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Posts Tagged ‘Tax Competition’

The Foreign Account Tax Compliance Act (FATCA) arguably is the worst feature of the internal revenue code. It’s an odious example of fiscal imperialism that is based on a very bad policy agenda.

But there is something even worse, a Multilateral Convention on Mutual Administrative Assistance in Tax Matters that has existed for decades but recently has been dangerously modified. MCMAATM is a clunky acronym, however, so let’s go with GATCA. That’s because this agreement, along with companion arrangements, would lead to a Global Tax Compliance Act.

Or, as I’ve argued, it would be a nascent World Tax Organization.

And the United States would be the biggest loser. That’s because FATCA was bad legislation that primarily imposed heavy costs on – and caused much angst in – the rest of the world.

GATCA, by contrast, is an international pact that would impose especially heavy costs on the United States and threaten our status as the world’s biggest haven for investment.

Let’s learn more about this bad idea, which will become binding on America if approved by the Senate.

James Jatras explains this dangerous proposal in a column for Accounting Today.

Treasury’s real agenda is…a so-called “Protocol amending the Multilateral Convention on Mutual Administrative Assistance in Tax Matters.” The Protocol, along with a follow-up “Competent Authority” agreement, is an initiative of the G20 and the Organization for Economic Cooperation and Development (OECD), with the support, unsurprisingly, of the Obama Administration. …the Protocol cannot be repaired. It is utterly inconsistent with any concept of American sovereignty or Americans’ constitutional protections. Ratification of the Protocol would mean acceptance by the United States as a treaty obligation of an international “common reporting standard,” which is essentially FATCA gone global—sometimes called GATCA. Ratifying the Protocol arguably would also provide Treasury with backdoor legal authority to issue regulations requiring FATCA-like reporting to foreign governments by U.S. domestic banks, credit unions, insurance companies, mutual funds, etc. This would mean billions of dollars in costs passed on to American taxpayers and consumers, as well as mandating the delivery of private data to authoritarian and corrupt governments, including China, Saudi Arabia, Mexico and Nigeria.

The Foreign Relations Committee unfortunately has approved the GATCA Protocol.

But Rand Paul, like Horatius at the bridge protecting Rome, is throwing sand in the gears and isn’t allowing easy passage by the full Senate.

…the senator is right to insist that the OECD Protocol is dead on arrival.

Taxpayers all over the world owe him their gratitude.

In a column for Investor’s Business Daily, Veronique de Rugy of the Mercatus Center warns that this pernicious and risky global pact would give the IRS power to collect and automatically share massive amounts of our sensitive financial information with some of the world’s most corrupt, venal, and incompetent governments.

During a visit to the World Bank this week, I got a sobering lesson about the degree to which the people working at international bureaucracies, including the Organization for Economic Cooperation and Development, dislike tax competition. For years, these organizations — which are funded with our hard-earned tax dollars — have bullied low-tax nations into changing their tax privacy laws so uncompetitive nations can track taxpayers and companies around the world. …they never tire of trying to raise taxes on everyone else. Take the Organization for Economic Cooperation and Development’s latest attempt to impose a one-size-fits-all system of “automatic information exchange” that would necessitate the complete evisceration of financial privacy around the world. A goal of the Convention on Mutual Administrative Assistance in Tax Matters is to impose a global network of data collection and dissemination to allow high-tax nations to double-tax and sometimes triple-tax economic activity worldwide. That would be a perfect tax harmonization scheme for politicians and a nightmare for taxpayers and the global economy.

But she closes with the good news.

Somehow the bureaucrats persuaded the lawmakers on the Senate Foreign Relations Committee to approve it. Thankfully, it’s currently being blocked by Sens. Rand Paul, R-Ky., and Mike Lee, R-Utah.

Actually, all that’s being blocked is the ability to ram the Multilateral Convention through the Senate without any debate or discussion.

John Gray explains the procedural issues in a piece for Conservative Review.

Senators Rand Paul (R-KY) and Mike Lee (R-UT)…aren’t blocking these treaties at all. Instead, they are just objecting to the Senate ratifying them by “unanimous consent.” The Senate leadership has the authority to bring these tax treaties to the floor for full consideration – debate, amendments, and votes. That is what Senators Paul and Lee are asking for. …Unanimous consent means that the process takes all of about 10 seconds; there is no time to review the treaties, there is no time for debate, and not a second of time to offer amendments.  They simply want them to be expedited through the Senate without transparency. …As sitting U.S. Senators, they have the right to ask for debate and amendments to these treaties. …These treaties are dangerous to our personal liberties.  Senator Paul and Senator Lee deserve the transparency and debate they’ve requested.

Amen.

For those of us who want good tax policy, rejecting this pact is vital.

An ideal fiscal system not only has a low rate, but also taxes income only one time and only taxes income earned inside national borders.

Yet the OECD Protocol to the Multilateral Convention is based on the notion that there should be pervasive double taxation of income that is saved and invested, and that these taxes should be levied on an extraterritorial basis.

For fans of the flat tax, national sales tax, or other proposals for tax reform, this would be a death knell.

But this isn’t just a narrow issue of tax policy. On the broader issue of privacy and government power, Professor Niall Ferguson of Harvard makes some very strong points in a column for the South China Morning Post.

I should be a paid-up supporter of the campaign to close down tax havens. I should be glad to see the back of 500-euro bills. …Nevertheless, I am deeply suspicious of the concerted effort to address all these problems in ways that markedly increase the power of states – and not just any states but specifically the world’s big states – at the expense of both small states and the individual.

He cites two examples, starting with the intrusive plan in the U.K. to let anybody and everybody know the owners of property.

The British government announced it will set up a publicly accessible register of beneficial owners (the individuals behind shell companies). In addition, offshore shell companies and other foreign entities that buy or own British property will henceforth be obliged to declare their owners in the new register. No doubt these measures will flush out or deter some villains. But there are perfectly legitimate reasons for a foreign national to want to own a property in Britain without having his or her name made public. Suppose you were an apostate from Islam threatened with death by jihadists, for example.

He also is uncomfortable with the “war against cash.”

…getting rid of bin Ladens is the thin end of a monetary wedge. …a number of economists…argue cash is an anachronism, heavily used in the black and grey economy, and easily replaced in an age of credit cards and electronic payments. But their motive is not just to shut down the mafia. It is also to increase the power of government. Without cash, no payment can be made without being recorded and potentially coming under official scrutiny. Without cash, central banks can much more easily impose negative interest rates, without fearing that bank customers may withdraw their money.

He’s right. The slippery slope is real. Giving governments some power invariably means giving governments a lot of power.

And that’s not a good idea if you’re a paranoid libertarian like me. But even if you have a more benign view of government, ask yourself if it’s a good idea to approve a global pact that is explicitly designed to help governments impose higher tax burdens?

Senators Paul and Lee are not allowing eight treaties to go forward without open debate and discussion. Seven of those pacts are bilateral agreements that easily could be tweaked and approved.

But the Protocol to the Multilateral Convention can’t be fixed. The only good outcome is defeat.

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Economists certainly don’t speak with one voice, but there’s a general consensus on two principles of public finance that will lead to a more competitive and prosperous economy.

To be sure, some left-leaning economists will say that high tax rates and more double taxation are nonetheless okay because they believe there is an “equity vs. efficiency” tradeoff and they are willing to sacrifice some prosperity in hopes of achieving more equality.

I disagree, mostly because there’s compelling evidence that the left’s approach ultimately leads to less income for the poor, but this is a fair and honest debate. Both sides agree that lower rates and less double taxation will produce more growth (though they’ll disagree on how much growth) and both sides agree that a low-tax/faster-growth economy will produce more inequality (though they’ll disagree on whether the goal is to reduce inequality or reduce poverty).

Since I’m on the low-tax/faster-growth side of the debate, this is one of the reasons why I’m a big fan of tax competition and tax havens.

Simply stated, when politicians have to worry that jobs and investment can cross borders, they are less likely to impose higher tax rates and punitive levels of double taxation. Interestingly, even the statist bureaucrats at the Organization for Economic Cooperation and Development (who, ironically, get tax-free salaries) agree with me, writing that tax havens “may hamper the application of progressive tax rates.” They think that’s a bad thing, of course, but we both agree that tax competition means lower rates.

And look at what has happened to tax rates in the past few years. Now that politicians have undermined tax competition and weakened tax havens, tax rates are climbing.

So I was very surprised to see some economists signed a letter saying that so-called tax havens “serve no useful economic purpose.” Here are some excerpts.

The existence of tax havens does not add to overall global wealth or well-being; they serve no useful economic purpose. …these jurisdictions…increase inequality…and undermine…countries’ ability to collect their fair share of taxes. …There is no economic justification for allowing the continuation of tax havens.

You probably won’t be surprised by some of the economists who signed the letter. Thomas Piketty was on the list, which is hardly a surprise. Along with Jeffrey Sachs, who also has a track record of favoring more statism. Another predictable signatory is Olivier Blanchard, the former top economist at the pro-tax International Monetary Fund.

The only surprise was that Angus Deaton, the most recent recipient of the Nobel Prize for economics, signed the letter.

But if that’s an effective “appeal to authority,” there’s a far bigger list of Nobel Prize winners who recognize the economic consensus outlined above and who understand a one-size-fits-all approach would undermine progress.

In other words, there is a very strong “economic purpose” and “economic justification” for tax havens and tax competition.

Simply stated, they curtail the greed of the political class.

Philip Booth of the Institute of Economic Affairs in London opined on this issue. Here’s some of what he wrote for City A.M.

…the statement that tax havens “have no useful purpose” is demonstrably wrong and most of the other claims in the letter are incredible. Offshore centres allow companies and investment funds to operate internationally without having to abide by several different sets of rules and, often, pay more tax than ought to be due. …Investors who use tax havens can avoid being taxed twice on their investments and can avoid being taxed at a higher rate than that which prevails in the country in which they live, but they do not avoid all tax. …tax havens also allow the honest to shelter their money from corrupt and oppressive politicians. …one of the advantages of tax havens is that they help hold governments to account. They make it possible for businesses to avoid the worst excesses of government largesse and crazy tax systems – including the 39 per cent US corporation tax rate. They have other functions too: it is simply wrong to say that they have no useful purpose. It is also wrong to argue that, if only corrupt governments had more tax revenue, their people would be better served.

Amen. I especially like his final point in that excerpt, which is similar to Marian Tupy’s explanation that tax planning and tax havens are good for Africa’s growth.

Last but not least, Philip makes a key point about whether tax havens are bad because they are sometimes utilized by bad people.

…burglars operate where there is property. However, we would not abolish property because of burglars. We should not abolish tax havens either.

When talking to reporters, politicians, and others, I make a similar point, arguing that we shouldn’t ban cars simply because they are sometimes used as getaway vehicles from bank robberies.

The bottom line, as Professor Booth notes, is that we need tax havens and tax competition if we want reasonable fiscal systems.

But this isn’t simply an issue of wanting better tax policy in order to achieve more prosperity. In part because of demographic changes, tax havens and tax competition are necessary if we want to discourage politicians from creating “goldfish government” by taxing and spending nations into economic ruin.

P.S. Here’s my video on the economic case for tax havens.

 

P.P.S. Let’s not forget that the Paris-based Organization for Economic Cooperation and Development is the international bureaucracy most active in the fight to destroy tax competition. The is especially outrageous because American tax dollars subsidize the OECD.

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I wrote yesterday about the Obama Administration’s head-in-the-sand approach regarding the anti-competitive nature of America’s corporate tax system (though maybe fiddling while Rome burns is a better metaphor).

Fortunately, some nations have more sensible policy makers. Even in Europe, which might come as a surprise to the pair of class warriors battling for the Democratic nomination.

Consider, for instance, what’s happening in Norway.

Norway will cut the corporate income tax rate to 23 percent from the current 27 percent by 2018…the country’s political parties announced on Wednesday. The basic personal tax rate will also be cut to 23 percent from 27 percent. …As part of the deal, further reductions in the company tax rate will be considered in the future. The compromise included…a small cut in Norway’s wealth tax.

What’s most remarkable about this story from Scandinavia is not that there’s a tax cut, though that surely would be a shock to Bernie Sanders’s mythological view of the Nordic nations.

I think it’s even more noteworthy that Norway already has a far lower corporate tax rate than the United States, yet the government is implementing a further reduction.

And Croatia also is poised to move policy in the right direction.

The reports from government circles that, as part of the tax reform, it could abolish the highest income tax rate of 40 percent have been welcomed by many observers. …“We support such a move. Croatia has a huge ‘brain drain’ of highly educated people, and they fall into the category of those whose salaries are covered by the 40 percent tax rate. Therefore, this decision would contribute to such people remaining in Croatia”, said Bernard Jakelić, the deputy director of the Croatian Employers’ Association. …Former Finance Minister Boris Lalovac (SDP) agreed that the abolition of the tax bracket would be a step in the right direction. …“Croatia is the only country in the region which has such a high rate of income tax. None of the countries in the region have income tax rates higher than 25 percent, and many countries have a flat tax. Its abolition would simplify the tax system and contribute to the reduction of the shadow economy. After all, the taxation of income at a rate of 25 percent is enough”, said Lalovac.

I especially like that the former finance minister makes both an argument based on tax competition and an argument based on the moral principle that there should be a limit on how much government should tax.

Maybe GOPer some day will be smart enough to include a moral component when seeking better tax policy. Especially if they learn that it’s politically persuasive.

So where can voters find a candidate who might implement such reforms in the United State?

Catherine Rampell of the Washington Post suggests that there is a “fiscally conservative” option already available.

Suppose you’re a hardcore fiscal conservative. …All you care about is getting the nation’s fiscal house in order. …the candidate you should vote for might surprise you. …the most fiscally conservative presidential contender left standing is…

Drum roll, please.

…Hillary Clinton.

No, it isn’t April Fool’s Day.

Ms. Rampell wants us to believe that Hillary Clinton is fiscally conservative because her agenda of much bigger government is matched by proposals for much higher taxes.

I’m not joking. Here’s what Rampell wrote.

Here’s the bottom line for the nation’s bottom line: Clinton’s spending increases and other proposals that cost money have a total price tag of about $1.8 trillion over the next decade. But her offsets, which come mostly from tax hikes, would save an estimated $1.9 trillion over that same period… Maybe when (if) voters start to notice this, Clinton will finally receive the praise she’s been due, from arithmetic fans and fiscal conservatives alike.

I suppose this is the point where I should explain that good fiscal policy is defined by a modest-sized government and a tax code that is designed to raise revenue in a relatively non-destructive fashion, not by whether lots of wasteful spending is okay if accompanied by lots of destructive tax hikes (i.e., a fixation on fiscal balance).

But I’ve made that point many times before, so instead I’ll merely observe that Ms. Rampell is either shockingly uninformed or (more likely) she thinks that she has some really stupid right-leaning readers who can be easily tricked into voting for Clinton.

And since we’re focusing on Mrs. Clinton’s ideological bona fides, ask yourself whether Ira Stoll of the New York Sun was describing a “fiscally conservative” candidate last December.

Call it Hillary’s Reichsfluchtsteuer. The former secretary of state and senator from New York, Hillary Clinton, reportedly will announce on Wednesday plans to impose an “exit tax” on companies that move their headquarters out of America or merge with foreign firms to escape America’s unreasonably high corporate taxes. …the Reichsfluchtsteuer, or Reich flight tax, was a 25% levy imposed originally…by the pre-Hitler, centrist government of Heinrich Brüning… Not exactly something to try to emulate. …As I pointed out back in 2012, the Universal Declaration of Human Rights, a product of the United Nations, says, “Everyone has the right to leave any country, including his own” and “No one shall be arbitrarily deprived of his property.” …it is unjust to force people or companies to stay where they do not want to be. …In 1963, at the Berlin Wall, President Kennedy said,Freedom has many difficulties and democracy is not perfect, but we have never had to put a wall up to keep our people in, to prevent them from leaving us.” Hillary Clinton’s exit tax would do exactly what Kennedy said we’ve never had to do: set up a virtual wall, in the form of a tax, to prevent companies from leaving America.

There’s something rather odious about a politician who wants to extort money from taxpayers as a price for re-domiciling. As a general rule, only very evil regimes levy such taxes.

Speaking of unsavory regimes, let’s play a fill-in-the-blank game. Here’s the first sentence from a recent Associated Press story.

___________ is looking to increase revenue from taxation.

Is the answer Hillary Clinton? That’s a good answer, but not correct in this case. What about Bernie Sanders of Barack Obama? Once again, smart guesses but not accurate for this story.

Give up? Well, here’s your answer.

The Islamic State extremist group is looking to increase revenue from taxation.

I share this item because this it reminded me of the time I gave a speech about reforming the welfare state and a leftist in the audience basically accused me of being a racist because the KKK also didn’t like the welfare state. The fact that I urged reform in part because poor people are hurt by such programs apparently didn’t matter to my accuser.

That being said, if we accept his logic, I guess this means we can accuse Hillary Clinton, Bernie Sanders, and Barack Obama of being in favor of Islamic terrorism because they share a goal with the Islamic State crazies.

Sigh. Needless to say, Hillary isn’t a radical Islamist. Just like Obama isn’t a communist simply because he was endorsed last election by the former head of the U.S. Communist Party.

I just wish folks on the left were equally prudent about avoiding absurd guilt-by-association charges.

P.S. Bruce Bartlett also claimed (presumably for the same disingenuous reason) that Obama is a conservative because of his proposed tax hikes, so Ms. Rampell is not alone.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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There’s a very powerful statement, variously attributed to Alexis de Toqueville, Benjamin Franklin, or Alexander Tytler, that basically warns that democracy is doomed when people figure out they can vote themselves money.

There’s no evidence that any of them actually spoke or wrote those words, though I guess it doesn’t matter that the quote didn’t originate with someone like Franklin. What does matter is that it accurately captures something very important, which is the tendency for governments to over-tax and over-spend once people decide that it’s okay to use government coercion to take other people’s money.

But it’s still nice to be able to cite something accurate. With this in mind, I came up with my Theorem of Societal Collapse. And I think it’s actually more accurate than the vote-themselves-money quote because democracy doesn’t necessarily lead to statism. What leads to bad outcomes is democracy combined with bad values.

And a pervasive belief in redistributionism is a bad value. Heck, it’s a self-destructive value. Consider Greece. When you add together the people getting welfare and disability to the people getting pension payments to the people on the government payroll, it turns out that a majority of people in the country are riding in the wagon of government dependency.

That’s bad. But what makes the Greek situation so hopeless is that those are the same people who vote. Which means there’s very little chance of getting a government that would implement good policy.

After all, why would the recipients of other people’s money vote for politicians who support limits on redistribution?

But I’m not just blaming voters. Politicians also deserve scorn and disdain because they are the ones who often seek votes by promising to take other people’s money.

Some observers would like to believe that these politicians will use their supposed superior expertise and knowledge about public policy to make appropriate tradeoffs and prevent the system from becoming over-burdened.

But that’s somewhat naive.

Indeed, there’s an entire school of thought in economics, known as “public choice,” which is based on making real-world assumptions about the self-interested behavior of politicians and interest groups. Here’s a partial description from the Library of Economics and Liberty.

As James Buchanan artfully defined it, public choice is “politics without romance.” The wishful thinking it displaced presumes that participants in the political sphere aspire to promote the common good. …public officials are portrayed as benevolent “public servants” who faithfully carry out the “will of the people.” …public choice, like the economic model of rational behavior on which it rests, assumes that people are guided chiefly by their own self-interests… As such, voters “vote their pocketbooks,” supporting candidates and ballot propositions they think will make them personally better off; bureaucrats strive to advance their own careers; and politicians seek election or reelection to office. Public choice, in other words, simply transfers the rational actor model of economic theory to the realm of politics. …collective decision-making processes allow the majority to impose its preferences on the minority.

In other words, both voters and politicians can have an incentive for ever-larger government, even if the end result is Greek-style fiscal chaos because taxes and spending reach ruinous levels.

I call this “Goldfish Government” because some think that a goldfish lacks the ability to control its appetite and therefore will eat itself to death when presented with unlimited food.

Indeed, public choice scholars explicitly recognize that unconstrained democracy can lead to bad results.

Public choice scholars have identified…deep…problems with democratic decision-making processes.

That’s the bad news.

The good news is that their research suggests ways to compensate for the natural tendency of ever-expanding government.

Like that founding father of the American constitutional republic, public choice recognizes that men are not angels and focuses on the importance of the institutional rules… If, for example, democratic governments institutionally are incapable of balancing the public budget, a constitutional rule that limits increases in spending and taxes to no more than the private sector’s rate of growth will be more effective.

Hmmm…., a rule that limits the government so it doesn’t grow faster than the private sector.

Sounds like an idea worth embracing.

But while I like anything that builds support for the Golden Rule, I’m not sure it’s a sufficient condition for good policy.

Simply stated, we have too many examples of nations that followed the Golden Rule for several years, only to then fall off the wagon with a new splurge of spending.

There are two ways to deal with this problem. First, make the spending restraint part of a jurisdiction’s constitution, as we see in Switzerland and Hong Kong.

Second, augment the internal constraint of a spending cap with the external constraint of tax competition. Bluntly stated, destructive tax policies will be less likely when politicians are afraid that taxpayers will move across borders.

I spoke about this topic at a recent conference in Slovakia.

I also discuss the critical role of demographic change toward the end of my speech.

P.S. America’s Founding Fathers had the right solution. They set up a democratic form of government, but they strictly limited the powers of the central government. This system worked remarkably well for a long period, but then the Supreme Court decided that the enumerated powers listed in the Constitution were just a suggestion.

P.P.S. While it’s bad news to combine democracy with bad value, I want to emphasize that the problem is bad values. Most non-democratic societies have policies that are so evil and destructive (think Cuba and North Korea) that they make France seem like a beacon of economic liberty.

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I sometimes wonder if I was put on this planet to defend tax competition and tax havens.

I argue for fiscal sovereignty, good tax policy, and financial privacy to the denizens of Capitol Hill, both in writing and in person.

I make the same arguments for readers of the New York Times, as well as readers of big-box store magazines.

My affection for low-tax jurisdictions is so strong that I ran the risk of getting thrown in a Mexican jail and also was accused of disloyalty to America by a bureaucrat for the Treasury Department.

Though I much prefer the hardship duty of arguing for tax competition and tax havens in places such as Bermuda, Antigua, Monaco, the British Virgin Islands, Anguilla, and the Cayman Islands. Yes, I’m willing to go the extra mile in the fight for economic liberty.

And, if nothing else, my intensity on these issues makes me quotable, at least to writers for the Economist.

Not one to mince words, Daniel Mitchell of the right-wing Cato Institute denounces the OECD’s push to co-ordinate global tax enforcement as “the devil’s spawn” and possibly even a step towards the fiscal equivalent of…the World Trade Organisation. Tax havens “should not have to enforce the burdensome tax laws of other countries”, he thunders. “Having grown rich with the tax policies of their choosing, the OECD countries are pulling up the ladder and saying, ‘you can’t do the same to attract investment’. It’s fiscal imperialism.”

But I’m not the only one with sensible views on these issues.

A different article in the Economist highlights some benefits made possible by “tax havens.”

Offshore centres oil the financial interface between larger economies, insists Alasdair Robertson of Maples. Grant Stein of Walkers, another Cayman firm, thinks of it as “the plumbing that connects the global financial system”. …They enjoy support from some fierce ideological warriors, including libertarians at the Cato Institute in Washington, DC. …many offshore transactions are about tax neutrality, not cheating. …“It’s not about evasion but about avoiding an extra, gratuitous layer of tax,” says John Collis of Conyers Dill & Pearman, a Bermuda law firm. Such structures offer legal neutrality too. In a joint venture in, say, the BVI, no shareholder has a home advantage; all get a sophisticated, predictable common-law system with a small but well-regarded local commercial court and Britain’s Privy Council as the ultimate arbiter. …Some offshore champions consider tax competition a good thing because it discourages countries from trying to tax their way out of trouble.

Writing for Hong Kong’s South China Morning Post, David Dodwell explains the valuable role of low-tax jurisdictions.

…offshore centres like Panama, the British Virgin Islands, Singapore, Hong Kong, Jersey, Lichtenstein or Switzerland serve a multitude of valuable roles. …Offshore financial centres have always acted as safe havens against such chaos or personal insecurity, and should be allowed to continue to do so. Is Hong Kong to be stigmatised as a tax haven because it offers a company low and simple tax arrangements compared with France, or Italy or India or wherever?

He uses his own experiences as an example.

When I settled permanently in Hong Kong, I did so not just because the work was interesting… I did so because I escaped onerous British taxes, and horrendous, stressful weeks completing nonsensically complex tax returns for Britain’s Inland Revenue. When I uplifted my Financial Times pension from Britain and placed it in a Hong Kong trust, I did so perfectly legally and transparently because if I had the pension sent to me monthly from Britain, it would be taxed. This was a pension built on a lifetime of hard-earned labour that had already been taxed once. I saw no justification for Britain’s inland revenue to tax me a second time. Was I acting unethically by eliminating a tax obligation to the British Government? …Building savings, and providing long-term security to my family…is not something I think I should feel embarrassed about. Nor should governments that create complex and burdensome personal and corporate tax regimes be surprised if people relocate to other jurisdictions where operating overheads are less onerous, and tax rules more simple and comprehensible.

He concludes with some wise words on the value of low-tax jurisdictions for the rest of the world.

As trade has exploded over the past four decades, so companies have become progressively more international, with operations sprawling across many economy and tax jurisdictions. Choosing a single low-tax base from which to coordinate such potentially messy production networks makes eminent good sense. So too is a zero-tax offshore location valuable as a way of avoiding double taxation for companies operating in more than one economy. …Use of such centres makes incorporation simpler, gives access to tried and tested legal systems including for arbitration, and tax-neutral treatment of investment. All legitimate reasons.

In a piece for the Financial Times that focuses primarily on British offshore financial centers, Richard Hay explains why so-called tax havens are so valuable.

Many of those who benefit from offshore centres — including millions receiving workplace pensions — are not aware of the key role they play in their financial affairs. Such financial centres facilitate trade, investment and economic growth. Globalisation has contributed to a doubling of world gross domestic product over the past two decades. Much of the benefit has accrued to developing countries, where dramatic declines in poverty have resulted from connecting local workforces to world consumers. …The true appeal of the UK offshore centres lies in their widely trusted British-inspired laws, courts, and professionals. The predictability and security offered by British institutions make such jurisdictions magnets for investors seeking reliable structures for international investment.

He cites one example of how Jersey (one of the Channel Islands, not the over-taxed New Jersey in the United States) produces big benefits for the United Kingdom.

UK offshore centres support British jobs, increase financing available for investment in the country and elevate the rate of return for savings. A 2013 study conducted by Capital Economics, a research consultancy, found that Jersey supports more than 140,000 British jobs — six times as many as the entire UK steel industry. The study found that Jersey’s contribution generates £2.5bn a year in tax for the exchequer, as much as the UK loses through all tax avoidance, onshore and offshore, combined.

And workers are big beneficiaries.

International investment is pooled in funds in tax-neutral countries like the Cayman Islands. Cost-efficient facilities afforded by such centres boost saving and pension returns, improving the lives of ordinary workers in retirement and easing the welfare burden on cash-strapped governments. Such pooled funds are liable to tax in the countries where their income and gains are earned, and again when received by the ultimate investors.

In a column for City A.M., James Quarmby highlights some of the practical and appropriate business reasons for utilizing so-called tax havens.

…the truth is that the major OFCs are extremely well regulated and have been so for many years. It is far harder to set up a company in Jersey than in the UK, for instance, because of its rigorous “know your client” rules. …most people use companies in OFCs for quite mundane, non-tax reasons. If you are trading or investing internationally, an offshore company is an essential building block for your business. …Experienced business people will tell you that there are certain emerging markets where, under no circumstances, would you want to resolve an investors’ dispute – you would much rather resolve it in a Cayman court where you could be sure of a fair fight. …Another reason for using an OFC is the bi-lateral treaties many of them have entered into with other countries. Mauritius, for instance, has excellent treaties with India and as a consequence it is now the world’s most important financial gateway to the sub-continent. Hong Kong, for similar reasons, is the gateway into China… OFCs are a vital part of our globalised world – without them international trade and investment would seriously suffer, global GDP would be lower, and the world would be a poorer place.

By the way, there is an effective and pro-growth way to boost tax compliance, as explained in another article in the Economist.

Getting rich people to pay their dues is an admirable ambition, but this attack is both hypocritical and misguided. It may be good populist politics, but leaders who want to make their countries work better should focus instead on cleaning up their own back yards and reforming their tax systems. …governments should not bash companies for trying to reduce their tax bills, if they do so legally. In the end, tax systems must be reformed. …Governments also need to lower corporate tax rates. Tapping companies is inefficient: firms pass the burden on to others. …Nor do corporate taxes raise much money: barely more than 2% of GDP (8.5% of tax revenue) in America and 2.7% in Britain. …a lower rate on a broader base…would be more efficient and would probably raise more revenue.

Pierre Bessard of Switzerland’s Liberales Institut looks at the big picture in his monograph on Individual Rights and the Fight Against Tax Evasion. He starts by noting that the entire anti-tax competition campaign is an illegitimate exercise of “might makes right.”

…the G20 as a body lacks democratic or legal legitimacy and is in effect a cartel of governments… The G20…is clearly a departure from the rule of law in international affairs and replaces negotiations with political pressure under the (explicit or implicit) threat of economic and financial sanctions.

He then explains that anti-tax competition advocates rely on laughable arguments about the supposed desirability of bigger government.

To make the G20 governments’ war against citizens protecting wealth and resources in “tax havens” more palatable, the OECD  has initially argued that governments “need every tax dollar legally due to combat the world recession”. As this argument lost its credibility as the evidence  increasingly showed that Keynesian-style fiscal interventionism worsened and prolonged the crisis, the OECD now holds that tax avoidance and tax evasion mean fewer resources “for infrastructure and services such as education and health, lowering standards of living in both developed and developing economies”. This statement, however, contradicts all theoretical and empirical evidence, which shows that a smaller scope and size of government go hand in hand with higher  economic growth and living standards.

And he also explains why tax competition leads to better tax policy and more growth.

By restricting government’s capacity to indefinitely raise the tax burden, the diversity of jurisdictions and systems unquestionably contributes to greater prosperity. The most obvious consequence of tax competition is its beneficial impact on saving, since lower taxes encourage capital accumulation. This in turn leads to more investment, more jobs and more economic welfare. …Experience shows that “tax havens”…play at most a preventive or corrective role of arbitrage in the face of excessive taxation. In general, tax competition from “tax havens” leads to a better balance between public services and the tax burden. …From an economic perspective, the use of “tax havens” facilitates capital accumulation and improves economic prosperity in the high-tax countries where the capital is eventually repatriated to be invested in factors of production. “Tax havens” therefore increase the efficiency of international  capital markets and thus the efficiency of capital allocation to the most productive investments, thereby contributing to raise overall living standards. As a result, “tax havens” benefit all residents, whether they make use of them directly or not. They serve to channel capital and avoid double or even triple taxation in high-tax countries and lead to better economic performance in those countries.

The bottom line is that tax competition protects individuals by at least partially constraining the greed of the political class.

…tax diversity is an essential condition for the preservation of individual liberty. Competition tends to restrict the predatory potential of the territorial monopoly on the use of coercion (which defines government). …An individual’s freedom of choice and legitimate rights to the fruits of his or her labor and property are thus better protected in a world with strong tax competition.

And Pierre closes by noting the powerful intellectual lineage in favor of systems diversity as a driver and protector of liberty.

…jurisdictional competition and the advantages of smaller, open territorial monopolies controlled by governments are important ideas of the intellectual liberal tradition. Such diverse thinkers as David Hume, Adam Smith, Montesquieu, Alexis de Tocqueville, Immanuel Kant, Wilhelm von Humboldt, and Turgot insisted on the role of institutional diversity and the right to exit for individual freedom.

P.S. Pierre also wrote a superb column a few years ago about tax competition, fiscal sovereignty, and financial privacy for the New York Times.

P.P.S. Here’s my video on the economic case for tax havens.

P.P.P.S. Let’s not forget that the Paris-based Organization for Economic Cooperation and Development is the international bureaucracy most active in the fight to destroy tax competition. The is doubly outrageous because, 1) our tax dollars subsidize the OECD, and 2) those bureaucrats get tax-free salaries!

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I’m hoping the “Panama Papers” issue will quickly fade from the news (as happened after a similar data theft from BVI in 2013)  for the simple reason that even left-leaning reporters will get bored when they discover it is mostly a story about internationally active investors legally using structures designed for cross-border investment.

Yes, statists have a broader agenda of trying to make tax avoidance somehow shameful and illegitimate. But I doubt they’ll make much progress since no rational person (not even Bono or Donald Trump) voluntarily pays more to the government than is legally required.

Instead, I’m hoping that advocates of economic liberty can use this non-controversy controversy to our advantage by explaining that good tax policy is the best way to encourage both growth and compliance.

I often explain, for instance, that the best way to “hurt” tax havens is for onshore countries to have lower tax rates and less double taxation.

But is it really possible to have a simple tax system that accomplishes all these things? Some folks say no. They argue that there are competing goals in tax policy and that lawmakers are in the unenviable position of having to choose among goals that are mutually inconsistent.

Indeed, a writer for The Economist has a column that purports to show the existence of a “trilemma.”

…the trilemma, under which three options are available, but only two at most can be selected. In this case, it is a simple tax system; independent national tax policies; and the existence of multinational companies and investors.

Here’s my amateur depiction of this supposed trilemma, which ostensibly allows only two out of the three goals to be achieved.

And why does the author think these three things can’t simultaneously exist?

…simple tax systems are the best; they do not distort behaviour. But countries also like to set their own tax policies… The existence of national tax policies also allows economies like Ireland to offer themselves as an attractive place to do business… But that freedom also means that multinational companies and investors can arrange their affairs so as to minimise their tax charge. Governments react to that possibility with a series of carrots and sticks; tax breaks to persuade companies to stay and regulations designed to close loopholes that multinationals try to exploit… This makes the tax system more complex.

This may sound superficially persuasive, but it’s wrong.

And it’s not just wrong in theory. There are real-world examples that show that the trilemma is false.

  • Hong Kong has a simple tax system, an independent national tax policy, and lots of multinational companies and investors.
  • The Cayman Islands has a simple tax system, an independent national tax policy, and lots of multinational companies and investors.
  • Switzerland has a simple tax system, an independent national tax policy, and lots of multinational companies and investors.
  • Estonia has a simple tax system, an independent national tax policy, and lots of multinational companies and investors.

So why is the author wrong?

For the simple reason that he omitted one word. The trilemma can be switched from false to true by adding “high” before “tax.”

To be fair, perhaps this is what the author actually meant since he writes at one point about the level of taxes needed to finance ever-expanding welfare states.

…a world of simple taxes, and independent tax policies, would probably undermine the tax base governments need to fund the welfare states

So there actually is a real lesson to be learned and a real trilemma to analyze. If nations have high taxes, they can’t also have simple tax systems that are appealing to companies and investors.

By the way, the author makes a very good point, noting that tax rates would be more punitive if politicians didn’t have to worry that jobs and investment could cross national borders.

…without…tax competition, one suspects the global tax take would creep higher and higher.

Actually, this is not something “one suspects.” It is a 99.9999 percent certainty. Heck, the OECD even admitted at the very beginning of its anti-tax competition project that the goal was to enable high tax rates and large fiscal burdens. Here’s what the (tax-free!) bureaucrats wrote on page 14 of their 1998 report about the impact of “harmful tax competition.”

Since I’ve pointed out that the OECD has an unseemly pattern of dishonest data manipulation, I feel compelled to give them credit for being uncharacteristically truthful in this instance.

P.S. Let’s take a look at some other trilemmas.

From what I can tell, the most famous trilemma in economics is the Impossible Trinity, which says you can’t simultaneously have fixed exchange rates, open capital flows, and an independent monetary policy. Instead, you have to pick only two of the three options. I try to steer clear of monetary policy issues, but this makes sense.

And it’s definitely true that you can spark an argument among libertarians by raising the possibility, as put forth by an economist from Sweden, that there is a trilemma regarding immigration policy. Is it really true that you can’t simultaneously have limited government, open borders, and democracy? Do you really have to pick two of the three options? For what it’s worth, I would change “democracy” to “majoritarianism.”

Though if you prefer non-policy trilemmas, there’s the one circulates in the business world. It hypothesizes that you can’t have a process for producing a product that is good, cheap, and fast. You have to pick two of the three options. I suspect this is true in the short run, but one of the great thing about capitalism is that markets over time generally make things cheaper, better, and faster.

Last but not least, while searching for good examples of trilemmas, I found this one about communism. It’s amusing, obviously, but can someone truly be both communist and intelligent? Maybe that was possible 100 years ago, before all the horrors that have been unleashed by communism, but is that possible today? Though maybe that’s the point of the trilemma. You can be a smart communist, but only if you actually understand that the system doesn’t work and you’re willing to make dishonest arguments. But, if that’s the case, are you really a communist, or are you some sort of sleazy, power-hungry opportunist?

P.P.S. For those who appreciate politically incorrect humor, here’s another trilemma that you may find amusing.

P.P.P.S. Returning to our original topic, I can’t resist sharing a blurb from this story about New Jersey’s fiscal problems.

The decision by billionaire hedge-fund manager David Tepper to quit New Jersey for tax-friendly Florida could complicate estimates of how much tax money the struggling state will collect, the head of the Legislature’s nonpartisan research branch warned lawmakers. …New Jersey relies on personal income taxes for about 40 percent of its revenue, and less than 1 percent of taxpayers contribute about a third of those collections.

Gee, what a surprise. A state that punishes success over time has less successful people.

But let’s now match this story to our aforementioned tax trilemma. I don’t know if New Jersey’s tax system is simple, but Tepper’s escape means we now have more evidence that high-tax policy is not compatible with attracting and retaining investors.

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