competition (are you surprised?), he assured me that he felt the same way, only he wanted to make sure it was “fair tax competition.”

But his idea of “fair tax competition” is that people should not be allowed to benefit from better policy in low-tax jurisdictions.

Allow me to explain. Let’s say that a Frenchman, having earned some income in France and having paid a first layer of tax to the French government, decides he wants to save and invest some of his post-tax income in Luxembourg.

In an ideal world, there would be no double taxation and no government would try to tax any interest, dividends, or capital gains that our hypothetical Frenchman might earn. But if a government wants to impose a second layer of tax on earnings in Luxembourg, it should be the government of Luxembourg. It’s a simple matter of sovereignty that nations get to determine the laws that apply inside their borders.

But if the French government wants to track – and tax – that flight capital, it has to coerce the Luxembourg government into acting as a deputy tax collector, and this generally is why high-tax governments (and their puppets at the OECD) are so anxious to bully so-called tax havens into emasculating their human rights laws on financial privacy.

Now let’s see the practical impact of “fair tax competition.” In the ideal world of Mr. Šemeta and his friends, a Frenchman will have the right to invest after-tax income in Luxembourg, but the French government will tax any Luxembourg-source earnings at French tax rates. In other words, there is no escape from France’s oppressive tax laws. The French government might allow a credit for any taxes paid to Luxembourg, but even in the best-case scenario, the total tax burden on our hypothetical Frenchman will still be equal to the French tax rate.

Imagine if gas stations operated by the same rules. If you decided you no longer wanted to patronize your local gas station because of high prices, you would be allowed to buy gas at another station. But your old gas station would have the right – at the very least – to charge you the difference between its price and the price at your new station.

Simply stated, you would not be allowed to benefit from lower prices at other gas stations.

So take a wild guess how much real competition there would be in such a system? Assuming your IQ is above room temperature, you’ve figured out that such a system subjects the consumer to monopoly abuse.

Which is exactly why the “fair tax competition” agenda of Europe’s welfare states (with active support from the Obama Administration) is nothing more than an indirect form of tax harmonization. Nations would be allowed to have different tax rates, but people wouldn’t be allowed to benefit.

For more information, here’s my video on tax competition.

And if you want information about the beneficial impact of “tax havens,” read this excellent column by Pierre Bessard and watch my three-part video series on the topic.

P.S. The Financial Transaction Tax also was discussed at the meeting, and it appears that the European actually intend on shooting themselves in the foot with this foolish scheme. Interestingly, when presented by other participants with some studies showing how the tax was damaging, Mr. Šemeta asked why we he should take those studies seriously since they were produced by people opposed to the tax. Since I’ve recently stated that healthy skepticism is warranted when dealing with anybody in the political/policy world (even me!), I wasn’t offended by the insinuation. But my response was to ask why we should act like the European Commission studies are credible since they were financed by governments that want a new source of revenue.

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If we want to avoid the kind of Greek-style fiscal collapse implied by this BIS and OECD data, we need some external force to limit the tendency of politicians to over-tax and over-spend.

That’s why I’m a big advocate of tax competition, fiscal sovereignty, and financial privacy (read Pierre Bessard and Allister Heath to understand why these issues are critical).

Simply stated, I want people to have the freedom to benefit from better tax policy in other jurisdictions, especially since that penalizes governments that get too greedy.

I’m currently surrounded by hundreds of people who share my views since I’m in Prague at a meeting of the Mont Pelerin Society. And I’m particularly happy since Professor Lars Feld of the University of Freiburg presented a paper yesterday on “Redistribution through public budgets: Who pays, who receives, and what effects do political institutions have?”.

His research produced all sorts of interesting results, but I was drawn to his estimates on how tax competition and fiscal decentralization are an effective means of restraining bad fiscal policy.

Here are some findings from the study, which was co-authored with Jan Schnellenbach of the University of Heidelberg.

In line with the previous subsections, we find that countries with a higher GDP per employee, i.e. a higher overall labor productivity, have a more unequal primary income distribution. …fiscal competition within a country or trade openness as an indicator of globalization do not exacerbate, but reduce the gap between income classes. …expenditure and revenue decentralization restrict the government’s ability to redistribute income when fiscal decentralization also involves fiscal competition. …fiscal decentralization, when accompanied by high fiscal autonomy, involves significantly less fiscal redistribution. Please also note that fiscal competition induces a more equal distribution of primary income and, even though the distribution of disposable income is more unequal, it is open how the effect of fiscal competition on income distribution should be evaluated. Because measures of income redistribution usu-ally have adverse incentive effects which consequently affect economic growth negatively, fiscal competition might be favorable for countries which have strong egalitarian preferences. A rising tide lifts all boats and might in the long-run outperform countries with more moderate income redistribution even in distributional terms.

The paper includes a bunch of empirical results that are too arcane to reproduce here, but they basically show that the welfare state is difficult to maintain if taxpayers have the ability to vote with their feet.

Or perhaps the better way to interpret the data is that fiscal competition makes it difficult for governments to expand the welfare state to dangerous levels. In other words, it is a way of protecting governments from the worst impulses of their politicians.

I can’t resist sharing one additional bit of information from the Feld-Schnellenbach paper. They compare redistribution in several nations. As you can see in the table reproduced below, the United States and Switzerland benefit from having the lowest levels of overall redistribution (circled in red).

It’s no coincidence that the U.S. and Switzerland are also the two nations with the most decentralization (some argue that Canada may be more decentralized that the U.S., but Canada also scores very well in this measure, so the point is strong regardless).

Interestingly, Switzerland definitely has significantly more genuine federalism than any other nation, so you won’t be surprised to see that Switzerland is far and away the nation with the lowest level of tax redistribution (circled in blue).

One clear example of Switzerland’s sensible approach is that voters overwhelmingly rejected a 2010 referendum that would have imposed a minimum federal tax rate of 22 percent on incomes above 250,000 Swiss Francs (about $262,000 U.S. dollars). And the Swiss also have a spending cap that has reduced the burden of government spending while most other nations have moved in the wrong direction.

While there are some things about Switzerland I don’t like, its political institutions are a good role model. And since good institutions promote good policy (one of the hypotheses in the Feld-Schnellenbach paper) and good policy leads to more prosperity, you won’t be surprised to learn that Swiss living standards now exceed those in the United States. And they’re the highest-ranked nation in the World Economic Forum’s Global Competitiveness Report.

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I was a bit surprised couple of years ago to read that an American company re-located to Canada to benefit from better tax policy.

But I wasn’t totally shocked by the news because Canada has been lowering tax rates, reducing the burden of government spending, and taking other steps to make its economy more competitive.

But I am downright stunned to learn that America’s high corporate tax rate is such an outlier that companies are even moving to welfare states such as the United Kingdom.

Here are some excerpts from a story in the Wall Street Journal.

More big U.S. companies are reincorporating abroad despite a 2004 federal law that sought to curb the practice. One big reason: Taxes. Companies cite various reasons for moving, including expanding their operations and their geographic reach. But tax bills remain a primary concern. … Aon plc…relocated to the U.K. in April. Aon has told analysts it expects to reduce its tax rate, which averaged 28% over the past five years, by five percentage points over time, which could boost profits by about $100 million annually. Since 2009, at least 10 U.S. public companies have moved their incorporation address abroad or announced plans to do so, including six in the last year or so, according to a Wall Street Journal analysis of company filings and statements. …Eaton, a 101-year-old Cleveland-based maker of components and electrical equipment, announced in May that it would acquire Cooper Industries PLC, another electrical-equipment maker that had moved to Bermuda in 2002 and then to Ireland in 2009. It plans to maintain factories, offices and other operations in the U.S. while moving its place of incorporation—for now—to the office of an Irish law firm in downtown Dublin. …Eaton’s chief executive, Alexander Cutler, has been a vocal critic of the corporate tax code. “We have too high a domestic rate and we have a thoroughly uncompetitive international tax regime,” Mr. Cutler said on CNBC in January. …In moving from Dallas to the U.K. in 2009, Ensco followed rivals such as Transocean Ltd., Noble Corp. and Weatherford International Ltd. that had relocated outside the U.S. The company said the move would help it achieve “a tax rate comparable to that of some of Ensco’s global competitors.”

Wow. I can understand moving to Ireland, with its 12.5 percent corporate tax rate, but I wouldn’t have thought that the U.K.’s 24 percent rate was overly attractive.

But compared to the punitive 35 percent rate in the United States, I guess 24 percent doesn’t look that bad.

So what’s the solution? The obvious answer is to lower the corporate tax rate. But it also would help to eliminate worldwide taxation, as noted in the article.

Lawmakers of both parties have said the U.S. corporate tax code needs a rewrite and they are aiming to try next year. One shared source of concern is the top corporate tax rate of 35%—the highest among developed economies. By comparison, Ireland’s rate is 12.5%. …Critics of the tax code also say it puts U.S. companies at a disadvantage because it taxes their profits earned abroad. Most developed countries tax only domestic earnings. While executives would welcome a lower tax rate and an end to global taxation, some worry their tax bills could rise under other measures that could be included in a tax-overhaul package.

Both Obama and Romney have said that they favor a slightly lower corporate rate, but I’m skeptical about their true intentions. In any event, neither one of them is talking about a low rate, perhaps 15 percent of below.

For more information, here’s my video on corporate taxation.

And the issue of worldwide taxation may sound arcane, but this video explains why it also is important.

Let’s close by noting that there are two obstacles to pro-growth reform. First, any good reform will deprive politicians of tax revenue. And since they’ve spent the country into a fiscal ditch, that makes it very difficult to enact legislation that – at least on paper – means less money flowing to Washington.

Second, politicians are very reluctant to lower tax rates on groups that can be demagogued, such as “rich people” and “big corporations.” This is the destructive mentality that drives class-warfare tax policy.

So America faces a choice. Jobs, investment, and growth or big government, class warfare, and stagnation. The solution should be obvious…unless you’re a politicians interested in preserving power in Washington.

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In previous posts, I put together tutorials on the Laffer Curve, tax competition, and the economics of government spending.

Today, we’re going to look at the issue of tax reform. The focus will be the flat tax, but this analysis applies equally to national sales tax systems such as the Fair Tax.

There are three equally important features of tax reform.

  1. A low tax rate – This is the best-known feature of tax reform. A low tax rate is designed to minimize the penalty of work, entrepreneurship, and productive behavior.
  2. No double taxation of saving and investment – All major tax reform plans, such as the flat tax and national sales tax, get rid of the tax bias against income that is saved and invested. The capital gains tax, double tax on dividends, and death tax are all abolished. Shifting to a system that taxes economic activity only one time will boost capital formation, thus facilitating an increase in productivity and wages.
  3. No distorting loopholes – With the exception of a family-based allowance designed to protect lower-income people, the main tax reform plans get rid of all deductions, exemptions, shelters, preference, exclusions, and credits. By creating a neutral tax system, this ensures that decisions are made on the basis of economic fundamentals, not tax distortions.

All three features are equally important, sort of akin to the legs of a stool. Using the flat tax as a model, this video provides additional details.

One thing I don’t mention in the video is that a flat tax is “territorial,” meaning that only income earned in the United States is taxed. This common-sense rule is the good-fences-make-good-neighbors approach. If income is earned by an American in, say, Canada, then the Canadian government gets to decide how it’s taxed. And if income is earned by a Canadian in America, then the U.S. government gets a slice.

It’s also worth emphasizing that the flat tax protects low-income Americans from the IRS. All flat tax plans include a fairly generous “zero-bracket amount,” which means that a family of four can earn (depending on the specific proposal) about $25,000-$35,000 before the flat tax takes effect.

Proponents of tax reform explain that there are many reasons to junk the internal revenue code and adopt something like a flat tax.

  • Improve growth – The low marginal tax rate, the absence of double taxation, and the elimination of distortions combine to create a system that minimizes the penalties on productive behavior.
  • Boost competitiveness – In a competitive global economy, it is easy for jobs and investment to cross national borders. The right kind of tax reform can make America a magnet for money from all over the world.
  • Reduce corruption – Tax preferences and penalties are bad for growth, but they are also one of the main sources of political corruption in Washington. Tax reform takes away the dumpster, which means fewer rats and cockroaches.
  • Promote simplicity – Good policy has a very nice side effect in that the tax system becomes incredibly simple. Instead of the hundreds of forms required by the current system, both households and businesses would need only a single postcard-sized form.
  • Increase privacy – By getting rid of double taxation and taxing saving, investment, and profit at the business level, there no longer is any need for people to tell the government what assets they own and how much they’re worth.
  • Protect civil liberties – A simple and fair tax system eliminates almost all sources of conflict between taxpayers and the IRS.

All of these benefits also accrue if the internal revenue code is abolished and replaced with some form of national sales tax. That’s because the flat tax and sales tax are basically different sides of the same coin. Under a flat tax, income is taxed one time at one low rate when it is earned. Under a sales tax, income is taxed one time at one low rate when it is spent.

Neither system has double taxation. Neither system has corrupt loopholes. And neither system requires the nightmarish internal revenue service that exists to enforce the current system.

This video has additional details – including the one caveat that a national sales tax shouldn’t be enacted unless the 16th Amendment is repealed so there’s no threat that politicians could impose both an income tax and sales tax.

Last but not least, let’s deal with the silly accusation that the flat tax is a risky and untested idea. This video is a bit dated (some new nations are in the flat tax club and a few have dropped out), but is shows that there are more than two dozen jurisdictions with this simple and fair tax system.

P.S. Fundamental tax reform is also the best way to improve the healthcare system. Under current law, compensation in the form of fringe benefits such as health insurance is tax free. Not only is it deductible to employers and non-taxable to employees, it also isn’t hit by the payroll tax. This creates a huge incentive for gold-plated health insurance policies that cover routine costs and have very low deductibles. This is a principal cause (along with failed entitlement programs such as Medicare and Medicaid) of the third-party payer crisis. Shifting to a flat tax means that all forms of employee compensation are taxed at the same low rate, a reform that presumably over time will encourage both employers and employees to migrate away from the inefficient over-use of insurance that characterizes the current system. For all intents and purposes, the health insurance market presumably would begin to resemble the vastly more efficient and consumer-friendly auto insurance and homeowner’s insurance markets.

P.P.S. If you want short and sweet descriptions of the major tax reform plans, here are four highly condensed descriptions of the flat tax, national sales tax, value-added tax, and current system.

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My friends at Americans for Tax Reform have received a bunch of attention for a new report entitled “Win Olympic Gold, Pay the IRS.”

In this clever document, they reveal that athletes could face a tax bill – to those wonderful folks at the IRS – of nearly $9,000 thanks to America’s unfriendly worldwide tax system.

The topic is even getting attention overseas. Here’s an excerpt from a BBC report.

US medal-winning athletes at the Olympics have to pay tax on their prize money – something which is proving controversial in the US. But why are athletes from the US taxed when others are not? The US is right up there in the medals table, and has produced some of the finest displays in the Olympics so far. … But not everyone is happy to hear that their Olympic medal-winning athletes are being taxed on their medal prize money. Athletes are effectively being punished for their success, argues Florida Senator Marco Rubio, a Republican, who introduced a bill earlier this week that would eliminate tax on Olympic medals and prize money. …This, he said, is an example of the “madness” of the US tax system, which he called a “complicated and burdensome mess”.

It’s important to understand, though, that this isn’t a feel-good effort to create a special tax break. Instead, Senator Rubio is seeking to take a small step in the direction of better tax policy.

More specifically, he wants to move away from the current system of “worldwide” taxation and instead shift to “territorial” taxation, which is simply the common-sense notion of sovereignty applied to taxation. If income is earned inside a nation’s borders, that nation gets to decided how and when it is taxed.

In other words, if U.S. athletes earn income competing in the United Kingdom, it’s a matter for inland revenue, not the IRS.

Incidentally, both the flat tax and national sales tax are based on territorial taxation, and most other countries actually are ahead of the United States and use this approach. The BBC report has further details.

The Olympic example highlights what they regard as the underlying problem of the US’ so-called “worldwide” tax model. Under this system, earnings made by a US citizen abroad are liable for both local tax and US tax. Most countries in the world have a “territorial” system of tax and apply that tax just once – in the country where it is earned. With the Olympics taking place in London, the UK would, in theory, be entitled to claim tax on prize money paid to visiting athletes. But, as is standard practice for many international sporting events, it put in place a number of tax exemptions for competitors in the Olympics – including on any prize money. That means that only athletes from countries with a worldwide tax system on individual income are liable for tax on their medals. And there are only a handful of them in the world, says Daniel Mitchell, an expert on tax reform at the Cato Institute, a libertarian think tank – citing the Philippines and Eritrea as other examples. But with tax codes so notoriously complicated, unravelling which countries would apply this in the context of Olympic prize money is a tricky task, he says. Mitchell is a critic of the worldwide system, saying it effectively amounts to “double taxation” and leaves the US both at a competitive disadvantage, and as a bullyboy, on the world stage. “We are the 800lb (360kg) gorilla in the world economy, and we can bully other nations into helping enforce our bad tax law.”

To close out this discussion, statists prefer worldwide taxation because it undermines tax competition. This is because, under worldwide taxation, individuals and companies have no ability to escape high taxes by shifting activity to jurisdictions with better tax policy.

Indeed, this is why politicians from high-tax nations are so fixated on trying to shut down so-called tax havens. It’s difficult to enforce bad tax policy, after all, if some nations have strong human rights policies on privacy.

For all intents and purposes, a worldwide tax regime means the government gets a permanent and global claim on your income. And without having to worry about tax competition, that “claim” will get more onerous over time.

P.S. Just because a nation has a right to tax foreigners who earn income inside its borders, that doesn’t mean it’s a good idea to go overboard. The United Kingdom shows what happens if politicians get too greedy and Spain shows what happens if marginal tax rates are reasonable.

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Mitt Romney is being criticized for supporting “territorial taxation,” which is the common-sense notion that each nation gets to control the taxation of economic activity inside its borders.

While promoting his own class-warfare agenda, President Obama recently condemned Romney’s approach. His views, unsurprisingly, were echoed in a New York Times editorial.

President Obama raised…his proposals for tax credits for manufacturers in the United States to encourage the creation of new jobs. He said this was greatly preferable to Mitt Romney’s support for a so-called territorial tax system, in which the overseas profits of American corporations would escape United States taxation altogether. It’s not surprising that large multinational corporations strongly support a territorial tax system, which, they say, would make them more competitive with foreign rivals. What they don’t say, and what Mr. Obama stressed, is that eliminating federal taxes on foreign profits would create a powerful incentive for companies to shift even more jobs and investment overseas — the opposite of what the economy needs.

Since even left-leaning economists generally agree that tax credits for manufacturers are ineffective gimmicks proposed for political purposes, let’s set that topic aside and focus on the issue of territorial taxation.

Or, to be more specific, let’s compare the proposed system of territorial taxation to the current system of “worldwide taxation.”

Worldwide taxation means that a company is taxed not only on it’s domestic earnings, but also on its foreign earnings. Yet the “foreign-source income” of U.S. companies is “domestic-source income” in the nations where those earnings are generated, so that income already is subject to tax by those other governments.

In other words, worldwide taxation results in a version of double taxation.

The U.S. system seeks to mitigate this bad effect by allowing American-based companies a “credit” for some of the taxes they pay to foreign governments, but that system is very incomplete.

And even if it worked perfectly, America’s high corporate tax rate still puts U.S. companies in a very disadvantageous position. If an American firm, Dutch firm, and Irish firm are competing for business in Ireland, the latter two only pay the 12.5 percent Irish corporate tax on any profits they earn. The U.S. company also pays that tax, but then also pays an additional 22.5 percent to the IRS (the 35 percent U.S. tax rate minus a credit for the 12.5 percent Irish tax).

In an attempt to deal with this self-imposed disadvantage, the U.S. tax system also has something called “deferral,” which allows American companies to delay the extra tax (though the Obama Administration has proposed to eliminate that provision!).

Romney is proposing to put American companies on a level playing field by going in the other direction. Instead of immediate worldwide taxation, as Obama wants, he wants to implement territorial taxation.

But what about the accusation from the New York Times that territorial taxation “would create a powerful incentive for companies to shift even more jobs and investment overseas”?

Well, they’re somewhat right…and they’re totally wrong. Here’s what I’ve said about that issue.

If a company can save money by building widgets in Ireland and selling them to the US market, then we shouldn’t be surprised that some of them will consider that option.  So does this mean the President’s proposal might save some American jobs? Definitely not. If deferral is curtailed, that may prevent an American company from taking advantage of a profitable opportunity to build a factory in some place like Ireland. But U.S. tax law does not constrain foreign companies operating in foreign countries. So there would be nothing to prevent a Dutch company from taking advantage of that profitable Irish opportunity. And since a foreign-based company can ship goods into the U.S. market under the same rules as a U.S. company’s foreign subsidiary, worldwide taxation does not insulate America from overseas competition. It simply means that foreign companies get the business and earn the profits.

To put it bluntly, America’s tax code is driving jobs and investment to other nations. America’s high corporate tax rate is a huge self-inflected wound for American competitiveness.

Getting rid of deferral doesn’t solve any problems, as I explain in this video. Indeed, Obama’s policy would make a bad system even worse.

But, it’s also important to admit that shifting to territorial taxation isn’t a complete solution. Yes, it will help American-based companies compete for market share abroad by creating a level playing field. But if policy makers want to make the United States a more attractive location for jobs and investment, then a big cut in the corporate tax rate should be the next step.

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I realize it’s a bold assertion, but the $100 million that American taxpayers send to Paris every year to subsidize the Organization for Economic Cooperation and Development is – on a per-dollar basis – the most destructively wasteful part in the federal budget.

This video will give you some evidence.

But the video also is a couple of years old, so it doesn’t even include some of the more recent and most outrageous examples of OECD perfidy.

The good news is that more and more people are sounding the alarm bells about this wretched bureaucracy.

Richard Rahn excoriates the statist swamp in his Washington Times column.

Most Americans probably would not approve of their tax dollars being used to support an international organization that undermines their fundamental liberties and promotes giving their hard-earned money to other governments, often run by corrupt or dictatorial regimes. This is precisely what the OECD is doing… The OECD was formed in 1960 to promote trade and investment among the developed countries. Over the years, it has morphed into an organization promoting higher taxes and the redistribution of income… Dan Mitchell, a senior fellow at the Cato Institute and well-known tax economist, has closely followed the efforts of the OECD in promoting bigger government and more statism. In his extensive work, he has described how the OECD’s “anti-tax competition project” is designed to prop up Europe’s bankrupt welfare states and how its advocacy of “higher marginal tax rates,” a “value-added tax” and “failed Keynesian stimulus” for the U.S. reduces economic growth. (Note: OECD bureaucrats work out of plush offices in Paris, travel first class and have taxfree salaries.) It is worth repeating: U.S. taxpayers are supporting high-salaried international bureaucrats who are advocating higher taxes on others, most notably U.S. taxpayers, but do not pay income taxes themselves. Hypocrisy abounds. …serious and fiscally responsible members of Congress have the ability to knock all or part of the OECD funding out of the budget through amendments, provided they can get a majority of their fellow members to vote with them. The major limited-government, free-market organizations have endorsed a cutback in OECD funding.

And here’s some of what Dennis Kleinfeld wrote for IFC Review. He starts with a bit of history and explains how OECD bureaucrats live a good life at our expense.

The Organisation of Cooperation and Development has been in existence since 1960. …The OECD’s purpose was to pave the way “for a new era of cooperation….” that started with the US and Europe and now essentially encompasses as members or to-be members virtually all the dominant industrial powers. The OECD Secretary General, Deputy Secretaries, and heads of the Directorates are non-elected administrators and policy-makers, who live in Paris tax free (except for the Americans), travel first class, live first class, and whose every expense is paid for by the member states from taxes or money borrowed. These are the guys who tell everyone else to pay their fair share of taxes and share in making sacrifices for the greater good of all. This reminds me that we should never confuse the Hippocratic Oath with hypocrisy.

He then puts forth a strong hypothesis.

In a colourful sense, the OECD is (if you remember Star Trek) the Borg of organisations. Looking around the world today, I believe it can be concluded that the OECD approach to solving the world’s problems has solved nothing but has created even greater, perhaps now nearly insurmountable difficulties.

And he backs up his assertion by pointing out how the OECD is undermining the global economy.

The OECD promotes tax policies to create tax harmony, eliminate tax competition, and end tax abuse. To achieve this, the OECD has found that it becomes ever necessary to impose draconian and oppressive measures in order to make the income tax system work. Any idea of cooperative economic prosperity, encouragement of trans-national capital flows, international trade, or making global investing a seamless effort has been sacrificed on the altar of the income tax system.

And he shows examples of how OECD-supported policies are causing trouble and reducing liberty.

The OECD has long promoted such means to enforce income tax compliance. What is becoming increasingly apparent is that FACTA has gone too far and the backlash is being dramatically felt across all sectors of the US economy. Why then is it such a surprise that combining short sighted legislation with an already failing tax policy would result in rapidly accelerating an already declining economy? The OECD is mandating and leading what seems to be a cavalry charge over the financial and social edge into chaos. Its weapon of choice, the income tax system, is not achieving success for the taxpayers in this battle; rather it is assuring the defeat of individual liberties, the natural desire for privacy, and the freedom to live without the fear of arbitrary governmental retribution. Perhaps George Orwell’s classic books 1984 and Animal Farm are not works of fiction but accurate previews of what the world will look like as the policies of the OECD create the future.

He then offers a strong conclusion about the OECD’s collectivist program.

After 61 years of the OECD providing its services in the interests of international cooperation and economic development policies, it is safe to say that there is a lack of demonstratable proof that the OECD policies have actually been a positive factor in the world’s affairs. In fact, the contrary seems to be the true. I am quite convinced that the OECD functionaries have proceeded under the fixed ideological beliefs that global social happiness and economic prosperity can only be achieved when individuals subordinate their economic freedom and liberties to the interests of the collective, a utopian view of society. They are wrong. The state of the world proves otherwise.

By the way, if you’re not convinced that the OECD is a cancer that need to be cut out, here are a few additional distressing bits of evidence.

Removing American-financed subsidies from the OECD won’t necessarily put an end to this corrupt and statist bureaucracy. But at least American taxpayers won’t be violated to subsidize the pampered officials who drive the OECD’s biased agenda.

And without America support, it is highly doubtful that the OECD would have any ability to bully nations into expanding the burden of government.

That’s a win-win situation for America and the world.

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Given the kleptocratic nature of international bureaucracies (particularly my good buddies at the Paris-based Organization for Economic Cooperation and Development), I’m never surprised when a bad proposal is unveiled.

And since the United Nations has a long track record of supporting global taxation (with the money going to the U.N., of course), I’m even less surprised when that crowd produces another idea for fleecing people in the productive sector of the economy.

Here are some excerpts from a Yahoo report.

The United Nations on Thursday called for a tax on billionaires to help raise more than $400 billion a year for poor countries. An annual lump sum payment by the super-rich is one of a host of measures including a tax on carbon dioxide emissions, currency exchanges or financial transactions proposed in a UN report that accuses wealthy nations of breaking promises to step up aid for the less fortunate.

These people love taxes, perhaps because they get tax-free salaries.

But setting aside their despicable hypocrisy, there’s scant evidence, if any, that foreign aid does anything other than foment corruption in recipient nations. And there’s lots of evidence, by contrast, that free markets and small government do create prosperity.

Yet the United Nations reflexively wants to line the pockets of the political elite in poor nations. And we’re not talking about pocket change.

The report estimates that the number of people around the globe worth at least $1 billion rose to 1,226 in 2012. There are an estimated 425 billionaires in the United States, 315 in the Asia-Pacific region, 310 in Europe, 90 in other North and South American countries and 86 in Africa and the Middle East. Together they own an estimated $4.6 trillion so a one percent tax on their wealth would raise more than $46 billion, according to the report. “Would this hurt them?” it questioned.

You have to appreciate the supreme irony of pampered international bureaucrats demanding that others should surrender some of their money.

I’m also impressed by their ability to come up with new tax schemes.

The document gives other ideas for international taxes, including:

  • — a tax of $25 per tonne on carbon dioxide emissions would raise about $250 billion. It could be collected by national governments, but allocated to international cooperation.
  • — a tax of 0.005 percent on all currency transactions in the dollar, yen, euro and pound sterling could raise $40 billion a year.
  • — taking a portion of a proposed European Union tax on financial transactions for international cooperation. The tax is expected to raise more than $70 billion a year.

…Without commenting on any of the individual taxes proposed, UN Secretary General Ban Ki-moon said that if the new “innovative financing” is to become viable, “strong international agreement is needed.”

Let’s close with some good news. Proposals for global taxation from the United Nations are so radical and so far from the mainstream that even the Obama Administration generally is opposed to these crack-pot ideas.

“I’m horribly offended”

Though that may simply be because Obama wants to seize the money for his own class-warfare purposes and doesn’t want to compete with other taxing authorities. Sort of the way hyenas and vultures sometime fight over a carcass. Or how inner-city gangs sometimes fight over turf.

Actually, I apologize for those analogies. I hope the carrion feeders and gang-bangers of the world will forgive me for equating them with politicians.

“That’s an unfair slur”

Hyenas and vultures both have valuable roles in the ecosystem. And gangs sometimes engage in non-coercive activities such as selling drugs to yuppies.

It’s beyond my abilities, however, to say something nice about politicians.

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Back in April, responding to an article written by Ann Hollingshead for the Task Force on Financial Integrity and Economic Development, I wrote a long post defending so-called tax havens.

I went through the trouble of a point-by-point response because her article was quite reasonable and focused on some key moral and philosophical issues (rather than the demagoguery I normally have to deal with when people on the left reflexively condemn low-tax jurisdictions).

She responded to my response, and she raised additional points that deserve to be answered.

So here we go again. Let’s go through Ann’s article and see where we agree and disagree.

A couple of weeks ago, I wrote a blog post criticizing the philosophies of Dan Mitchell, a libertarian scholar from the Cato Institute. I asked for a “thoughtful discussion” and I got it—both from the comments section of our blog and from Dan himself.  On his own blog, Dan replied with a thought-provoking point-by-point critique of my piece.

It has been a polite discussion, which is good because readers get to see that we don’t really disagree on facts. Our differences are a matter of philosophy, as Ann also acknowledges.

Dan made several interesting points in his rebuttal. As much as I’d like to take on the whole post right now, my reply would be far too long and I don’t think our readers would appreciate a blog post that approaches a novella. Rather I’ll focus on a couple of his comments that I find interesting on a philosophical level (there were many) and which demand a continued conversation because, I believe, they are the basis of our differences. We’ll start with a rather offhand remark in which Dan indirectly refers to financial privacy as a human right. This is an argument we’ve heard before. And it is worth some exploration.Unless I am very much mistaken, Dan’s belief that financial privacy is a human right arises out of his fundamental value of freedom. My disagreement with Dan, therefore, does not arise from a difference in the desire to promote human rights (I believe we both do), but rather in the different relative weights we each place on the value of privacy, which Dan (I’m supposing) would call an extension of freedom.

I wouldn’t argue with her outline, though I think it is incomplete. I’m a big fan of privacy as a principle of a civil and just society, but I also specifically support financial privacy as a means to an end of encouraging better tax policy. Simply stated, politicians are much more likely to reduce or eliminate double taxation if they feel such taxes can’t be enforced and simply put a country in a much less competitive position.

Okay, so on to [my] answer of the subject of this post. Privacy—and financial privacy by extension—is important. But is it a human right? That’s a big phrase; one which humanity has no business throwing around, lest it go the way of “[fill in blank]-gate” or “war on [whatever].” And as Dan himself points out, governments have a way of fabricating human rights—apparently some European courts have ruled that free soccer broadcasts and owning a satellite dish are a human rights—so it’s important that we get back to [philosophical] basics and define the term properly. The nearly universally accepted definition of “human rights” was established by the Universal Declaration of Human Rights, which the United Nations adopted in 1948. According to the UN, “human rights” are those “rights inherent to all human beings,” regardless of “nationality, place of residence, sex, national or ethnic origin, colour, religion, language, or any other status.” The Declaration includes 30 Articles which describe each of those rights in detail. “Financial privacy” per se is not explicitly a human right in this document, but “privacy” is, and I think it’s reasonable to include financial privacy by extension. But privacy is defined as a fundamental, not an absolute, human right. Absolute rights are those that there is never any justification for violating. Fundamental freedoms, including privacy and freedom from detention, can be ethically breached by the government, as long as they authorized by law and not arbitrary in practice. The government therefore has the right to regulate fundamental freedoms when necessary.

I’m not sure how to react. There are plenty of admirable provisions in the U.N.’s Universal Declaration of Human Rights, but there are also some nonsensical passages – some of which completely contradict others.

Everyone hopefully agrees with the provisions against slavery and in favor of equality under law, but Article 25 of the U.N. Declaration also includes “the right to a standard of living adequate for the health and well-being of himself and of his family, including food, clothing, housing and medical care and necessary social services.”

That sounds like a blank check for redistributionism, similar to the statism that I experienced when I spoke at the U.N. last month, and it definitely seems inconsistent with the right of property in Article 17.

I guess what I’m trying to say is that I don’t care that the U.N. Universal Declaration of Human Rights includes a “right to privacy” because I don’t view that document as having any legal or moral validity. I don’t know whether it’s as bad as the European Union’s pseudo-constitution, but I do know that my support for privacy is not based on or dependent on a document from the United Nations.

As an aside, I can’t help noting that Articles 13 and 15 of the U.N. Declaration guarantee the right to emigrate and the right to change nationality, somethings leftists should keep in mind when they demonize successful people who want to move to nations with better tax law.

Getting back to Ann’s column, she confirms my point that you can’t protect property rights for some people while simultaneously giving other people a claim on their output.

That’s important because it means, that when it comes to freedom and privacy, we need to make choices. We can’t always have them all at once. To use a hideously crude example that gets back to the issue of tax evasion, in a developing country, a rich person’s right to financial privacy might be at odds with a poor person’s right to “a standard of living adequate for the health and well-being of himself and of his family.”

For those who are not familiar with the type of discussion, it is the difference between “negative rights” promoted by classical liberals, which are designed to protect life, liberty, and property from aggression, and the “positive rights” promoted by the left, which are designed to legitimize the redistributionist state.

Tom Palmer has a good discussion of the topic here, and he notes that “positive rights” create conflict, writing that, “…classical liberal ‘negative’ rights do not conflict with each other, whereas ‘positive’ rights to be provided with things produce many conflicts. If my ‘right to health care’ conflicts with a doctor’s ‘right to liberty,’ which one wins out?”

Continuing with Ann’s article, she says values conflict with one another, though that’s only if true if one believes in positive rights.

I started this post with a discussion of values, because at the core that’s what we’re talking about. Values are relative, individual, and often in conflict with one another. And they define how we rank our choices between human rights. Dan values freedom, perhaps above most else. He might argue that economic freedom would lead to an enrichment of human rights at all levels, but he probably wouldn’t disagree that that thesis remains untested. My views are a little more complicated because I don’t get to enjoy the (albeit appealing and consistent) simplicity of libertarianism.

I’m tempted to say, “C’mon in, Ann, the water’s fine. Libertarianism is lots of fun.” To be a bit more serious, libertarianism is simple, but it’s not simplistic. You get to promote freedom and there’s no pressure to harass, oppress, or pester other people.

As my colleague David Boaz has stated, “You could say that you learn the essence of libertarianism — which is also the essence of civilization –  in kindergarten: don’t hit other people, don’t take their stuff, keep your promises.”

The world would be a lot better if more people rallied to this non-coercive system.

One more point. Dan mentioned he does “fully comply” with the “onerous demands imposed on [him] by the government.” But as Dan insinuates, irrespective of an individual’s personal values, those demands are not optional. In the United States, we have the luxury of electing a group of individuals to represent our collective values. Together those people make a vision for the country that reflects our ideals. And then, we all accept it. If our country got together and decided to value freedom above all else, we would live in a world that looks a lot like Dan’s utopia. But, frankly, it hasn’t. So we respect our tax code out of a respect for the vision of our country. Dan has the right to try to shape that vision, as do I. Neither of us has the right to violate it.

What Ann writes is true, but not persuasive. Libertarians don’t like untrammeled majoritarianism. We don’t think two wolves and a sheep should vote on what’s for lunch.

We like what our Founding Fathers devised, a constitutional republic where certain rights were inalienable and protected by the judicial system, regardless of whether 90 percent of voters want to curtail our freedoms.

Ann, as you can see from her final passage, does not agree.

That, at is heart, is my problem with both tax evasion and tax avoidance. Neither lines up with the spirit of our collective compact; although the latter is not necessarily reflected in the official laws on the books. I’m not saying tax avoiders should be thrown in jail; they’ve done nothing illegal. I’m saying the regulations that confine us should line up with the vision we’ve created and the values we’ve agreed upon. If that vision is Dan’s, I’ll accept it. But I’m glad he’ll (begrudgingly) accept ours too.

I’m not automatically against having a “collective compact.” After all, that’s one way of describing the American Constitution. But I will return to my point about America’s founders setting up that system precisely because they rejected majoritarianism.

So what does all this mean? Probably nothing, other than the less-than-remarkable revelation that Ann and I have different views on the legitimate role(s) of the federal government.

Since I want to restrain the size and scope of government (not only in America, but elsewhere in the world) and avert future Greek-style fiscal nightmares, that means I want tax competition. And, to be truly effective, that means tax havens.

If that appeals to you (or at least seems like a reasonably hypothesis), I invite you to read some writings by Allister Heath of the United Kingdom and Pierre Bessard of Switzerland.

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It is very sad that America’s tax system is so onerous that some rich people feel they have no choice but to give up U.S. citizenship in order to protect their family finances.

I’ve written about this issue before, particularly in the context of Obama’s class-warfare policies leading to an increase in the number of Americans “voting with their feet” for places with less punitive tax regimes.

We now have a very high-profile tax expatriate. One of the founders of Facebook is escaping for Singapore. Here are some relevant passages in a Bloomberg article.

Escaping to Singapore, where success is encouraged rather than penalized

Eduardo Saverin, the billionaire co- founder of Facebook Inc. (FB), renounced his U.S. citizenship before an initial public offering that values the social network at as much as $96 billion, a move that may reduce his tax bill. …Saverin’s stake is about 4 percent, according to the website Who Owns Facebook. At the high end of the IPO valuation, that would be worth about $3.84 billion. …Saverin, 30, joins a growing number of people giving up U.S. citizenship, a move that can trim their tax liabilities in that country. The Brazilian-born resident of Singapore is one of several people who helped Mark Zuckerberg start Facebook in a Harvard University dorm and stand to reap billions of dollars after the world’s largest social network holds its IPO. “Eduardo recently found it more practical to become a resident of Singapore since he plans to live there for an indefinite period of time,” said Tom Goodman, a spokesman for Saverin, in an e-mailed statement. …Singapore doesn’t have a capital gains tax. It does tax income earned in that nation, as well as “certain foreign- sourced income,” according to a government website on tax policies there. …Renouncing your citizenship well in advance of an IPO is “a very smart idea,” from a tax standpoint, said Avi-Yonah. “Once it’s public you can’t fool around with the value.” …Renouncing citizenship is an option chosen by increasing numbers of Americans. A record 1,780 gave up their U.S. passports last year compared with 235 in 2008, according to government records. …“It’s a loss for the U.S. to have many well-educated people who actually have a great deal of affection for America make that choice,” said Richard Weisman, an attorney at Baker & McKenzie in Hong Kong. “The tax cost, complexity and the traps for the unwary are among the considerations.”

What makes this story amusing, from a personal perspective, is that Saverin’s expatriation takes place just a couple of days after my wayward friend Bruce Bartlett wrote a piece for the New York Times, in which he said that people like me are exaggerating the impact of taxes on migration.

Here are some key excerpts from Bruce’s column.

In recent years, the number of Americans renouncing their citizenship has increased. …the number of Americans renouncing their citizenship rose to 1,781 in 2011 from 231 in 2008. This led William McGurn of The Wall Street Journal to warn that the tax code is turning American citizens living abroad into “economic lepers.” The sharply rising numbers of Americans renouncing their citizenship “are canaries in the coal mine,” he wrote. The economist Dan Mitchell of the libertarian Cato Institute was more explicit in a 2010 column in Forbes, “Rich Americans Voting With Their Feet to Escape Obama Tax Oppression.” …the sharp rise in Americans renouncing their citizenship since 2008 is less pronounced than it appears if one looks at the full range of data available since 1997, when it first was collected. As one can see in the chart, the highest number of Americans renouncing their citizenship came in 1997. …The reality is that taxes are just one factor among many that determine where people choose to live. Factors including climate, proximity to those in similar businesses and the availability of amenities like the arts and cuisine play a much larger role. That’s why places like New York and California are still magnets for the wealthy despite high taxes. And although a few Americans may renounce their citizenship to avoid American taxes, it is obvious that many, many more people continually seek American residency and citizenship.

I actually agree with Bruce. Taxes are just one factor when people make decisions on where to live, work, save, and invest.

But I also think Bruce is drinking too much of the Kool-Aid being served by his new friends on the left. There is a wealth of data on successful people leaving jurisdictions such as California and New York that have confiscatory tax systems.

And there’s also lots of evidence of taxpayers escaping countries controlled by politicians who get too greedy. Mr. Saverin is just the latest example. And I suspect, based on the overseas Americans I meet, that there are several people who quietly go “off the grid” for every person who officially expatriates.

The statists say these people are “tax traitors” and “economic Benedict Arnolds,” but those views are based on a quasi-totalitarian ideology that assumes government has some sort of permanent claim on people’s economic output.

If people are leaving America because our tax law is onerous, that’s a signal we should reform the tax code. Attacking those who expatriate is the fiscal version of blaming the victim.

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What’s the worst policy idea that would cause the most damage to society?

I’m tempted to say the value-added tax since our hopes of restraining the federal government will be greatly undermined if we give the buffoons in Washington a new source of revenue. Indeed, this is one of the reasons why Mitt Romney may be an ever greater long-term threat to American exceptionalism than Barack Obama.

But even though the VAT is fiscal poison, it’s not the most dangerous policy proposal.

At the top of my list is global taxation.

I wrote in 2010 about some of the awful global tax schemes being pushed by the United Nations. And I also noted that unrepentant statists such as George Soros are pimping for global taxation.

I even wrote a paper back in 2001 to explain why global taxes are such a bad idea.

The details of the tax don’t matter. It’s the principle.

A supra-national taxing authority inevitably would mean bigger government and more statism. As such, it doesn’t matter whether the new global tax is imposed on financial transactions, carbon emissions, tobacco, the Internet, munitions, foreign exchange, pollution permits, energy, or airline tickets.

And the statists are not giving up. Here are passages from a news report on their latest scheme.

…civil society leaders demanded a basic level of social security as they promoted a “social protection floor” at a preparatory forum for the Commission on Social Development, which began Feb. 1. The focus of the forum was “universal access to basic social protection and social services.” “No one should live below a certain income level,” stated Milos Koterec, President of the Economic and Social Council of the United Nations. “Everyone should be able to access at least basic health services, primary education, housing, water, sanitation and other essential services.” These services were presented at the forum as basic human rights equal to the rights of “life, liberty and the pursuit of happiness.” The money to fund these services may come from a new world tax. “We will need a modest but long-term way to finance this transformation,” stated Jens Wandel, Deputy Director of the United Nations Development Program. “One idea which we could consider is a minimal financial transaction tax (of .005 percent). This will create $40 billion in revenue.” “It is absolutely essential to establish controls on capital movements and financial speculation,” said Ambassador Jorge Valero, the current Chairman of the Commission on Social Development. He called for “progressive policies of taxation” that would require “those who earn more to pay more taxes.” Valero’s speech to the forum focused on capitalism as the source of the world financial problems.

This is unfettered statism, class warfare, and redistributionism, which is what you might expect from proponents of global taxation. But the part that really stands out is the assertion that government should guarantee a “certain income level” with freebies for things such as healthcare and housing.

If this sounds familiar, you probably saw the post about Franklin Roosevelt’s authoritarian proposal for a “Second Bill of Rights” that would guarantee “rights” to jobs, recreation, housing, good health, and security.

Remember, though, that whenever a leftist asserts the right to be given something, that person simultaneously and necessarily is demanding a right to take from someone else. This is why I deliberately chose to call the proposal authoritarian.

But I’m digressing. Let’s get back to the issue of global taxation.

The most important thing to understand is that leftists want global taxation. To get the ball rolling, they’ll take any tax for any purpose. They simply want to get the camel’s nose under the tent.

Once the precedent of global taxation has been established, then it’s a relatively simple matter for politicians to augment the first levy with additional taxes. Perhaps the camel analogy would be more accurate if we referred to some other part of the animal and warned that taxpayers won’t be happy when they learn where it’s going to be inserted.

The bad news is that some American politicians already have endorsed this scheme, most notably Nancy Pelosi, the former Speaker of the House.

But the good news is that global taxation is a toxic issue, which means politicians who have to get votes from non-crazy people are very reluctant to support taxing powers for the United Nations or any other entity. President Obama, for instance, already has rejected some global tax proposals and his Administration has been resisting other European proposals for global taxation.

But don’t be deluded into thinking the White House actually is good on these issues. This is the Administration, after all, that avidly supports a scheme from an American-funded Paris-based bureaucracy that would result in something akin to an international tax organization. Same bad concept, but different approach.

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I’m perfectly willing to give my opponents credit when they do something clever and/or effective.

I posted this video making fun of libertarians, for instance, because it is genuinely funny. People like me, I will confess, sometimes are so allergic to government that we do things that make us easy targets for satire.

Well, here’s a video parody of Mitt Romney and the Cayman Islands, obviously designed to resemble the Corona beer commercials. I’m not impressed.

My tepid reaction is not because I recently defended Romney’s use of Cayman-based investment vehicles.

Indeed, here’s an old video attacking tax havens, and I think it’s sufficiently amusing that I just uploaded it onto my Youtube channel because it’s worth sharing and I couldn’t find it online.

Both of these leftist videos make silly and inaccurate points, but the anti-Romney video is simplistic and the entire premise is false. He’s not hiding anything. Intelligent satire uses the truth as a starting point. This video doesn’t.

The anti-Cheney video, by contrast, has some big mistakes, but at least it is based on the accurate premise that companies legally try to reduce their taxes. Moreover, the Jimmy Buffett music is a nice touch.

Since I’ve share a couple of anti-tax haven videos, I feel compelled to post one of mine for some balance. And since I recently posted my video on the economic case for tax havens, here’s my video on the moral case for tax havens.

And if you want to really understand these issues, I humbly suggest you look at the paper I wrote for the UK-based Adam Smith Institute.

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I sometimes make fun of the English, for reasons ranging from asinine laws to milquetoast politicians to horrid healthcare policy.

But at least some U.K. elected officials are willing to stand up for tax competition and fiscal sovereignty by defending low-tax jurisdictions. In previous posts, I’ve applauded Dan Hannan and Godfrey Bloom for great speeches at the European Parliament.

There are also some sensible people in the U.K. Parliament, most notably Mark Field.

Here are some excerpts from an article in the U.K.-based Telegraph.

A conservative MP has spoken out in defence of tax havens and against what he called “a one-sided debate that demonstrates a fundamental lack of understanding of their role in the global financial market”. …In an attempt to balance the “one-sided” debate on international finance centres (IFCs), Mr Field…advised the UK government to think twice before imposing more regulation on these jurisdictions. …In a bid to dismiss the age-old belief that tax havens attract investors purely because of their tax regimes, Mr Field argued that it is a combination of their political stability, familiar legal systems, quality of service, lack of foreign exchange controls, and tax and legal neutrality that make them ideal locations to deposit money.The current financial crisis, he continued, had more to do with poor regulation and mistakes made onshore rather than offshore, and if the EU pressed ahead with its intention to harmonise tax systems across international borders “it could potentially represent the end for healthy tax competition… Tax harmonisation and cooperation, added Mr Field, was simply Brussels-speak for exporting high tax models on continental Europe to low tax jurisdictions.

These issues are just as relevant for the United States, but how many American politicians stand up and defend free markets and jurisdictional competition as a means of restraining the political predators in Washington?

I’m re-posting my video on The Economic Case for Tax Havens below, for those who haven’t seen it. But I also want to call your attention to this chart from the Treasury Department.

You’ll have to click and enlarge it. You’ll see that it shows the amount of capital invested in America from various parts of the world. The “C” category shows that more money is invested in America via Caribbean banking centers such as the Cayman Islands than from any other source.

And this is just one type of foreign investment. As I’ve explained elsewhere, foreigners have more than $10 trillion invested in the U.S. economy, in part because the United States is a tax haven for foreign investors.

So when Obama climbs into bed with the Europeans to push a global network of tax police, he’s pushing policies that ultimately will do great damage to American competitiveness.

Let’s close by returning to the original theme of wise and astute Englishmen. If you want a good defense of tax competition and tax havens, read what Allister Heath wrote last year.

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I’ve written several times about a proposed IRS regulation that would force American banks to put foreign law above U.S. law. I’ve repeatedly warned that the scheme, which would force financial institutions to report the deposit interest they pay to foreigners, is bad economic policy, bad regulatory policy, and bad banking policy.

My arguments have included:

But these points don’t seem to matter to the Obama Administration, which is ideologically committed to the anti-tax competition agenda of Europe’s welfare states. This is why the White House supports all sorts of destructive policies, including not only this misguided regulation, but also the creation of something akin to a world tax organization that will have power to block free-market tax policy.

A new article in the Weekly Standard explains what’s at stake.

Early last year the Treasury Department published its “Guidance on Reporting Interest Paid to Nonresident Aliens,” which would require banks to report to the Internal Revenue Service the interest paid to foreign depositors with a U.S. bank account. While the Treasury and the regulatory apparatus insist that the cost and inconvenience of adhering to this regulation is next to nothing, the rule may cost the U.S. banking system hundreds of billions of dollars in lost deposits, in turn costing our economy billions of dollars, while providing no discernible benefit to banks, depositors, taxpayers, or the U.S. economy. …a much bigger problem—for banks and the economy—than the compliance costs is the threat of a massive capital flight. The United States is a very popular place for foreigners to park their savings, for a variety of reasons. For starters, we offer a stable government that can be trusted to keep its hands off deposits—something that appeals greatly to residents of Venezuela, Argentina, Ecuador, and any number of other unstable countries. …As a result, a staggeringly large amount of savings from abroad is currently held in U.S banks. While the Treasury asserts that “deposits held by nonresident alien individuals are a very small percentage of the [total] deposits held by U.S. financial institutions,” that very small percentage amounts to more than $3.7 trillion, according to a 2011 Bureau of Economic Analysis report, hardly a pittance. The massive amount of foreign savings here is a boon to the U.S. economy. Banks lend against these deposits, mainly to companies here in the United States. Jay Cochran, an economist at George Mason University, studied the impact that the more limited 2002 reporting requirements would have had on the banking system, estimating that it would have resulted in nearly $100 billion in deposits leaving the U.S. banking system. A reporting regulation that covers all foreign accounts would likely result in two to three times more capital flight. The impact would be harmful not just for the banks but for the broader economy. The decline in profits in the banking sector alone from a roughly quarter-trillion-dollar capital flight would be in the range of $5-10 billion—which makes a mockery of the notion that the costs of the regulation are under $100,000.

For more information about this wretched proposal, here’s a video I narrated on the topic.

To put it bluntly, the Obama Administration is pushing this regulation because it thinks the anti-tax competition agenda of Europe’s welfare states is so important that it is willing to risk the health of the American economy, undermine the soundness of U.S. financial institutions, disregard the rule of law, and abuse the regulatory process.

Indeed, this proposal is even worse than the increasingly infamous Foreign Account Tax Compliance Act.

And that’s saying something, because with each passing day, it is more and more obvious that FATCA is a destructive law that will significantly harm the American economy. But at least it’s a law, one that was approved by Congress and signed by the President. And the costly FATCA regulations being developed by the IRS are for the purpose of enforcing the law.

The interest-reporting IRS regulation is also costly and destructive, to be sure, but what makes it so perverse is that it is – at best – completely gratuitous. It is being advanced solely for reasons of ideology, regardless of the law and consequences be damned.

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I don’t often have reason to praise the White House. But the Administration occasionally winds up fighting on the right side when dealing with the statists on the other side of the Atlantic Ocean.

I lauded the Obama Administration two years ago when the Treasury Department was fighting against a scheme from the Europeans to impose a tax on financial transactions.

And now it’s time to praise the White House again. In this case, they are fighting against a proposal by the European Union to impose an emissions tax on airliners. And even though the proposed tax is similar to the cap-and-trade scheme supported by Obama, the Administration is on the right side, as noted in this AP story.

The House voted Monday to exclude U.S. airlines from an emissions cap-and-trade program that the European Union plans to impose on all airlines flying to and from the continent beginning next year. With the legislation, which passed by voice vote, lawmakers joined the airline industry and the Obama administration in opposing the EU Emissions Trading Scheme scheduled to go into effect on Jan. 1. The bill now goes to the Senate, where there is currently no companion legislation. The measure directs the transportation secretary to prohibit U.S. carriers from participating in the program if it is unilaterally imposed. It also tells other federal agencies to take steps necessary to ensure that U.S. carriers are not penalized by the emissions control scheme. …The U.S. aviation industry says the cost between 2012 and 2020 could hit $3.1 billion. It says it is unfair that a flight from the United States, for example from Los Angeles, would have to pay for emissions for all parts of flights to Europe, including time spent over the United States and the Atlantic. “It’s a tax grab by the European Union,” Transportation Committee Chairman John Mica, R-Fla., said. “The meter starts running the minute the plane departs from any point in the U.S. until it reaches Europe.” …That drew fire from Krishna R. Urs, the U.S. deputy assistant secretary of State for transportation affairs, who repeated the U.S.’s “strong legal and policy objections to the inclusion of flights by non-EU carriers” in the EU program.

Individual nations have the right, of course, to impose tax on activities that take place inside national borders. And a group of nations, such as the European Union, has the right to impose taxes on things that take place within their combined borders.

In this case, however, the EU wants to levy the tax based on miles flown inside the United Stats and over international waters. This type of extraterritorial tax grab should be strongly resisted.

Fiscal sovereignty is a very important principle, one that is necessary to preserve tax competition and constrain the greed of the political class.

As such, even though the Obama Administration often is guilty of supporting schemes to impose bad US tax law on a worldwide basis, I’m glad they are fighting this European Union tax grab.

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Earlier this year, President Obama’s IRS proposed a regulation that would force banks in America to report any interest they pay to accounts owned by non-resident aliens (that’s the technical term for foreigners who don’t live in the U.S.).

What made this regulation so bizarre, however, is that Congress specifically has exempted these account from taxation for the rather obvious reason that they want to attract this mobile capital to the American economy. Indeed, Congress repeatedly has ratified this policy ever since it was first implemented 90 years ago.

So why, you may be asking, would the IRS propose such a regulation? After all, why impose a regulatory burden on a weakened banking sector when it has nothing to do with enforcing American tax law?

The answer, if you can believe it, is that they want American banks to help enforce foreign tax law. And the bureaucrats at the IRS want to impose this burden even though the regulation is completely contrary to existing U.S. law.

Not surprisingly, this rogue behavior by the IRS already has generated considerable opposition. Senator Rubio has been a leader on the issue, being the first to condemn the proposed regulation.

Both Senators from Texas also have announced their opposition, and the entire Florida congressional delegation came out against the IRS’s regulatory overreach.

And now we have two more important voices against the IRS’s rogue regulation.

The Chairman of the Oversight Subcommittee in charge of the IRS, Congressman Charles Boustany of Louisiana, just sent a very critical letter to Treasury Secretary Geithner, and these are some of his chief concerns.

If the regulation were to take effect, it would not only run counter to the will of the Congress, but would potentially drive foreign investments out of our economy, hurting individuals and small businesses by reducing access to capital.  I write to request that IRS suspend the proposed regulation. …As the Internal Revenue Code imposes no taxation or reporting requirements on this deposit interest, the proposed regulation serves no compelling tax collection purpose.  Instead, it is my understanding that the IRS seeks this new authority to help foreign governments collect their own taxes abroad.  …It is disappointing to see the IRS once again try to impose unnecessary regulations and costs on U.S. banks. To attract investment of foreign dollars into the U.S. economy, the Internal Revenue Code generally exempts these deposits from taxation and reporting requirements.  These foreign investments in turn help to finance a variety of products essential to economic growth, such as small business loans and home mortgages.  Imposing reporting requirements on these deposits through regulatory fiat threatens to drive significant investments out of our economy by undermining the rules Congress has set in place specifically to attract it, and at exactly the time when our economy can least afford it.

But criticism is not limited to Capitol Hill. The Center for Freedom and Prosperity has spearheaded opposition from think tanks, taxpayer organizations, and public policy groups.

And now the business community has become involved. Here’s some of what the Chamber of Commerce recently said, and you can click this PDF file (USCC S1506) to read the entire letter.

Given the fragile state of America’s economic recovery, it is disturbing to see actions by the Treasury that could jeopardize deposits at U.S. banks and credit unions held by nonresident aliens. These deposits, which are not subject to U.S. taxes, are at risk of being abruptly withdrawn and future deposits deterred, which could lead to a reallocation of deposits out of the U.S. banking system and, thus, reduce lending to businesses. Furthermore, complying with the proposed regulation places additional reporting requirements and expenses upon financial firms. Without any real benefit stemming from the collection of this information, imposition of this reporting requirement seems to be a solution in search of a problem.

This may seem like an arcane issue and international tax matters often are not terribly exciting, but a couple of minutes of watching this video will make you realize there are some very important principles at stake.

Only the IRS could manage to combine bad tax policy, bad regulatory policy, bad human rights policy, and bad sovereignty policy into one regulation.

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Having grown up during the Cold War, I never though I would write a sentence like the title of this blog post, but there have been lots of firsts during the reign of Obama.

When the head of a major multinational company says the American tax system is worse than the policy of a nation that is nominally still communist, that’s a remarkable – and worrisome – development.

Here’s an excerpt from a story in the UK-based Financial Times.

Coca-Cola now sees the US becoming a less friendly business environment than China, its chief executive has revealed, citing political gridlock and an antiquated tax structure as reasons its home market has become less competitive. Muhtar Kent, Coke’s chief executive, said “in many respects” it was easier doing business in China, which he likened to a well-managed company. “You have a one-stop shop in terms of the Chinese foreign investment agency and local governments are fighting for investment with each other,” he told the Financial Times. Mr Kent also pointed to Brazil as an example of an emerging economy that is making itself attractive to investment in ways that the US once did.

As much as I criticize the U.S. tax system and notwithstanding the passage you just read, I wouldn’t want anyone to conclude that China has better economic policy. The United States may have become more statist in the past decade, dropping from 3rd to 10th in the Economic Freedom of the World rankings, but 10th place is still a heck of a lot better than 92nd place, which is where China currently ranks.

And I also think it’s important to draw a distinction between a nation being “business friendly” and “market friendly.” I strongly prefer the latter. I want small government and laissez-faire markets, not policies that cater to big business. And some of China’s development is based on special deals for large companies.

This is not a big knock on China, which has improved. It used to rank as one of the 10th-worst nations, so gradual economic liberalization is boosting its economy and has lifted hundreds of millions out of absolute poverty (as compared to the relatively benign poverty found in the U.S.).

But even with those caveats, it’s not a good thing that America’s corporate tax system is so unfriendly. And it’s not a good thing that investors, entrepreneurs, CEOs, and others have a perception that it’s better to produce outside of America.

For more information, here are two of my videos. This one (my very first effort, so forgive the lack of polish) discusses the overall issue of corporate taxation.

And here’s a video that looks at the critical issue of international corporate taxation. You won’t be surprised to learn that America probably has the most unfriendly regime in the world.

One last thing worth mentioning is that most European governments have territorial tax systems and the average corporate tax rate in “socialist” Europe is down to 23 percent.

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Actually, the answer is all of the above.

He pontificates about debt, but he voted for the fake stimulus and budget-busting Obamacare legislation.

He’s a preening self-styled deficit hawk, but the nation’s four largest deficits have occurred since he became Chairman of the Senate Budget Committee.

As Chairman of the Budget Committee, with a bloated staff and a budget of millions of dollars, his only responsibility – under law – is to produce a budget resolution every year, yet it’s now been more than 800 days since he’s bothered to fulfill this obligation.

You may be asking why I’m going after Senator Conrad. Is it because I’m upset that he has played a key role in tricking some gullible Republicans into supporting tax increases, based on a laughably vague set of talking points?

Sure, that galls me, but I’m used to Republicans engaging in self-immolation. I can’t really get too upset with Conrad for taking advantage of GOP naiveté.

What irks me is that this buffoon went to the Senate floor last night to make an impassioned plea for higher taxes. But rather than honestly say that he wants to take more of our money, he demagogued about a building in the Cayman Islands.

According to our financial-wizard friend from North Dakota, there is something inherently criminal about this structure (offices of a top-flight international law firm) because it is the home of more than 18,000 companies.

Here’s an image I captured from one of Conrad’s earlier speeches, where he made the same accusation.

So why am I irritated about his speech? Is it because Senator Conrad lied about the number of companies at Ugland House? No, the Senator is correct (unlike Obama, who demagogued about the same building during the 2008 campaign, but said there were 12,000 companies).

What bothers me is that Conrad presumably is educated enough to understand that he is being disingenuous. While he’s been sucking on the public teat his entire life, surely he knows that a company’s home is merely the place where it is chartered for legal purposes. A firm’s legal domicile has nothing to do with where it does business or where it is headquartered.

But just to make things clear, here’s a picture of another building. This building is smaller than Ugland House, yet it is the home of more than 200,000 companies.

So why isn’t the empty suit from North Dakota attacking this building? Maybe we should ask the Vice President. After all, this building is in Wilmington, Delaware.

The moral of the story is that companies like to make their legal homes in jurisdictions that have honest courts, sensibly light levels or red tape, and business-friendly reputations. The Cayman Islands is such a place, as is Delaware.

To Kent Conrad, that’s de facto evidence of criminal activity. To normal and honest people, that’s evidence that good policy generates more economic activity.

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One of the biggest threats against global prosperity is the anti-tax competition project of a Paris-based international bureaucracy known as the Organization for Economic Cooperation and Development. The OECD, acting at the behest of the European welfare states that dominate its membership, wants the power to tell nations (including the United States!) what is acceptable tax policy.

I’ve previously explained why the OECD is a problematic institution – especially since American taxpayers are forced to squander about $100 million per year to support the parasitic bureaucracy.

For all intents and purposes, high-tax nations want to create a global tax cartel, sort of an “OPEC for politicians.” This issue is increasingly important since politicians from those countries realize that all their overspending has created a fiscal crisis and they are desperate to figure out new ways of imposing higher tax rates. I don’t exaggerate when I say that stopping this sinister scheme is absolutely necessary for the future of liberty.

Along with Brian Garst of the Center for Freedom and Prosperity, I just wrote a paper about these issues. The timing is especially important because of an upcoming “Global Forum” where the OECD will try to advance its mission to prop up uncompetitive welfare states. Here’s the executive summary, but I encourage you to peruse the entire paper for lots of additional important info.

The Paris-based Organization for Economic Cooperation and Development has an ongoing anti-tax competition project. This effort is designed to prop up inefficient welfare states in the industrialized world, thus enabling those governments to impose heavier tax burdens without having to fear that labor and capital will migrate to jurisdictions with better tax law. This project received a boost a few years ago when the Obama Administration joined forces with countries such as France and Germany, which resulted in all low-tax jurisdictions agreeing to erode their human rights policies regarding financial privacy. The tide is now turning against high-tax nations – particularly as more people understand that ever-increasing fiscal burdens inevitably lead to Greek-style fiscal collapse. Political changes in the United States further complicate the OECD’s ability to impose bad policy. Because of these developments, low-tax jurisdictions should be especially resistant to new anti-tax competition initiatives at the Bermuda Global Forum.

To understand why this issue is so important, here’s a video I narrated for the Center for Freedom and Prosperity.

And here’s a shorter video on the same subject, narrated by Natasha Montague from Americans for Tax Reform.

Last but not least, here’s a video where I explain why the OECD is a big waste of money for American taxpayers.

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I’m not a big fan of the IRS, but usually I blame politicians for America’s corrupt, unfair, and punitive tax system. Sometimes, though, the tax bureaucrats run amok and earn their reputation as America’s most despised bureaucracy.

Here’s an example. Earlier this year, the Internal Revenue Service proposed a regulation that would force American banks to become deputy tax collectors for foreign governments. Specifically, they would be required to report any interest they pay to accounts held by nonresident aliens (a term used for foreigners who live abroad).

The IRS issued this proposal, even though Congress repeatedly has voted not to tax this income because of an understandable desire to attract job-creating capital to the U.S. economy. In other words, the IRS is acting like a rogue bureaucracy, seeking to overturn laws enacted through the democratic process.

But that’s just the tip of the iceberg. The IRS’s interest-reporting regulation also threatens the stability of the American banking system, makes America less attractive for foreign investors, and weakens the human rights of people who live under corrupt and tyrannical governments.

This Center for Freedom and Prosperity video outlines five specific reason why the IRS regulation is bad news and should be withdrawn.

I’m not sure what upsets me most. As a believer in honest and lawful government, it is outrageous that the IRS is abusing the regulatory process to pursue an ideological agenda that is contrary to 90 years of congressional law. But I guess we shouldn’t be surprised to see this kind of policy from the IRS with Obama in the White House. After all, this Administration already is using the EPA in a dubious scheme to impose costly global warming rules even though Congress decided not to approve Obama’s misguided legislation.

As an economist, however, I worry about the impact on the U.S. banking sector and the risks for the overall economy. Foreigners invest lots of money in the American economy, more than $10 trillion according to Commerce Department data. This money boosts our financial markets and creates untold numbers of jobs. We don’t know how much of the capital will leave if the regulation is implemented, but even the loss of a couple of hundred billion dollars would be bad news considering the weak recovery and shaky financial sector.

As a decent human being, I’m also angry that Obama’s IRS is undermining the human rights of foreigners who use the American financial system as a safe haven. Countless people protect their assets in America because of corruption, expropriation, instability, persecution, discrimination, and crime in their home countries. The only silver lining is that these people will simply move their money to safer jurisdictions, such as Panama, the Cayman Islands, Hong Kong, or Switzerland, if the regulation is implemented. That’s great news for them, but bad news for the U.S. economy.

In pushing this regulation, the IRS even disregarded rule-making procedures adopted during the Clinton Administration. But all this is explained in the video, so let’s close this post with a link to a somewhat naughty – but very appropriate – joke about the IRS.

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Regular readers know that I’m a big fan of tax competition because politicians are less likely to misbehave if the potential victims of plunder have the ability to escape across borders.

Here is an excerpt from a superb article by Allister Heath, one of the U.K.’s best writers on economic and business issues.

In a modern, global and open world, states have to compete for people. Weirdly, that is something that a large number of commentators have failed to recognise… They assume implicitly that governments remain quasi-monopolies, as was the case throughout most of human history, with citizens mere subjects forced to put up with poor public services, high taxes, crime, misgovernment and a poor quality of life. Yet the reality is that there is now more competition than ever between governments for human capital, with people – especially the highly skilled and the successful – more footloose and mobile than ever before. This is true both within the EU, where freedom of movement reins, and globally. …competition between governments is as good for individuals as competition between firms is for consumers. It keeps down tax rates, especially on labour and capital, which is good for growth and job creation; states need to produce better services at the cheapest possible cost. And if governments become too irritating or incompetent, it allows an exit strategy. It is strange how pundits who claim to want greater competition in the domestic economy – for example, in banking – are so afraid of competition for people between states, decrying it as a race to the bottom. Yet monopolies are always bad, in every sphere of human endeavour, breeding complacency, curtailing innovation and throttling progress. …Globalisation is not just about buying cheap Chinese goods: it also limits the state’s powers to over-tax or over-control its citizens.

For those who haven’t seen them before, here are a couple of my videos that elaborate on these critical issues.

First, here’s a video on tax competition, which includes some well-deserved criticism of international bureaucracies and high-tax nations that are seeking to create global tax cartels.

Here’s a video that makes a powerful economic case for tax havens.

But this is not just an economic issue. Here’s a video that addresses the moral issues and explains why tax havens play a critical role in protecting people subject to persecution by venal governments – as well as people living in nations plagued by crime and instability.

And last but not least, this video punctures some of the myths promoted by the anti-tax haven advocates of global tax cartels.

By the way, since the main purpose of this post is to draw your attention to the superb analysis of a British writer, I may as well close by drawing your attention to a couple of speeches by Dan Hannan, a British member of the European Parliament. In a remarkably limited time, he explains what this battle is all about.

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