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Posts Tagged ‘Tax Compliance’

I’ve been at the United Nations this week for both the 14th Session of the Committee of Experts on International Cooperation in Tax Matters as well as the Special Meeting of ECOSOC on International Cooperation in Tax Matters.

As you might suspect, it would be an understatement to say this puts me in the belly of the beast (for the second time!). Sort of a modern-day version of Daniel in the Lion’s Den.

These meetings are comprised of tax collectors from various nations, along with U.N. officials who – like their tax-free counterparts at other international bureaucracies – don’t have to comply with the tax laws of those countries.

In other words, there’s nobody on the side of taxpayers and the private sector (I’m merely an observer representing “civil society”).

I could share with you the details of the discussion, but 99 percent of the discussion was boring and arcane. So instead I’ll touch on two big-picture observations.

What the United Nations gets wrong: The bureaucracy assumes that higher taxes are a recipe for economic growth and development.

I’m not joking. I wrote last year about how many of the international bureaucracies are blindly asserting that higher taxes are pro-growth because government supposedly will productively “invest” any additional revenue. And this reflexive agitation for higher fiscal burdens has been very prevalent this week in New York City. It’s unclear whether participants actually believe their own rhetoric. I’ve shared with some of the folks the empirical data showing the western world became rich in the 1800s when fiscal burdens were very modest. But I’m not expecting any miraculous breakthroughs in economic understanding.

What the United Nations fails to get right: The bureaucracy does not appreciate that low rates are the best way of boosting tax compliance.

Most of the discussions focused on how tax laws, tax treaties, and tax agreements can and should be altered to extract more money from the business community. Participants occasionally groused about tax evasion, but the real focus was on ways to curtail tax avoidance. This is noteworthy because it confirms my point that the anti-tax competition work of international bureaucracies is guided by a desire to collect more revenue rather than to improve enforcement of existing law. But I raise this issue because of a sin of omission. At no point did any of the participants acknowledge that there’s a wealth of empirical evidence showing that low tax rates are the most effective way of encouraging tax compliance.

I realize that these observations are probably not a big shock. So in hopes of saying something worthwhile, I’ll close with a few additional observations

  • I had no idea that people could spend so much time discussing the technicalities of taxes on international shipping. I resisted the temptation to puncture my eardrums with an ice pick.
  • From the moment it was announced, I warned that the OECD’s project on base erosion and profit shifting (BEPS) was designed to extract more money from the business community. The meeting convinced me that my original fears were – if possible – understated.
  • A not-so-subtle undercurrent in the meeting is that governments of rich nations, when there are squabbles over who gets to pillage taxpayers, are perfectly happy to stiff-arm governments from poor nations.
  • The representative from the U.S. government never expressed any pro-taxpayer or pro-growth sentiments, but he did express some opposition to the notion that profits of multinationals could be divvied up based on the level of GDP in various nations. I hope that meant opposition to “formula apportionment.”
  • Much of the discussion revolved around the taxation of multinational companies, but I was still nonetheless surprised that there was no discussion of the U.S. position as a very attractive tax haven.
  • The left’s goal (at least for statists from the developing world) is for the United Nations to have greater power over national tax policies, which does put the UN in conflict with the OECD, which wants to turn a multilateral convention into a pseudo-International Tax Organization.

P.S. The good news is that the folks at the United Nations have not threatened to toss me in jail. That means the bureaucrats in New York City are more tolerant of dissent than the folks at the OECD.

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Republicans promised voters all sorts of pro-growth reforms. They assured us that they learned a lesson about the dangers of expanding government and calling it “compassionate conservatism.”

Give us control of both Congress and the White House, they said before the election, and we’ll move our agenda to limit government and drain the swamp in Washington.

  • Repeal Obamacare!
  • Cut tax rates!
  • Slash wasteful spending!
  • Reform entitlements!
  • Eliminate senseless red tape!

Of course, now that they’re in power, they’re getting cold feet. It now appears there will be reform of the disastrous Obamacare law, but not full repeal. Moreover, tax cuts are being jeopardized by a risky scheme for a $1 trillion “border-adjustable” tax hike. Based on Trump’s recent address to Congress, I’m also not holding my breath for much-needed spending cuts and entitlement reform. And it’s unclear whether we’ll see much progress cutting back on the mountains of regulation hindering economic vitality.

Even the easy promises may not be fulfilled.

The Foreign Account Tax Compliance Act (FATCA) is an odious law enacted back in 2010 when the left controlled all the levers of power. It’s horrible legislation that threatens the rest of the world with financial protectionism (a 30 percent levy on all money flowing out of the United States) unless foreign governments and foreign financial institutions agree to serve as deputy tax collectors for America’s anti-competitive worldwide tax system.

That’s the bad news.

The good news is that the Republican platform endorses the repeal of this onerous law.

But will GOPers deliver on that promise? Especially if the left unleashes the kind of demagoguery we often see in Congress and that we saw from Obama during the 2008 campaign?

I guess time will tell, but if the goal is good policy (and keeping promises), this law deserves to be tossed in the trash.

I’ve previously explained that FATCA is so brutal that it has led many overseas Americans to give up their citizenship simply because FATCA made their lives miserable. They couldn’t open bank accounts. They had trouble finding places to manage their investments. Even retirement accounts became a nightmare.

Some people said that these difficulties were just temporary and would disappear once everyone learned how the law operated.

Hardly. Let’s start with some data from a Bloomberg story that should be a wake-up call for the crowd in Washington.

The number of Americans renouncing their citizenship rose to a new record of 5,411 last year, up 26 percent from 2015, according to the latest government data. …Since Fatca came into being, annual totals for Americans renouncing citizenship have reached their four highest historic levels.

And here’s a chart showing this dismal trend.

The Wall Street Journal opines on this issue today.

…the Foreign Account Tax Compliance Act (Fatca) became law in 2010 to go after fat cats stashing money abroad, these pages have reported that it has led the IRS to treat law-abiding Americans as criminals. …Under Fatca, Americans must now report overseas holdings of more than $50,000 even if they owe no taxes, or else face crushing fines. For foreign financial institutions, the penalty for not giving the IRS what it wants to know about their American clients is a 30% withholding penalty on any U.S.-sourced payment to these institutions. …With the GOP controlling Congress and White House, the time is ripe for Republicans to make good on their pledge and give Fatca the heave-ho.

Amazingly, even the “taxpayer advocate” at the IRS recognizes the law is a disgrace, reversing the presumption of innocence in the Constitution.

The IRS has adopted an enforcement-oriented regime with respect to international taxpayers. Its operative assumption appears to be that all such taxpayers should be suspected of fraudulent activity, unless proven otherwise.

This is a remarkable development. I’ve groused before that the IRS’s taxpayer advocate has a bad habit of advocating for the IRS rather than the American people, so FATCA must be really bad to generate a report that actually defends the rights of taxpayers.

It’s also bad news for financial institutions.

An article in the Economist has some very remarkable admissions, including the fact that compliance costs will be at least twice as high as the tax revenue that ostensibly is being generated.

FATCA’s intrusiveness has caused concern among banks and fund managers. It raises big questions about data privacy. Compliance costs, mostly borne overseas, are likely to be at least double the revenue that the law will generate for America. The necessary overhauls of systems and procedures and the extra digging around to identify American clients could add $100m or more to a large bank’s administrative costs. No wonder bankers have dubbed FATCA the Fear And Total Confusion Act. An OECD tax official describes the law as “awful, in a way, like a nuclear bomb” but also sees it as “a remarkable leap forward for transparency”. …A further concern is the risk of misuse of information by corrupt administrations, or rogue government employees, such as the sale of personal financial data to would-be kidnappers.

It’s also revealing that an OECD bureaucrat thinks that an “awful…nuclear bomb” can be seen as a “remarkable leap forward.” I guess that’s the attitude we should expect from leftist bureaucrats who are exempt from paying tax on their own bloated salaries.

But I call it disgusting and I desperately hope that Trump gets rid of the subsidies that American taxpayers send to this parasitical Paris-based bureaucracy.

But I’m digressing.

Let’s now focus on how the law is an attack on the sovereignty of other nations (and how it creates a precedent that will be used to attack America’s fiscal sovereignty).

Some leftists justify this wretched law by saying it only targets so-called tax havens. But Trinidad and Tobago is hardly in that category. Yet because FATCA applies to the entire world, a senior official in that country very much hopes Trump will follow through on promises in the Republican platform to repeal the misguided legislation.

Kamla Persad-Bissessar, the leader of the opposition coalition in parliament, recently…discovered that the GOP had called for repeal of the Foreign Account Tax Compliance Act, or Fatca, which is best understood as a license for IRS imperialism. …Mrs. Persad-Bissessar wrote Donald Trump in January asking if he will keep this promise. …Mrs. Persad-Bissessar, a former prime minister, wants to know because the Trinidad and Tobago parliament is now considering changing the nation’s laws to accommodate Fatca.

Repeal would be good for T&T, but it also would be good for the USA.

Americans have an even bigger stake in the answer. …the law has become another example of gross federal overreach, adding another burden on Americans overseas who are already paying taxes where they live. The 2010 law has almost no parallel anywhere, for good reason. While most nations limit their taxes to income earned within their borders, the U.S. is among the smaller group of nations that taxes its citizens on global income. …The roughly eight million Americans working overseas have been hit hardest by this bad law. Some foreign banks and financial institutions have responded simply by refusing to take American customers, on grounds that Fatca requirements are more trouble than the business is worth. For similar reasons others do not want Americans as business partners. Many others of modest means who owe no U.S. taxes can still find themselves hit by hefty fines and penalties because they have fallen afoul of the reporting requirements.

Heck, even if the law isn’t repealed, Trump can defang it.

…the whole Fatca edifice has been built on the intergovernmental agreements that Treasury has negotiated with more than 100 countries—agreements for which there is no statutory authority or Congressional ratification. Mr. Trump could take the teeth out of Fatca by announcing he has suspended negotiations for future agreements and won’t enforce the ones we have. …Let’s hope President Trump gives the answer that Americans deserve, by making clear he intends to deliver on the GOP pledge to dismantle a bad law that never should have been passed.

Amen.

The law is also running into problems in Israel, another nation that hardly fits the “tax haven” definition. A Forbes columnist has a dismal assessment of this intrusive and destructive law.

…the Israeli High Court’s temporary injunction against the enforcement of America’s controversial global tax law FATCA should serve as “a wake-up call” for other nations to rethink enforcing this “toxic, flawed and imperialistic legislation,” according to the boss of a leading independent financial firm that advises high-net-worth individuals (HNWI’s) and expats globally. …“Justice Meltzer’s action should be championed,” deVere’s Green asserts, who is an outspoken critic of FATCA. “His wise caution should serve as a wake-up call for other countries to rethink enforcing this toxic, flawed, damaging legislation that is being imposed on sovereign states around the world by the U.S.” …FATCA could indeed be described as a “masterclass” in fiscal imperialism and unintended consequences. But also of concern is that the US is increasingly secret in matters of financial data. It’s no wonder some have labelled it “horrific” and a nightmare for financial institutions. …Perhaps unsurprisingly there a growing trend and an overwhelming number of U.S. citizens are giving up their American citizenship (citizenship abdications), which has been revealed by the U.S. Treasury Department. And, according to a survey conducted in early 2015 by deVere itself almost three quarters (73%) of Americans living overseas expressed the view that they were tempted to relinquish their U.S. passports.

Canada also is unhappy that the U.S. is engaging in an extraterritorial revenue grab.

Some 7m Americans outside the country (1m of them in Canada), along with an unknown number of “US persons”, are now caught in FATCA’s net. …Ms Hillis is fighting back through the courts. She and Gwen Deegan, an artist who has lived in Canada since she was five, filed a suit claiming that the Canadian government’s co-operation with FATCA violates a tax treaty and constitutional protections against discrimination. …If Ms Hillis and Ms Deegan win in court, Canada’s government will face an awkward choice between complying with the decision and exposing Canadian banks to huge penalties. The Alliance for the Defence of Canadian Sovereignty, which is paying the women’s legal expenses, has harvested donations from China, Vatican City and beyond.

These examples are why I wrote back in 2011 that Obama united the world…in opposition to bad US policy.

An article from CNBC highlights how bad the law is.

With an estimated 9 million Americans currently living overseas, the U.S expatriate community is comprised of a wide variety of people from all walks of life. ..The one nagging truth that is both common and unique to all of these individuals? They remain effectively fettered to the U.S. tax system. Unlike almost every other tax regime in the world, the U.S. taxes its citizens no matter where they reside. Thus, even if you expect never to return, you should expect to have to file an annual tax return. …As many expats can attest, it has become more difficult to open or maintain a bank account overseas without having to sign an IRS Form W-9 or other U.S. tax-related documentation. This increasingly common bank procedure is a result of the Foreign Account Tax Compliance Act, which requires foreign banks and other financial institutions, among other things, to gather and report information to the IRS about their U.S. customers or face stiff tax-withholding penalties on U.S. investments.

The last sentence is that excerpt deserves some attention. The FATCA law is so onerous that it is advantageous for many to simply not invest in the American economy.

And that means less growth and prosperity for the rest of us.

But that’s just part of the story.

Because the United States has imposed this awful law on the rest of the world, other nations now want to do the same thing. Indeed, the tax-aholics at the OECD have modified a Multilateral Convention and turned it into an Orwellian regime for promiscuous collection and sharing of data by almost every government. This scheme, sometimes referred to as the Global Account Tax Compliance Act because of its similarity to FATCA (I call it a nascent World Tax Organization), will boomerang on America because of the presumption that we’re obliged to change our tax and privacy laws so that foreign governments can tax investments in the United States.

Thankfully, Senator Rand Paul heroically is blocking this evil pact.

Let’s close with a semi-amusing description of FATCA.

But if you prefer my more dour approach, here’s what I said a few years ago about FATCA for a Chinese network.

I’ve been criticizing this awful legislation from the beginning. Hopefully Congress and the Trump Administration will give me one less thing to worry about.

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The War against Cash is a battle that shouldn’t even exist. But politicians don’t like cash because it’s hard to control something that people can freely trade back and forth. So folks on the left are arguing that governments should ban or restrict paper money.

  • In Part I, we looked at the argument that cash should be banned or restricted so governments could more easily collect additional tax revenue.
  • In Part II, we reviewed the argument that cash should be curtailed so that governments could more easily impose Keynesian-style monetary policy.
  • In Part III, written back in March, we examined additional arguments by people on both sides of the issue and considered the risks of expanded government power.
  • In Part IV, a few months ago, there was additional discussion of the dangers that would be unleashed if politicians banned cash.

Now let’s add a fifth installment in this series, and we’ll focus on the destructive turmoil resulting from India’s decision earlier this month to ban “large” notes.

The Financial Times explains what happened.

India unexpectedly scrapped all larger-denomination banknotes overnight… Prime Minister Narendra Modi said 500 and 1,000 rupee notes — worth around $7.50 and $15, respectively — would cease to be legal tender from midnight on Tuesday. The announcement stunned Indians, who were given four hours’ notice that much of their cash would be “mere paper”. RBI data suggests that the Rs500 and Rs1,000 notes account for 86 per cent of the value of all cash in circulation in India at present. …The shock move is the latest step by Mr Modi’s administration to crack down on the vast shadow economy, which remains beyond the reach of India’s tax authorities.

Before delving into why this is an unfortunate development, I can’t resist pointing out that banknotes worth $7.50 and $15 are neither large nor inappropriate for an economy at India’s level of development.

When the United States had a similar level of per-capita GDP (back in the late 1800s), there were $500 and $1000 notes. Yet America didn’t have serious problems with corruption and tax evasion. So why should the existence of far smaller bills be a problem in India today?

I’ll return to that question in the conclusion, but let’s first look at the impact of Prime Minister Modi’s unilateral attack on currency. A column in the New York Times explains why the policy does more harm than good.

On Nov. 8, the Indian government announced an immediate ban on two major bills that account for the vast majority of all currency in circulation. …In the two weeks after the measure was announced, millions of Indians stricken with small panic rushed out to banks; A.T.M.s and tellers soon ran dry. Some 98 percent of all transactions in India, measured by volume, are conducted in cash. …So far its effects have been disastrous for the middle- and lower-middle classes, as well as the poor. And the worst may be yet to come.

The ripple effect of the policy is large and unpleasant.

…demonetization is a ham-fisted move that will put only a temporary dent in corruption, if even that, and is likely to rock the entire economy. …Anyone seeking to convert more than 250,000 rupees (about $3,650) must explain why they hold so much cash, or failing that, must pay a penalty. The requirement has already spawned a new black market to service people wishing to offload: Large amounts of illicit cash are broken into smaller blocks and deposited by teams of illegal couriers. Demonetization is mostly hurting people who aren’t its intended targets. Because sellers of certain durables, such as jewelry and property, often insist on cash payments, many individuals who have no illegal money build up cash reserves over time. Relatively poor women stash away cash beyond their husbands’ reach.

As is so often the case, the bogeyman of terrorism is being used as a rationale for bad policy, even though everyone realizes that terrorists won’t be affected.

When the government announced demonetization, it also justified the measure as a way to curb terrorism financing that relies on counterfeit rupee notes… Catching fake notes already in circulation neither helps trap the terrorists who minted them nor prevents more such money from being injected into the economy. It simply inconveniences the people who use it as legal tender, the vast majority of whom had no hand in its creation.

I’m sympathetic, by the way, to the notion that the government should fight counterfeiting. Crooks printing up fake notes is even worse than central banks printing up too many real notes.

In any event, this indirect attack on the shadow economy imposes considerable costs on regular Indians.

In a country like India, where the illegal economy is so intimately intertwined with the mainstream economy, one inept government intervention against shadow activities can do a lot of harm to the vast majority, who are just trying to make a legitimate living.

Writing for Bloomberg, Elaine Ou has a negative assessment of this proposal.

India is conducting a big test of the idea that getting rid of cash can help address crime and corruption. Unfortunately, it might achieve nothing more than a lot of inconvenience. Criminals and corrupt officials often conduct business in cash, because it’s hard to trace. So in a sense it’s logical to assume that abolishing cash will help reduce criminal activity. …This rationale has led Indian Prime Minister Narendra Modi to declare a surprise cancellation of the nation’s two highest-denomination notes, effectively invalidating 86 percent of total currency in circulation. Anyone with outstanding notes must either deposit them in a bank — potentially incurring a tax — or exchange them for replacements in strictly limited sums.

Ms. Ou explains that the policy will be traumatic for the hundreds of millions of Indians who don’t have bank accounts.

In a country where most transactions are conducted in cash, many people have been unable to pay for necessities like food or medical services. Banks have had to work overtime to handle the exchange, bringing other financial services to a halt. It’s certainly likely that the sheer trauma will leave people less keen to hoard rupees, creating a big incentive to move economic activity out of cash and into banks. Except that a huge number of Indians don’t have a bank account.

In any event, she points out, banning cash won’t have much impact on corruption since politicians and public officials have plenty of ways to extort wealth from the productive sector.

…the prevalence of cash is far from a foolproof indicator of criminality and corruption. Consider Nigeria, which is perceived as one the world’s most corrupt countries and has a currency-to-GDP ratio even lower than Sweden’s… Nigerians have abandoned cash because they have so little trust in government-issued currency. Instead of using banks, they tend to transact in mobile airtime minutes. …Those with more substantial wealth put it in foreign currency. By undermining faith in its cash notes, India may go the way of Nigeria. Villagers are already resorting to barter. …corrupt public officials were believed to have their wealth in real estate and gold.

A news report highlights the real-world impact of the Indian government’s bad policy. Starting with the impact on a poor single mother.

With demonetisation, Sayyed’s family has been forced to cut costs across the board to make sure their limited cash resources don’t get exhausted faster than the banks can exchange money. “Last week it took me four hours of waiting in line to get my old notes exchanged,” said Sayyed. “And because no one had change for a Rs 2,000 note, I had to buy ration on credit for six whole days.” Vegetables and foodgrains, says Sayyed, have grown more expensive in the past 10 days, because of the impact of demonetisation on wholesalers and retailers.

And the impact on a small-business owner.

His salon, which charges Rs 40 for a haircut, used to make anywhere between Rs 1,000 to Rs 1,200 on the weekend. But now, he said, that has fallen to Rs 500. …How is he coping with this liquidity crunch? Not by going cashless. In part because he doesn’t have a bank account. “I tried to open one but they wanted too many proofs of identity,” Sharma said.

By the way, Sharma is a victim of pointless anti-money laundering laws, something even the World Bank recognizes as being particularly harmful for the poor.

A farmer also has been hit hard.

It has been three weeks since Vedagiri’s single acre of land had been tilled and paddy seedlings had been sown. …“The cooperative bank cannot lend us money now, so for the whole of last week, our crop has been standing without pesticides,” said Vedagiri. Several times last week, Vedagiri and the other farmers of Royalpattu were turned away by bank employees. New currency notes have been slow to reach most rural cooperative banks across India. While sowing the crop, Vedagiri had employed 20 labourers. But he has been unable to pay any of them since he had not still received the rest of the money…Vedagiri does not know how he will get through this cropping season without incurring a loss.

Bloomberg reports on some of the bizarre unintended consequences of this bad policy.

Indian ingenuity is being stretched by Prime Minister Narendra Modi’s cash ban to crackdown on unaccounted money. India’s cash economy has been thrown into turmoil since Modi announced last week that 500 and 1,000 rupee notes would cease to be legal tender and would have to be deposited at banks by year-end, leaving about one-seventh of currency in circulation. …Here are some unintended consequences. Indian defense jets are on standby to airlift cash from mints across India to remote corners of the country. …wealthy Indians rushed to make costly purchases with unaccounted cash. One luxury watch outlet in north-west Mumbai saw 45 units of Rolex watches sold on a single day, according to a representative of a watchmaker, who was present when the sales took place. Demand matched what the shop would usually sell in a month and the store had to turn away customers… A new gold rush also emerged soon after Modi’s announcement. “Jewelers who had shut shop for the day on Nov. 8 had to reopen their stores within a couple of hours and were selling gold up to 4 a.m.,” Chirag Thakkar, a director at gold wholesaler Amrapali Group, said by phone… Customers paid as much as 52,000 rupees per 10 grams, almost double the current prices, he said. …About half of an estimated 9.3 million trucks under the All India Motor Transport Congress were off the road eight days after the announcement as drivers abandoned vehicles mid-way into their trips after running out of cash, according to Naveen Gupta, secretary general of the group. India’s roads carry about 65 percent of the country’s freight. Drivers don’t have enough money for food, truck maintenance and to make payments at border check posts. …Compounding the problem of pumping new money into the system is the need to reconfigure the country’s 220,000 cash machines so that they can dispense the new 500 and 2,000 rupee notes, which do not fit into existing ATM cash trays.

To be fair, some of these costs are transitory in nature, so it’s important to distinguish between those consequences and others that might linger.

Though the part of this story that doesn’t make sense is that the government plans on issuing new high-value banknotes. So the Prime Minister is not actually banning large banknotes (or even all non-digital currency), which is the usual goal of the war-on-cash crowd.

So why did the Modi cause so much turmoil with an overnight ban rather than allow for an orderly transition? I’m assuming that the answer has something to do with inconveniencing those with large cash holdings, some of whom will be crooks or counterfeiters or corrupt public officials.

As already noted, the battle against counterfeit currency surely is worthwhile.

But I have considerable doubts about whether this currency swap will have much impact on the shadow economy or public corruption.

And that brings me back to the rhetorical question I posed early in this column about why the United States didn’t have massive problems with crime and public corruption back in the late 1800s (when our per-capita GDP was akin to India’s today according to the Maddison data), even though we had banknotes that were far more valuable ($500 and $1000 compared to $7.50 and $15).

The answer, at least in part, is that the United States had a very tiny government. Government spending consumed at most 10 percent of economic output, with most of that spending at the state and local level. And there was no income tax.

And since people weren’t penalized for earning money and creating wealth, there was no incentive to be part of the shadow economy. And since government was small, there weren’t that many favors to distribute, so there wasn’t much need to bribe politicians or bureaucrats.

If Prime Minister Modi wants a vibrant, above-ground economy with minimal corruption, maybe that’s the path he should follow.

Let’s close with a very sage warning from Richard Fernandez’s column in PJ Media.

Money in its various forms has become the new battleground between a State that needs to reward its constituencies with and the actual economy which produces most of the real goods and services required to do it. The sad experience of command economies suggests in end the Real always wins over the Official.  As Ramesh Thakur said of India’s demonitization policy: “a better solution would have been to shift the balance of economic decision-making away from the state to firms and consumers; simplify, rationalize and reduce taxes; cut regulations and curtail officials’ discretionary powers; eliminate loopholes; and widen the tax net.”

And my favorite Russian-Irish-Californian economist also has a very apt summary of this issue.

Remember, if the answer is more government, you’ve asked a very silly question.

P.S. If he wants more future prosperity, Modi also should make sure the government no longer attacks private schools.

P.P.S. And it also would be a good idea to reform civil service rules so that it doesn’t take two decades to get rid of no-show bureaucrats.

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When I wrote last year about “Hillary Clinton’s Plan to Increase the Cost of College,” I explained that colleges and universities boost tuition when the government hands out more subsidies to students, so the main effect is to make higher education even more expensive.

Today, let’s look at Donald Trump’s plan to increase the cost of childcare. And this is a very easy column to write because the economic consequences of Trump’s plan to make childcare expenses deductible are the same as Hillary’s misguided plan to subsidize tuition.

Let’s start with a caveat. We don’t know a lot about Trump’s new scheme. All we know is that he said in his big speech to the Economic Club of Detroit earlier today that “My plan will also help reduce the cost of childcare by allowing parents to fully deduct the average cost of childcare spending from their taxes.”

From an economic perspective, Trump’s statement doesn’t make sense. At best, creating a big deduction for childcare expenses simply creates the illusion of lower cost because of the tax loophole.

But that’s the best-case scenario. The actual result will be to increase costs and make the tax code even more convoluted.

When income is shielded from taxation, either based on how it is earned or how it is spent, that creates an incentive for taxpayers to make economically irrational decisions solely to benefit from the special tax preference. And just as the healthcare exclusion has led to ever-higher prices and ever-greater levels of bureaucracy and inefficiency in the health sector, a deduction for childcare expenses will have similar effects in that sector of the economy. Providers will boost prices to capture much of the benefit (much as colleges have jacked up tuition to capture the value of government-provided loans and grants).

Creating a new distortion in the tax code also will have a discriminatory impact. The tax loophole will only have value for parents who use outside care for their kids. Parents who care for their own kids get nothing. Moreover, the new loophole also won’t have any value for the millions of people who don’t earn enough to have any tax liability. Yet these people will be hurt when childcare providers increase their prices to capture the value of the deduction for parents with higher levels of income.

And that will probably lead politicians to make the tax loophole “refundable,” which is a wonky way of saying that people with low levels of income will get handouts from the government (in other words, “refundable” tax breaks are actually government spending laundered through the tax code, just like much of the EITC).

So we’d almost certainly be looking at a typical example of Mitchell’s Law, where one bad policy leads to another bad policy.

And when the dust settles, government is bigger, the tax code is more convoluted, and the visible foot of government crowds out another slice of the invisible hand of the market.

Remember, bigger government and more intervention is a mistake when Republicans do it, and it’s a mistake when Democrats do it.

I want fewer favors in the tax code, not more. I want rationality to guide economic decisions, not distorting tax preferences. Most of all, I don’t want politicians to have more power over the economy. I wish Trump listened to Ben Carson when putting together a tax plan.

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What’s the best measure of the tax burden on the U.S. economy?

Is it the amount of money that we’re forced to surrender to the knaves in Washington (i.e., the difference between our pre-tax income and post-tax consumption)?

Or is it the loss of economic output caused by high tax rates, distorting preferences, and pervasive double taxation (i.e., policies that reduce our pre-tax income)?

The answer is both.

But even that’s not sufficient. There’s another very big part of the tax burden, which is the complexity caused by a 75,000-page tax code that imposes very high compliance costs on taxpayers. In other words, the tax (as measured by time, resources, and energy) we pay for the ostensible privilege of paying taxes.

And this compliance tax is enormous according to new research from the Tax Foundation. The report starts with some very sobering numbers.

…In 1955, the Internal Revenue Code stood at 409,000 words. Since then, it has grown to a total of 2.4 million words: almost six times as long as it was in 1955 and almost twice as long as in 1985. However, the tax statutes passed by Congress are only the tip of the iceberg when it comes to tax complexity. There are roughly 7.7 million words of tax regulations, promulgated by the IRS over the last century, which clarify how the U.S. tax statutes work in practice. On top of that, there are almost 60,000 pages of tax-related case law, which are indispensable for accountants and tax lawyers trying to figure out how much their clients actually owe.

It then measures the burden of this convoluted system for taxpayers.

According to the latest estimates from the Office of Information and Regulatory Affairs, Americans will spend more than 8.9 billion hours complying with IRS tax filing requirements in 2016. This is equal to nearly 4.3 million full-time workers doing nothing but tax return paperwork. …in dollar terms, the 8.9 billion hours needed to comply with the tax code computes to $409 billion each year in lost productivity, or greater than the gross product of 36 states… The cost of complying with U.S. business income taxes accounts for 36 percent of the total cost of the entire tax code, at $147 billion. Complying with the individual income tax costs another $99 billion annually.

The report provides data for 50 provisions of the tax code. In the interest of brevity, here are the 10-most expensive features of the internal revenue code.

The overall $147 billion compliance cost for businesses is enormous, particularly when you consider that corporate tax revenue for Uncle Sam this year is estimated to be $329 billion. So companies have a double-whammy of enduring the developed world’s highest corporate tax rate, and they have to spend lots of money for the pleasure of that punitive system.

Another part that grabbed my attention is “Form 4562” dealing with depreciation. If you care about good policy and stronger growth, businesses shouldn’t even have to depreciate. Instead, we should have a policy of “expensing,” which is simply the common-sense approach of recognizing costs in the year they occur. So firms are paying a $23 billion-plus tax for the privilege of a policy that already punishes them for investing. Amazing.

And don’t forget the death tax, which also makes the top-10 list. The Tax Foundation points out that the compliance cost basically doubles the burden of that horrible and unfair levy.

The estate and gift tax, which will only collect approximately $20 billion in federal revenues this year, has a compliance cost of $19.6 billion.

What a mess.

So what’s the answer?

Simply stated, we should rip up the entire internal revenue code and replace it with a simple and fair flat tax.

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I recently wrote a primer on the issue of tax evasion, which is illegal. I made the elementary point that low tax rates and a simple tax code are the best (and only good) way of promoting high levels of tax compliance.

Now let’s shift to the related topic of tax avoidance, which is legal. Unlike evasion, there’s no civil disobedience and no breaking of laws with tax avoidance. It simply means that taxpayers are taking advantage of provisions in the tax code that help protect income from the government.

And we all do it.

All these things I do to lower my taxes are legal.

As Judge Learned Hand correctly opined, nobody has any obligation to deliberately overpay the government.

Tax avoidance also is moral. Tax codes are corrupt and governments waste money, so anything that reduces the flow of revenue to the public sector is helpful.

With that in mind, I want to offer a hearty defense of Mr. Cameron from the United Kingdom. But I’m not referring to David Cameron, the current Prime Minister. Instead, I want to defend Ian Cameron, his late father.

The Financial Times has a summary of what Cameron’s father did to protect against punitive taxation.

Mr Cameron’s father, Ian, was one of the founder investors. Blairmore was incorporated in Panama but based in the Bahamas. The idea was for investors to avoid an extra layer of tax because investors came from lots of jurisdictions and some, at least, would have faced double taxation if the fund had been based in a mainstream jurisdiction — firstly by the country where the fund operated, and then by the investor’s own country when he or she received his profits. …In 1982, when Blairmore was set up, offshore funds were more tax-efficient than UK funds, on which investors had to pay tax annually. …It is also possible that investors avoided paying stamp duty — a tax on the transfer of documents, including share certificates — by using bearer shares, which were exempt from the duty.

I also want to defend David Cameron’s mother, who is still alive and engaging in tax avoidance, as noted by a column in the U.K.-based Times.

He also admitted receiving a lump sum of £200,000 from his mother in 2011, eight months after his father died in September 2010. The handout, which came on top of a £300,00 legacy, could allow Mr Cameron to avoid an £80,000 inheritance tax bill if his mother lives until 2018.

This is perfectly appropriate and legitimate tax planning, and also completely moral and economically beneficial since death taxes shouldn’t exist.

Now let’s consider why David Cameron’s parents decided to engage in tax avoidance. To understand his father’s motives, let’s look at the history of British tax rates, as reported by the Institute for Fiscal Studies in a survey of the U.K. tax system released last November.

In 1978–79, there was a starting rate of 25%, a basic rate of 33% and higher rates ranging from 40% to 83%. In addition, an investment income surcharge of 15% was applied to those with very high investment income, resulting in a maximum income tax rate of 98%.

In other words, David Cameron’s father had to deal with a tax code that basically stole all his money above a certain threshold. Much of his income was earned when the top rate was 98 percent. And when he set up his offshore structures, even after Thatcher’s early reforms, his top tax rate could have been as high as 75 percent.

I frequent use “confiscatory” when talking about tax systems that grab, say, 50 percent of the additional income being earned by taxpayers, but I’m simply expressing outrage at excessive taxation. In the case of 1970’s-era England, even a leftist presumably would agree that word applies to a system that seizes 75 percent-98 percent of a taxpayer’s income (though some British statists nonetheless will applaud because they think all income belongs to the government and some American leftists also will applaud because of spite).

By the way, let’s not forget that David Cameron’s father was presumably also aware that there was lots of double taxation in the United Kingdom because of other levies such as the corporate income tax, death tax, and capital gains tax. So I shudder to think about the effective marginal tax rate that may have applied to him and other taxpayers in the absence of tax planning (maybe they paid more than 100 percent, like the thousands of unfortunate French taxpayers victimized by that nation’s wretched tax system).

The bottom line if that I’m very sympathetic to Cameron’s father, who was simply doing what was best for his family and what was best for the economy.

But I’m not exactly bubbling over with sympathy for the Prime Minister, who appears to be a puerile and shallow hypocrite. I’ve previously shared examples of his government browbeating taxpayers who don’t choose to needlessly give extra money to the government.

And now he’s caught is his own web of demagoguery.

Writing in the U.K.-based Sunday Times, Dominic Lawson has an appropriately jaundiced perspective.

Jimmy Carr must be laughing. In June 2012 the comedian was revealed by The Times as one of a number of showbiz folk to have invested in a scheme that had the effect of minimising the tax paid on their (typically volatile) income. Somehow unable to resist commenting on this story, David Cameron…told journalists that Carr’s behaviour had been “morally wrong”. …In other words: the people are angry and the prime minister wants to be with the pitchfork-waving crowd, not on the other side of the barricades. …now the PM is himself the subject of a whipped-up storm of fury… That is why, in my column of June 24, 2012 (“Cameron’s the clown in this Carr sketch”), there appeared these words: “The prime minister could not resist accusing Carr of ‘morally wrong’ behaviour, a piece of headline-grabbing he will have cause to regret.” …As a result, Cameron has now felt forced to become the first prime minister to make his tax details open to the electorate. It’s a sort of ritual humiliation, but one that will in no way appease those who regard the very idea of personal wealth as immoral. He should never have pandered to them.

Janet Daly of the U.K.-based Telegraph is similarly unimpressed with Cameron’s shallow posturing.

…there is a great mass of voters…who are very susceptible to the impression that Mr Cameron is a rich man who may possibly be a hypocrite when he denounces the tax-avoiding wealthy. …The Prime Minister and his Chancellor had put themselves in the forefront of the assault on “the rich”. This was the modern Conservative party…a major rhetorical revolution that took dangerous liberties with the vocabulary of what was being discussed. The Government began to obscure the difference between tax evasion, which is a crime, and tax avoidance…George Osborne invented a new category of sin called “aggressive tax avoidance”. This was a far nastier, more elaborate form of financial planning… Some kinds of tax avoidance are OK but other kinds are not, and the difference between them is, well, basically a matter of what kind of person you are – which is for the Government to decide. …Mr Cameron says…he has done nothing illegal or unusual… Nor, apparently, have most of the people whose private finances have been revealed to the world in the Panama Papers. …free societies should not create moral “crimes” that can put people beyond the pale when they have done nothing illegal. Mr Cameron may be about to conclude that himself.

By the way, Cameron and his people are not very good liars. Here are some more excerpts from the Times column I cited above, which explained how his mother is transferring assets to David in ways that will avoid the awful death tax.

Government sources pushed back yesterday against claims that the arrangement was a tax dodge. …“Every year hundreds of thousands of parents give money to their children,” a No 10 source said. “To suggest that by giving money to the prime minister there is somehow a tax dodge is extraordinary.” A No 10 spokesman said: “This is in no way linked to tax avoidance and it would be wrong to suggest otherwise.”

This is bollocks, as the English would say. If there was no desire to avoid an unfair and pernicious tax, Cameron’s mother could have left him that money upon her death.

Instead, she made a gift for purposes of hopefully keeping any extra money if her family rather than letting the government grab it. David Cameron should proudly embrace this modest bit of tax avoidance.

It’s definitely what I would do if I ever get to the point where I had enough money to worry about the death tax. Sadly, I don’t expect that to happen because it’s not easy for policy wonks to earn large amounts of money.

But if I ever find a big pot of money that will be around after my death, I know that I’ll want my children and the Cato Institute to be the beneficiaries, not a bunch of greedy and wasteful politicians (sorry to be redundant).

Heck, I’d leave my money to my cats before giving it to the corrupt crowd in Washington.

P.S. Rich leftists often say they want to pay higher taxes, yet they change their tune when presented with the opportunity to voluntarily give more of their money to Washington.

P.P.S. Since I quoted Judge Learned Hand on tax avoidance, I’m almost certain to get feedback from my leftist friends about the quote by Oliver Wendell Holmes about taxes being the price we pay for civilization. Allow me to preempt them by noting that Justice Holmes made that remark when the federal government consumed about 5 percent of our economy. As I wrote in 2013, “I’ll gladly pay for that amount of civilization.”

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Hillary Clinton and Bernie Sanders are basically two peas in a pod on economic policy. The only difference is that Sanders wants America to become Greece at a faster rate.

Folks on the left may get excited by whether we travel 60 mph in the wrong direction or 90 mph in the wrong direction, but this seems like a Hobson’s choice for those of us who would prefer that America become more like Hong Kong or Singapore.

Consider the issue of taxation. Clinton and Sanders both agree that they want to raise tax rates on investors, entrepreneurs, small business owners, and other “rich” taxpayers. The only difference is how high and how quickly.

Scott Winship of the Manhattan Institute has a must-read column on this topic in today’s Wall Street Journal.

He starts by speculating whether there’s a rate high enough to satisfy the greed of these two politicians.

Here is a question to ask Hillary Clinton and Bernie Sanders: What is the best tax rate to impose on high-income earners…? Perhaps they think it is 83%, a rate that economists Thomas Piketty and Emmanuel Saez hypothesized in 2014… Or maybe it is 90%, which Sen. Sanders told CNBC last May was not out of the question.

He then points out that there were very high tax rates in America between World War II and the Reagan era.

…the U.S. had such rates in the past. From 1936 to 1980, the highest federal income-tax rate was never below 70%, and the top rate exceeded 90% from 1951 to 1963. …The discussion of these rates can easily create the impression that the federal government collected far more money from “the rich” before the Reagan administration.

But rich people aren’t fatted calves awaiting slaughter. They generally are smart enough to figure out ways to avoid high tax rates. And if they’re not smart enough, they know to hire bright lawyers, lobbyists, and accountants who figure out ways to protect their income.

Which is exactly what happened.

The effective tax rates actually paid by the highest income earners during the 1950s and early ’60s were far lower than the highest marginal rates. …In the 1960s, for example, the average rate paid by the top 0.1% of tax filers—the top 10th of the top 1%—ranged from 26.5% to 29.5%, according to a 2007 study by Messrs. Piketty and Saez. Even during the 20 years after the Reagan tax cuts, the top 10th of the top 1% paid an average rate of 23.7% to 33%—essentially the same as in the 1960s.

Gee, sounds like Hauser’s Law – a limit on how much governments can tax – is true, at least for upper-income taxpayers.

And Winship provides some data showing that high tax rate are not the way to collect more revenue.

When average tax rates went up from 27.6% in 1965 to 34% in 1975, revenues went down, from 0.6% to 0.5% of the sum of GDP plus capital gains. When average tax rates declined to 23.7% over the second half of the 1970s and the ’80s, tax revenues from the top went up, reaching 0.8% of GDP plus capital gains in 1990. …in the early 1990s, Presidents George H.W. Bush and Bill Clinton raised average tax rates at the top, and revenue from the top 0.1% eventually skyrocketed. But the flood of revenue overwhelmingly reflected not the increase in rates but the stock market’s takeoff… Consider: If the higher top tax rates had caused the growth in revenue, then revenues should have fallen when Mr. Clinton cut the top tax rate on capital gains to 20% from 28% in 1997. But revenues from the top 0.1% kept pouring in.

And if you want more detail, check out the IRS data from the 1980s, which shows that rich taxpayers paid a lot more tax when the top rate was dropped from 70 percent to 28 percent.

That was a case of the Laffer Curve on steroids!

No wonder some leftists admit that spite is their real reason for supporting confiscatory tax rates on the rich, not revenue.

But what if the high tax rates are imposed on a much bigger share of the population, not just the traditional target of the “top 1 percent”?

Well, even hardcore statists who favor punitive tax policy admit that this would be a recipe for economic calamity.

Mr. Piketty said, “I firmly believe, that imposing a 70% or 80% marginal rate on large segments of the population (say, 25% of the population, or even 10%, or even a few percentage points) would lead to an economic disaster.” In other words, sayonara increased tax revenue.

Heck, even the European governments with the biggest welfare states rarely impose tax rates at those levels.

And when they do (as in the case of Hollande’s 75 percent tax rate in France), they suffer severe consequences.

Which is why the real difference in taxation between the United States and Europe isn’t the way the rich are taxed. Government is bigger in Europe because of higher tax burdens on the poor and middle class, specifically onerous value-added taxes and top income tax rates that take effect at relatively modest levels of income.

In other words, the rich already pay the lion’s share of tax in the United States. But not because we have 1970s-style tax rates, but because the tax burden is relatively modest for lower- and middle-income people.

Which brings us to Winship’s final point.

Proposals to soak the rich by raising their tax rates are unlikely to yield the revenue windfall that Mr. Sanders or Mrs. Clinton are dangling before voters. Leveling with the American people means…admitting that they will have to raise the money from tax hikes on middle-class voters.

Though he “buried the lede,” as they say in the journalism business. The most important takeaway from his column is that the redistribution agenda being advanced by Clinton and Sanders necessarily will require big tax hikes on the middle class.

Indeed, the “tax-the-rich” rhetoric they employ is simply a smokescreen to mask their real goals.

Which is why I included that argument in my video that provided five reasons why class-warfare taxation is a bad idea.

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