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Posts Tagged ‘Tax Competition’

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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I wrote a couple of days ago about the “Panama Papers” issue and touched on the key issues. I explained that this non-scandal scandal is simply another chapter in the never-ending war by high-tax governments against tax competition, fiscal sovereignty, and financial privacy.

Here are a few of the other points I made: .

I touched on some of these topics in this interview with Neil Cavuto.

Let’s look at what some others have written on this issue.

Veronique de Rugy of the Mercatus Center looks at some reactions from onshore politicians, which range from illogical to extremist.

The French finance minister, for instance, already put Panama back on the list of countries that aren’t sufficiently willing to help enforce onerous French tax law. That’s despite France’s removal of Panama from its list of uncooperative states and territories in 2012 after reaching a bilateral agreement on precisely that issue. President Barack Obama, on the other hand, recognizes that most of the activities reported in the stolen pages are legal. As such, he wants to do something that might be even more radical than what France has done. He proposes making it illegal to legally reduce one’s tax burden. Falling back on some generic and zero-sum concept of tax fairness, he told reporters that we “shouldn’t make it legal to engage in transactions just to avoid taxes” and that he wants to enforce “the basic principle of making sure everyone pays their fair share.”

So France wants to punish Panama, even though Panama already has agreed to help enforce bad French tax laws. Meanwhile, President Obama reflexively wants to punish taxpayers who have the temerity and gall to not voluntarily over-pay their taxes (an issue where Donald Trump actually said something sensible).

As an economist, Veronique highlights the most important issue (assuming, of course, one wants more prosperity).

If you want more global trade and more global investments, international bureaucracies such as the Organisation for Co-operation and Economic Development and governments around the world shouldn’t make it harder to operate international businesses and engage in cross-border investment and business.

Then she looks at discouraging developments from her home country.

For years, France has punished its entrepreneurs and businesses with high taxes and terrible laws. As a result, last year alone, some 10,000 French millionaires called it quits and moved abroad. However, rather than reform its tax laws and streamline its government, it wants to put its grabby hands on some cash… But it won’t work in the long run. France and other high-tax nations can try very hard to destroy tax competition, financial privacy and the sovereignty of countries with better tax structures, but they still won’t be able to afford their big and broken welfare states. …That’s the real financial scandal.

Amen. This is a simple matter of math and demographics.

The Wall Street Journal also has opined on the controversy, wondering about the fact that some folks on the left are fixating on legal tax avoidance.

The papers…purport to document the dealings of the Mossack Fonseca law firm, which appears to have helped wealthy clients establish shell companies in Panama, a rare remaining bastion of bank secrecy. …The fact that an individual created such a company, or opened bank accounts in Panama, is not proof of any wrongdoing… That’s not stopping the media from jumping to conclusions, many are oddly focusing on tax avoidance.

There’s a reason for the fixation on tax avoidance, of course. Politicians realize that they need to demonize legal tax if they want to impose big tax hikes by shutting down loopholes (both the real ones and the fake ones).

In any event, the editors agree that the real issue from Panama Papers is the presumably dodgy accumulation of assets by politicians.

The mistake now would be to narrow the focus prematurely, zeroing in on tax avoidance that is a hobbyhorse of the political class but in this case is a distraction. The real news here are the incomes and far-flung bank accounts of the political class.

The WSJ is right.

I touch on that issue in this interview with CNBC, explaining that it should be a non-story that international investors use international structures, but hitting hard on the fact that politicians so often manage to obtain a lot of wealth during their time in public “service.”

The bottom line is that if we’re going to have a crusade for transparency, it should focus on government officials, who have a track record of unethical behavior, not on the investors and entrepreneurs who actually earn their money by using capital to boost growth.

I should have dug into my files and provided a few examples of the hypocritical American politicians who have utilized tax havens. Such as…ahem…the current Secretary of the Treasury.

Speaking of hypocrisy, Seth Lipsky of the New York Sun identifies another strange example of double standards, in this case involving privacy.

The New York Times…defended Apple when the iPhone maker refused to help the FBI break into the iPhone that had been used by the Islamist terrorists who slew 14 innocent people in San Bernardino. It even praised Apple for refusing to help. Yet it’s joining in the feeding frenzy over what are coming to be known as the Panama Papers…calling for major investigations into money laundering and tax evasion.

I was sympathetic to Apple’s legal argument, even though I also wished the company would have helped the FBI (albeit without giving the government any details that could have been used to create a backdoor into all of our iPhones).

But Mr. Lipsky is right that the privacy-loving defenders of Apple have a remarkably inconsistent approach to the issue.

Where were most of the do-gooders…when the FBI was frantically trying to gain access to the infamous iPhone? It might be able to tell us to whom the killers had been talking and whether they were planning more attacks. …Apple…got cheered by all the right people. The Gray Lady…praised Apple for refusing to help. …So why are the do-gooders who are so protective of iPhone data when it belongs — or relates — to terrorists nonetheless so delighted about the disclosure of data when the data belong to the rich? Or relates to their property? Property rights, it seems, just don’t interest the do-gooders. They don’t believe individuals have a right to property or to due process before their stuff is taken.

This is a great point.

What it basically shows is that leftists (“do-gooders” to Seth) have more sympathy for medieval butchers who kill innocent people than they have for over-burdened taxpayers who actually want to preserve their money so it is used to promote prosperity rather than to fatten government budgets.

By the way, I can’t resist sharing another excerpt.

…tax havens can serve a benign purpose. They put pressure on law-abiding governments to keep taxation within non-abusive limits, something that is increasingly rare in the age of socialism.

Bingo. This is why everyone – especially those of us who aren’t rich – should applaud low-tax jurisdictions.

Just imagine how high taxes would be if politicians thought all of us were captive customers!

Let’s look at one final interview on the topic. But I’m not sharing this BBC interview because I said anything new or different. Instead, I want to use this opportunity to grouse about media bias. You’ll notice that I was out-numbered 2-to-1 in the discussion (3-to-1 if you include the host).

But I’m not upset I was in the minority. That’s so common that I barely notice when it happens.

What did irk me, though, was the allocation of time. Both statists got far more ability to speak, turning a run-of-the-mill example of bias into an irritating experience.

On the other hand, I did get to point out that the OECD bureaucrat was staggeringly hypocritical since she urges higher taxes on everyone else when she (like the rest of her colleagues) gets a tax-free salary. So maybe I should be content having unleashed that zinger.

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For all his faults, you have to give President Obama credit for strong convictions. He’s generally misguided, but it’s perversely impressive to observe his relentless advocacy for higher taxes, bigger government, more intervention, and limits on constitutional freedoms.

That being said, his desire to “fundamentally transform” the United States leads him to decisions that run roughshod over core principles of a civilized society such as the rule of law.

Consider, for instance, the Obama Administration project, known as “Operation Choke Point,” to restrict banking services to politically incorrect businesses such as gun dealers.

It doesn’t matter than these companies are engaged in legal activities. In pursuit of its ideological agenda, the White House is using regulatory bullying in hopes of getting banks to deny services to these businesses.

For more information, click here to read about recent efforts to end this thuggish initiative. Also, here’s a very short video explaining the topic.

Well, there’s an international version of Operation Choke Point.It’s called “de-risking,” and it occurs when banks are pressured by regulators into cutting off banking services to certain regions.

The Wall Street Journal has a column on this topic by two adjunct professors from Fordham Law School.

…a widespread trend in banking called “de-risking.” Reacting to pressure by various government regulators…, banks are rejecting customers in risky regions and industries. Throughout 2014 J.P. Morgan Chase dropped more than 100,000 accounts because they were considered risky… Between 2013 and 2014, Standard Chartered closed 70,000 small and medium-size business accounts, and ended hundreds of relationships with banks in Latin America and Central Europe. …In yet another form of de-risking, the European Central Bank reports that banks have steadily cut their correspondent relationships—that is, the other banks they work with in sending money around the globe. HSBC alone closed more than 326 correspondent bank accounts between 2010 and 2012. …the banks’ actions are understandable. They face unprecedented regulatory penalties, unclear legal standards, high litigation costs and systemic risks to their business. In 2012 HSBC settled with the Justice Department, paying $1.9 billion in fines for such failings as “ignor[ing] the money laundering risks associated with doing business with certain Mexican customers.” …A bank with a single mistaken customer relationship could be put out of business. Banks have concluded that they will be punished anytime money reaches criminals, regardless of their own efforts. It’s better to drop all supposedly risky customers.

The authors explain that there should be “safe harbor” rules to protect both banks and their customers. That’s a very sensible suggestion.

And there are easy options to make this happen. I’m not a big fan of the Financial Action Task Force, which is an OECD-connected organization that ostensibly sets money-laundering rules for the world. Simply stated, the bureaucrats at FATF think there should be no human right to privacy. Moreover, FATF advocates harsh regulatory burdens that impose very high costs while producing miserly benefits.

That being said, if a nation is not on the FATF blacklist, that should be more than enough evidence that it imposes very onerous rules to guard against misbehavior.

Unfortunately, bureaucrats in the United States and Europe don’t actually seem interested in fighting money laundering. Or, to be more precise, it appears that their primary interest is to penalize places with low tax rates.

Many Caribbean jurisdictions, for instance, are being victimized by de-risking even though they comply with all the FATF rules. And this means they lose important correspondent relationships with larger banks.

To address this issue, the Organization of American States recently held a meeting to consider this topic. I was invited to address the delegations. And since other speakers dealt with the specific details of de-risking (you can watch the entire event by clicking here), I discussed the big-picture issue of how low-tax jurisdictions are being persecuted by harsh (and ever-changing) demands. Here are my remarks, with a few of my PowerPoint slides embedded in the video.

Now for the most remarkable (and disturbing) development from that meeting.

Many of the Caribbean nations offered a rather innocuous resolution in hopes of getting agreement that de-risking is a problem and that it would be a good idea if nations came up with clear rules to eliminate the problem.

That seems like a slam dunk, right?

Not exactly. The U.S. delegation actually scuttled the declaration by proposing alternative language that was based on the notion that other countries should put the blame on themselves – even though these nations already are complying with all the FATF rules! You can read the original declaration and proposed changes by the U.S. by clicking here, but this is the excerpt that really matters.

Wow, what arrogance and hypocrisy by the Obama appointees. These jurisdictions, most with black majorities, are suffering from ad hoc and discriminatory de-risking because the Administration doesn’t like the fact that they generally have low taxes.

But rather than openly state that they favor discrimination against low-tax nations, the political hacks put in place by the Obama White House proposed blame-the-victim language, thus ensuring that nothing would happen.

P.S. Perhaps the most surreal part of the experience is the strange bond I felt with the Venezuelan delegation. Regular readers know I’m not a fan of the statist and oppressive government in Caracas. But the Venezuelan delegation apparently takes great pleasure in opposing the position of the U.S. government, so we were sort of on the same side in the discussion. A very bizarre enemy-of-my-enemy-is-my-friend situation.

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There’s no agreement on the most important variable for state tax competitiveness.

I’m sympathetic to the final option, in part because of my disdain for the income tax. And if an income tax is imposed, I prefer a simple and fair flat tax.

With that in mind, here’s a fascinating infographic I received via email. I don’t know if Reboot Illinois is left wing, right wing, or apolitical, but they did a very good job. I particularly like the map showing zero-income tax states (gray), flat tax states (red), and states with so-called progressive tax schemes (blue).

For what it’s worth, Illinois taxpayers should fight as hard as possible to preserve the state’s flat tax. If the politicians get the power to discriminate among income classes, it will just be a matter of time before all taxpayers are hit by higher rates.

Now let’s shift to the spending side of the fiscal ledger.

Like any good libertarian, I generally focus on the size of government. I compare France with Hong Kong and that tells me that big is bad and small is good.

But regardless of whether a government is large or small, it’s desirable if it spends money efficiently and generates some benefit. I shared, for instance, a fascinating study on “public sector efficiency” from the European Central Bank and was not surprised to see that nations with smaller public sectors got much more bang for the buck (with Singapore easily winning the prize for the most efficient government).

So I was very interested to see that WalletHub put together a report showing each state’s “return on investment” based on how effectively it uses tax monies to achieve desirable outcomes for education, health, safety, economy, and infrastructure, and pollution.

I’m not completely comfortable with the methodology (is it a state government’s fault if the population is more obese and therefore less healthy, for instance, and what about adjusting for demographic factors such as age and race?), but I nonetheless think the study is both useful and interesting.

Here are the best and worst states.

One thing that should stand out is that the best states are dominated by zero-income tax states and flat tax states.

The worst states, by contrast, tend to have punitive tax systems (Alaska is a bit of an outlier because it collects – and squanders – a lot of revenue from oil).

By the way, if you’re a Republican, you can probably give yourself a small pat on the back. The so-called red states do a bit better than the so-called blue states.

P.S. WalletHub put together some fascinating data on which cities get a good return on investment (i.e., bang for the back) for spending on police and education.

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Three years ago, thieves stole a bunch of information from “offshore” service providers in the Cook Islands and British Virgin Islands. This was supposed to be a ground-breaking exposé with huge ramifications, but it turned out to be a tempest in a teapot. As I pointed out at the time, all that we really learned is that people who use offshore services are generally honest and law-abiding. And they definitely had far more integrity than the politicians who routinely attack the offshore world.

Well, here we go again. We’ve learned that thieves have now obtained client data from a global law firm based in Panama, and leftists once again are making this seem like a giant story.

But here’s what you really need to know. This is simply another chapter in the never-ending war by high-tax governments against tax competition, fiscal sovereignty, and financial privacy.

Here’s some of what I wrote for Caribbean News on the issue, starting with the big picture.

Many nations in Western Europe can no longer afford their big welfare states. Countries such as Greece, Spain, and Italy already have needed bailouts, while it’s just a matter of time before several other European nations face a fiscal day of reckoning. …rather than fix their own fiscal problems, many of these nations are working through international bureaucracies such as the G-20 and the Organization for Economic Cooperation and Development to rewrite the rules and traditions of global commerce in an attempt to extract more tax revenue. This is why there’s been a major attack against so-called tax havens as part of a coordinated campaign to undermine fiscal sovereignty and restrict the human right of financial privacy.

In other words, welfare states are going bankrupt and they hope to somehow prop up their unaffordable entitlements with a money grab.

And they’re more than happy to rely on stolen data.

One of the more bizarre chapters in this story is the way the pro-welfare state crowd is now trying to demonize financial service providers such as law firms that are hired to fill out paperwork by investors and entrepreneurs who are setting up trusts, companies, and other entities. Consider, for instance, the plight of Mossack Fonseca, a professional services firm based in Panama. …this collection of legal practitioners and egghead trust advisors is suddenly being portrayed as an international crime syndicate that’s corrupting Western civilization one business incorporation at a time.

But it makes no sense to attack service providers.

The controversy, in large part, derives from a basic and arguably willful misunderstanding of what firms like Mossack Fonseca do – and don’t do – for their clients. In basic terms, these firms help people create new businesses and trusts. …unlike banks, these law firms don’t take possession of their clients’ money. So the notion that they are involved in “money laundering” is laughable. Once incorporation papers are filed, the law firms don’t direct in any way the operation of the businesses.

Besides, the real target isn’t the Panamanian law firm. Activists on the left, working in concert with international bureaucracies and uncompetitive governments, want to create a global tax cartel (sort of an “OPEC for politicians“) in hopes of enabling higher tax burdens.

Firms like Mossack Fonseca are merely just the latest stand-ins and proxies for a much wider campaign being waged by left-wing governments and their various allies and interest groups. This campaign is built around aggressive attacks on anyone who, for any reason, seeks to legally protect their hard-earned assets from confiscatory tax policies. …a cabal of governments…has decided not to compete…instead simply seeking to malign and destroy any entity, individual or jurisdiction that exists that deprives them of tax revenue to which politicians greedily believe they are entitled. As usual, the media outlets running these perennial “exposés,” usually at the bidding of OECD bureaucrats (who ironically get tax-free salaries).

Let’s close with a couple of points about the broader issue.

  • It is hardly a surprise that wealthy people with cross-border investments use instruments (such as foundations, trusts, and companies) designed for such purposes.
  • Like everyone, wealthy people value privacy (even more so because they have to worry more about kidnapping and other crimes), so these structures are designed to protect their confidentiality.
  • Some of these clients may not have complied with the tax laws of their countries. That is generally a function of excessive tax rates and home-country corruption.
  • A few end-user clients may be unsavory (Putin’s cronies, for instance), but should businesses be prohibited from dealing with people who are viewed as sketchy (but otherwise are not under investigation and haven’t been convicted of crimes)?
  • Cross-border economic activity and structures play a valuable role in the global economy and should not be demonized, just as GM shouldn’t be demonized if some crooks use a Chevy as their getaway vehicle.
  • Low-tax jurisdictions have stronger laws against dirty money than high-tax nations.

So at the risk of stating the obvious, I’m on the side of low-tax jurisdictions and the service providers in those jurisdictions. And I’ll defend them (here, here, here, here, and here) 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 explaining why it’s a non-story that internationally active investors use international structures.

P.S. Why is it okay for rich leftists to utilize “tax havens” but not okay for people in the economy’s productive sector?

P.P.S. We should be very thankful that Senator Rand Paul is standing tall in the fight against nosy and destructive governments on this issue.

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