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Posts Tagged ‘Tax Haven’

When I wrote about the wealth tax early this year, I made three simple points.

I obviously have not been very persuasive.

At least in certain quarters.

A story in the Wall Street Journal explores the growing interest on the left in this new form of taxation.

The income tax..system could change fundamentally if Democrats win the White House and Congress. …Democrats want to shift toward taxing their wealth, instead of just their salaries and the income their assets generate. …At the end of 2017, U.S. households had $3.8 trillion in unrealized gains in stocks and investment funds, plus more in real estate, private businesses and artwork… Democrats are eager to tap that mountain of wealth to finance priorities such as expanding health-insurance coverage, combating climate change and aiding low-income households. …The most ambitious plan comes from Sen. Warren of Massachusetts, whose annual wealth tax would fund spending proposals such as universal child care and student-loan forgiveness. …rich would pay whether they make money or not, whether they sell assets or not and whether their assets are growing or shrinking.

The report includes this comparison of current law with various soak-the-rich proposals (click here for my thoughts on the Wyden plan).

The article does acknowledge that there are some critiques of this class-warfare tax proposal.

European countries tried—and largely abandoned—wealth taxes. …For an investment yielding a steady 1.5% return, a 2% wealth levy would be equivalent to an income-tax rate above 100% and cause the asset to shrink. …The wealth tax also has an extra asterisk: it would be challenged as unconstitutional.

The two economists advising Elizabeth Warren, Emmanuel Saez and Gabriel Zucman, have a new study extolling the ostensible benefits of a wealth tax.

I want to focus on their economic arguments, but I can’t resist starting with an observation that I was right when I warned that the attack on financial privacy and the assault on so-called tax havens was a precursor to big tax increases.

Indeed, Saez and Zucman explicitly argue this is a big reason to push their punitive new wealth tax.

European countries were exposed to tax competition and tax evasion through offshore accounts, in a context where until recently there was no cross-border information sharing. …offshore tax evasion can be fought more effectively today than in the past, thanks to recent breakthrough in cross-border information exchange, and wealth taxes could be applied to expatriates (for at least some years), mitigating concerns about tax competition. …Cracking down on offshore tax evasion, as the US has started doing with FATCA, is crucial.

Now that I’m done patting myself on the back for my foresight (not that it took any special insight to realize that politicians were attacking tax competition in order to grab more money), let’s look at what they wrote about the potential economic impact.

A potential concern with wealth taxation is that by reducing large wealth holdings, it may reduce the capital stock in the economy–thus lowering the productivity of U.S. workers and their wages. However, these effects are likely to be dampened in the case of a progressive wealth tax for two reasons. First, the United States is an open economy and a significant fraction of U.S. saving is invested abroad while a large fraction of U.S. domestic investment is financed by foreign saving. Therefore, a reduction in U.S. savings does not necessarily translate into a large reduction in the capital stock used in the United States. …Second, a progressive wealth tax applies to only the wealthiest families. For example, we estimated that a wealth tax above $50 million would apply only to about 10% of the household wealth stock. Therefore increased savings from the rest of the population or the government sector could possibly offset any reduction in the capital stock. …A wealth tax would reduce the financial payoff to extreme cases of business success, but would it reduce the socially valuable innovation that can be associated with such success? And would any such reduction exceed the social gains of discouraging extractive wealth accumulation? In our assessment the effect on innovation and productivity is likely to be modest, and if anything slightly positive.

I’m not overly impressed by these two arguments.

  1. Yes, foreign savings could offset some of the damage caused by the new wealth tax. But it’s highly likely that other nations would copy Washington’s revenue grab. Especially now that it’s easier for governments to track money around the world.
  2. Yes, it’s theoretically possible that other people may save more to offset the damage caused by the new wealth tax. But why would that happen when Warren and other proponents want to give people more goodies, thus reducing the necessity for saving and personal responsibility?

By the way, they openly admit that there are Laffer Curve effects because their proposed levy will reduce taxable activity.

With successful enforcement, a wealth tax has to deliver either revenue or de-concentrate wealth. Set the rates low (1%) and you get revenue in perpetuity but little (or very slow) de-concentration. Set the rates medium (2-3%) and you get revenue for quite a while and de-concentration eventually. Set the rates high (significantly above 3%) and you get de-concentration fast but revenue does not last long.

Now let’s look at experts from the other side.

In a column for Bloomberg, Michael Strain of the American Enterprise Institute takes aim at Elizabeth Warren’s bad math.

Warren’s plan would augment the existing income tax by adding a tax on wealth. …The tax would apply to fortunes above $50 million, hitting them with a 2% annual rate; there would be a surcharge of 1% per year on wealth in excess of $1 billion. …Not only would such a tax be very hard to administer, as many have pointed out. It likely won’t collect nearly as much revenue as Warren claims. …Under Warren’s proposal, the fair market value of all assets for the wealthiest 0.06% of households would have to be assessed every year. It would be difficult to determine the market value of partially held private businesses, works of art and the like… This helps to explain why the number of countries in the high-income OECD that administer a wealth tax fell from 14 in 1996 to only four in 2017. …It is highly unlikely that the tax would yield the $2.75 trillion estimated by Emmanuel Saez and Gabriel Zucman, the University of California, Berkeley, professors who are Warren’s economic advisers. Lawrence Summers, the economist and top adviser to the last two Democratic presidents, and University of Pennsylvania professor Natasha Sarin…convincingly argued Warren’s plan would bring in a fraction of what Saez and Zucman expect once real-world factors like tax avoidance…are factored in. …economists Matthew Smith, Owen Zidar and Eric Zwick present preliminary estimates suggesting that the Warren proposal would raise half as much as projected.

But a much bigger problem is her bad economics.

…a household worth $50 million would lose 2% of its wealth every year to the tax, or 20% over the first decade. For an asset yielding a steady 1.5% return, a 2% wealth tax is equivalent to an income tax of 133%. …And remember that the wealth tax would operate along with the existing income tax system. The combined (equivalent income) tax rate would often be well over 100%. Underlying assets would routinely shrink. …The tax would likely reduce national savings, resulting in less business investment in the U.S… Less investment spending would reduce productivity and wages to some extent over the longer term.

Strain’s point is key. A wealth tax is equivalent to a very high marginal tax rate on saving and investment.

Of course that’s going to have a negative effect.

Chris Edwards, in a report on wealth taxes, shared some of the scholarly research on the economic effects of the levy.

Because wealth taxes suppress savings and investment, they undermine economic growth. A 2010 study by Asa Hansson examined the relationship between wealth taxes and economic growth across 20 OECD countries from 1980 to 1999. She found “fairly robust support for the popular contention that wealth taxes dampen economic growth,” although the magnitude of the measured effect was modest. The Tax Foundation simulated an annual net wealth tax of 1 percent above $1.3 million and 2 percent above $6.5 million. They estimated that such a tax would reduce the U.S. capital stock in the long run by 13 percent, which in turn would reduce GDP by 4.9 percent and reduce wages by 4.2 percent. The government would raise about $20 billion a year from such a wealth tax, but in the long run GDP would be reduced by hundreds of billions of dollars a year.Germany’s Ifo Institute recently simulated a wealth tax for that nation. The study assumed a tax rate of 0.8 percent on individual net wealth above 1 million euros. Such a wealth tax would reduce employment by 2 percent and GDP by 5 percent in the long run. The government would raise about 15 billion euros a year from the tax, but because growth was undermined the government would lose 46 billion euros in other revenues, resulting in a net revenue loss of 31 billion euros. The study concluded, “the burden of the wealth tax is practically borne by every citizen, even if the wealth tax is designed to target only the wealthiest individuals in society.”

The last part of the excerpt is key.

Yes, the tax is a hassle for rich people, but it’s the rest of us who suffer most because we’re much dependent on a vibrant economy to improve our living standards.

My contribution to this discussion it to put this argument in visual form. Here’s a simply depiction of how income is generated in our economy.

Now here’s the same process, but with a wealth tax.

For the sake of argument, as you can see from the letters that have been fully or partially erased, I assumed the wealth tax would depress the capital stock by 10 percent and that this would reduce national income by 5 percent.

I’m not wedded to these specific numbers. Both might be higher (especially in the long run), both might be lower (at least in the short run), or one of them might be higher or lower.

What’s important to understand is that rich people won’t be the only ones hurt by this tax. Indeed, this is a very accurate criticism of almost all class-warfare taxes.

The bottom line is that you can’t punish capital without simultaneously punishing labor.

But some of our friends on the left – as Margaret Thatcher noted many years ago – seem to think such taxes are okay if rich people are hurt by a greater amount than poor people.

P.S. Since I mentioned foresight above, I was warning about wealth taxation more than five years ago.

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Why do I relentlessly defend tax competition and tax havens?

Sadly, it’s not because I have money to protect. Instead, I’m motivated by a desire to protect the world from “goldfish government.”

Simply stated, politicians have a “public choice” incentive for never-ending expansions of government, even if they actually understand such policies will lead to Greek-style collapse.

Speaking at a recent conference in Moldova, I explained why tax competition is the best hope for averting that grim outcome.

In my remarks, I basically delivered a results-based argument for tax competition.

Which is why I shared data on lower tax rates and showed these slides on what politicians want compared to what they’ve been pressured to deliver.

Likewise, I also talked about reductions in the tax bias against saving and investment and shared these slides on what politicians want compared to what they’ve been pressured to deliver.

There’s also a theoretical side to the debate about tax competition and tax havens.

In a 2013 article for Cayman Financial Review, I explained (fairly, I think) the other side’s theory.

…there also has been a strain of academic thought hostile to tax competition. It’s called “capital export neutrality” and advocates of the “CEN” approach assert that tax competition creates damaging economic distortions. They start with the theoretical assumption of a world with no taxes. They then hypothesize, quite plausibly, that people will allocate resources in that world in ways that maximise economic output. They then introduce “real world” considerations to the theory, such as the existence of different jurisdictions with different tax rates. In this more plausible world, advocates of CEN argue that the existence of different tax rates will lead some taxpayers to allocate at least some resources for tax considerations rather than based on the underlying economic merit of various options. In other words, people make less efficient choices in a world with multiple tax regimes when compared to the hypothetical world with no taxes. To maximise economic efficiency, CEN proponents believe taxpayers should face the same tax rates, regardless of where they work, save, shop or invest. …One of the remarkable implications of capital export neutrality is that tax avoidance and tax evasion are equally undesirable. Indeed, the theory is based on the notion that all forms of tax planning are harmful and presumably should be eliminated.

And I then explained why I think the CEN theory is highly unrealistic.

…the CEN is flawed for reasons completely independent from preferences about the size of government. Critics point out that capital export neutrality is based on several highly implausible assumptions. The CEN model, for instance, assumes that taxes are exogenous – meaning that they are independently determined. Yet the real-world experience of tax competition shows that tax rates are very dependent on what is happening in other jurisdictions. Another glaring mistake is the assumption that the global stock of capital is fixed – and, more specifically, the assumption that the capital stock is independent of the tax treatment of saving and investment. Needless to say, these are remarkably unrealistic conditions.

Since economists like numbers, I even created an equation to illustrate whether tax competition is a net plus or a net minus.

Basically, the CEN argument is only defensible if the economic inefficiency associated with tax minimization is greater than the economic damage caused by higher tax rates, plus the damage caused by more double taxation, plus the damage caused by a bigger public sector.

Needless to say, honest empirical analysis will never support the CEN approach (as even the OECD admits).

That being said, politicians and special interests are not overly sympathetic to my arguments.

Which is why I very much identify with the guy in this cartoon strip.

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

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I’m currently in the Cayman Islands, which is one of my favorite places since – like Bermuda, Monaco, Vanuatu, Antigua and Barbuda, and a few other lucky places in the world – it has no income tax.

At the risk of stating the obvious, the absence of an income tax has helped make the Cayman Islands very prosperous, 14th-richest in the world according to the latest data from the World Bank on per-capita economic output (top 10 in the world if you exclude oil-rich jurisdictions).

This does not mean, incidentally, that economic policy is perfect in the Cayman Islands.

There is a overly large and excessively compensated government bureaucracy. Indeed, financing the civil service is becoming such a burden that the Cayman Islands almost made a suicidal decision to impose an income tax earlier this decade.

And the absence of an income tax doesn’t mean an absence of taxes. Here’s a chart from a 2010 report on the jurisdiction’s fiscal challenges. Yes, the tax burden is low compared to many nations, but the government nonetheless collects plenty of revenue from import duties, fees on financial services, and tourism.

But the key thing to understand is that not all taxes are created equal. Some levies impose much more damage than others.

Richard Rahn, a fellow member of the Cayman Financial Review editorial board, explained this insight a few years ago in a column for the Washington Times.

Cayman is prosperous… Critics of Cayman and other offshore financial centers call them “tax havens,” ignoring the fact that they all have many taxes, particularly on consumption — which is good tax policy — rather than on productive labor and capital — which is bad tax policy. The statist political actors in the high-tax jurisdictions will not admit that people do not work, save and invest if they are going to be overly taxed and otherwise abused by their own governments.

And it’s also worth noting that the Cayman Islands are a role model for racial tranquility.

There are people from 135 nations and “mixed” is the largest racial category.

Here are some excerpts from a column published by Forbes about the progressive social structure of the Cayman Islands.

Somebody recently said to me “The Cayman Islands is just a mailbox.”  I started wondering if that was fair. The Cayman Islands are a real places where people live.  And they are not all attorneys and accountants, although they do have more than their fair share.  …a big upside to the Caymans. …Mr. Leung, who is of Asian descent, noticed a whiff of it in Scotland, but finds the Caymans utterly devoid of racism.  Pirates, refugees, shipwrecked sailors and enslaved people might not seem to be the best material to start a country to some, but clearly there is an upside.

I’ll close by noting that there is some trouble in paradise.

The Cayman Islands faces unrelenting pressure from international bureaucracies and high-tax nations. There is a lot of resentment because the jurisdiction is so successful.

The Cayman Islands will not be bullied by countries that cannot compete with this jurisdiction on a level playing field, Premier Alden McLaughlin told an audience… He said that despite the Cayman government’s cooperation on international standards, the Netherlands and others are more concerned about the zero tax rate here. …“But we will not be bullied by those who are jealous of our success, resentful of our tax policies and unable to compete with us on a level playing field,” McLaughlin said.

What makes these attacks so ironic and unfair is that the Cayman Islands actually has much tougher standards than “onshore” nations such as the United States and United Kingdom.

Since I began this column by looking at World Bank data on the most prosperous, let’s wrap up by perusing the U.N.’s numbers.

Hmmm…, lots of so-called tax havens are on this list. I wonder if we can draw any conclusions?

Folks on the left have accused me of “trading with the enemy” for supporting these jurisdictions, but the real story is that we should emulate rather than prosecute these low-tax jurisdictions.

P.S. My affection for the Cayman Islands is mutual.

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My long-running feud with the Paris-based Organization for Economic Cooperation and Development could be categorized as a fight over tax compliance.

The bureaucrats at the OECD say that financial privacy must be eviscerated and the fiscal sovereignty must be wiped out so that high-tax governments can track and tax money around the world.

My view is that pro-growth reforms like the flat tax would be a much better approach. With a simple and fair tax code that doesn’t impose extra layers of tax on saving and investment, the IRS no longer would need to know about our bank accounts or investment funds – regardless of whether they are based in Geneva, Illinois, or Geneva, Switzerland.

Though I view better compliance as a secondary benefit. My main goal is to have a tax system that doesn’t impose needlessly high levels of economic damage.

But let’s stick with the compliance issue. Writing for E21, Daniel Di Martino explains that the Italian government makes evasion and avoidance a preferable option because tax rates are too onerous.

Italy’s problem, similar to many of its southern-European neighbors, is an oppressively high tax burden, irresponsible welfare programs that encourage high measured unemployment and increase the debt, and high levels of regulation. …the share of average wages collected by the Italian government via income and social security taxes is among the highest in the OECD at 48 percent. In addition, Italy imposes a value-added tax of 22 percent on most goods and services, one of the highest in Europe. Plus, Italy’s corporate, capital gains, gift, and myriad other taxes are passed on to individuals and borne directly by workers. These high taxes lead to a growing shadow economy, where people underreport work to avoid paying taxes. …many estimates point to more than  $175 billion (€150 billion) in lost tax revenue.

So what’s the best way of addressing that nation’s huge shadow economy?

Simple, less government.

Instead of cracking down on tax evasion and the shadow economy, Italy’s new government needs to rethink long-standing policies to bring a real economic recovery. Taxes need to be lowered so more businesses open and already-existing businesses and individuals come out of the shadows, broadening the tax base and raising revenue. This would allow those in the shadow economy to expand their businesses. Additionally, the welfare state should be trimmed so that people do not have an incentive to stay unemployed and young Italians are less burdened by government debt. Moreover, Italy needs to become more competitive by slashing the number of regulations.

The Institut Economique Molinari in Belgium took a look at the same issue, but included data for all European Union nations.

Economic reasoning and international experience point invariably to common causes that consistently create obstacles to dealings in the official economy: prohibitions, compulsory levies and specific tax measures, as well as fastidious and complex regulations. …As noted by two specialists, “In almost all studies, one of the most important causes (…) is the rise of the tax and social security burdens.” The higher these burdens on labour relations and dealings in the official economy, the less profitable these dealings become and the greater the incentive to trade on the black market. …As long as taxes account for a high share of the final price, opportunities for profit are provided in the underground economy, which moves in on a long‐term basis and comes to account for a significant share of countrywide sales. …Increasing this tax burden can only increase the disconnection between the real production cost of goods and their price on the official market, to such a degree that consumers begin abandoning the official market on a larger scale.

So what’s the answer?

Definitely not more government.

Given the scope of the underground economy, public authorities generally suggest toughening the means of repression so as to collect more tax revenues. The justification for this repression remains the same: it would promote the transfer of all under ground activity to the legal market, thereby creating new tax revenues. Beyond the cost of this repression in terms of resources and bureaucratisation of the economy, this reasoning and the resulting forecasts are erroneous. Though certain activities may no longer be undertaken in the underground economy, they will not be undertaken in the official economy either — in part or even in whole, depending on the specific case — because of the burden of compulsory levies and regulations. …Increased repression by the public authorities, without any change in regulatory and tax frameworks, risks simply destroying economic activities and the associated revenues. The only long‐lasting solution for ending the underground economy consists of dealing with the causes that give rise to it and thus to free the official market from its fiscal and regulatory burdens. …there is no other choice but to lighten tax and regulatory burdens.

Let’s now cross to this side of the Atlantic Ocean.

In an editorial about the current and former Treasury Secretary and their Cayman investments, the Wall Street Journal highlighted hypocrisy. But the best part was the conclusion about bad government policy driving money away from America.

Mr. Mnuchin served as director of Dune Capital, an investment firm he said he registered in the Caymans primarily to “accommodate nonprofits and pensions that want to invest through these off-shore entities.” By contrast, Mr. Lew was personallyinvested in the Citigroup Venture Capital International Growth Partnership II. You know, like that evil profiteer Mitt Romney, the subject of a now infamous Barack Obama campaign ad scoring Mr. Romney for profiting from money in offshore havens such as the Caymans. Mr. Lew’s Cayman company even used the same Ugland House building in the Caymans that President Obama so famously trashed as an “outrage” and “tax scam.” …The Democratic goal…seemed to be to get Mr. Mnuchin to admit that investors go to the Caymans to avoid American taxes. Mr. Mnuchin denied it but needn’t have been so shy. The Caymans have no corporate tax rate. The way to deal with the Caymans is not to punish investors who go there but to get rid of the regulations and high tax rates that send capital offshore.

But it’s not just market-friendly organizations that realize high tax burdens bolster the underground economy.

The International Monetary Fund released a study earlier this year on the shadow economy, which is defined as legal activities that are hidden from government.

The shadow economy includes all economic activities which are hidden from official authorities for monetary, regulatory, and institutional reasons. Monetary reasons include avoiding paying taxes and all social security contributions, regulatory reasons include avoiding governmental bureaucracy or the burden of regulatory framework, while institutional reasons include corruption law, the quality of political institutions and weak rule of law. For our study, the shadow economy reflects mostly legal economic and productive activities that, if recorded, would contribute to national GDP.

And what causes people to hide legal activity from government?

Here are some of the factors that drive the shadow economy according to the IMF.

In other words, people are less likely to comply when they have to endure bad government policy.

…in most cases trade openness, unemployment rate, GDP per capita, size of government, fiscal freedom and control of corruption are highly statistically significant.

And the number one bad government policy is high tax rates.

Let’s close by looking at the other side’s arguments.

Earlier this month, I revealed that the OECD finally admitted that it’s anti-tax competition project was motivated by a desire for class warfare and bigger government.

That’s terrible policy, but I give the bureaucrats in Paris credit for finally being honest.

By contrast, I’m not sure what to say about the bureaucrats in Brussels. The European Commission’s idea of an argument is this vapid video, which attempts to convince viewers that 20 percent of what they like is missing because government isn’t collecting more tax revenue.

In reality, of course, the money isn’t “missing.” It’s still in the private sector, where it actually is providing things that people like, rather than financing the stuff politicians like.

P.S. Speaking of vapid arguments from the European Commission, the bureaucrats actually created an online game designed to brainwash kids into supporting higher tax burdens.

P.P.S. The Wall Street Journal’s editorial mentioned Ugland House in the Cayman Islands. That’s the building that featured in some of Barack Obama’s dishonest demagoguery.

P.P.P.S. I’m still mystified that Republicans continue to send our tax dollars to Paris to subsidize the OECD. Actually, I’m not mystified. This is actually a good example of why they’re called the Stupid Party.

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

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

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

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

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

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

Zuluaga notes that tax competition ties the hands of politicians.

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

And here is the aforementioned Figure 2 from the report.

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

So I made the following correction.

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

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

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

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

Excellent points. I strongly recommend reading the entire publication.

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

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

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

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

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

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

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

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

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

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

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

Which is a point I’ve made as well.

And here’s his conclusion.

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

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

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

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

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I almost feel guilty when I criticize the garbled economic thoughts of Pope Francis. After all, he was influenced by Peronist ideology as a youngster, so he was probably a lost cause from the beginning.

Moreover, Walter Williams and Thomas Sowell have already dissected his irrational ramblings on economics and explained that free markets are better for the poor. Especially when compared to government dependency.

But since Pope Francis just attacked tax havens, and I consider myself the world’s foremost defender of these low-tax jurisdictions, I can’t resist adding my two cents. Here’s what the Wall Street Journal just reported about the Pope’s ideological opposition to market-friendly tax systems.

The Vatican denounced the use of offshore tax havens… The document, which was released jointly by the Vatican’s offices for Catholic doctrine and social justice, echoed past warnings by Pope Francis over the dangers of unbridled capitalism. …The teaching document, which was personally approved by the pope, suggested that greater regulation of the world’s financial markets was necessary to contain “predatory and speculative” practices and economic inequality.

He even embraced global regulation, not understanding that this increases systemic risk.

“The supranational dimension of the economic system makes it easy to bypass the regulations established by individual countries,” the Vatican said. “The current globalization of the financial system requires a stable, clear and effective coordination among various national regulatory authorities.”

And he said that governments should have more money to spend.

A section of the document was dedicated to criticizing offshore tax havens, which it said contribute to the “creation of economic systems founded on inequality,” by depriving nations of legitimate revenue.

Wow, it’s like the Pope is applying for a job at the IMF or OECD. Or even with the scam charity Oxfam.

In any event, he’s definitely wrong on how to generate more prosperity. Maybe he should watch this video.

Or read Marian Tupy.

Or see what Nobel Prize winners have to say.

P.S. And if the all that doesn’t work, methinks Pope Francis should have a conversation with Libertarian Jesus. He could start here, here, and here.

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According to bureaucrats at the Paris-based Organization for Economic Cooperation and Development, so-called tax havens are terrible and should be shut down. Their position is grossly hypocritical since they get tax-free salaries while pushing for higher taxes on everyone else, but not very surprising since the OECD’s membership is dominated by increasingly uncompetitive European welfare states.

Many economists, by contrast, view tax havens favorably since they discourage politicians from over-taxing and over-spending (thus protecting nations from “goldfish government“).

I agree with this economic argument for tax havens, but I also think there’s a very strong moral argument for these jurisdictions since there are so many evil and incompetent governments in the world.

But I don’t want to rehash the argument about the desirability of tax havens in this column. Instead, we’re going to focus on a nation that is becoming the world’s premier “offshore” center.

But it’s not a Caribbean island or a micro-state in Europe.

Instead, as noted in a recent Bloomberg editorial, the United States is now the magnet for global investment.

…the U.S. is becoming one of the world’s best places to hide money from the tax collector. …Congress rejected the Obama administration’s repeated requests to make the necessary changes to the tax code. As a result, the Treasury cannot compel U.S. banks to reveal information such as account balances and names of beneficial owners. The U.S. has also failed to adopt the so-called Common Reporting Standard, a global agreement under which more than 100 countries will automatically provide each other with even more data than FATCA requires. …the U.S. is rapidly becoming the new Switzerland. Financial institutions catering to the global elite, such as Rothschild & Co. and Trident Trust Co., have moved accounts from offshore havens to Nevada, Wyoming and South Dakota. New York lawyers are actively marketing the country as a place to park assets. …From a certain perspective, all this might look pretty smart: Shut down foreign tax havens and then steal their business.

The Economist also identified the U.S. as a haven.

America seems not to feel bound by the global rules being crafted as a result of its own war on tax-dodging. It is also failing to tackle the anonymous shell companies often used to hide money. …All this adds up to “another example of how the US has elevated exceptionalism to a constitutional principle,” says Richard Hay of Stikeman Elliott, a law firm. …America sees no need to join the CRS. …reciprocation is patchy. It passes on names and interest earned, but not account balances; it does not look through the corporate structures that own many bank accounts to reveal the true “beneficial” owner; and data are only shared with countries that meet a host of privacy and technical standards. That excludes many non-European countries. …The Treasury wants more data-swapping and corporate transparency, and has made several proposals to bring America up to the level of the CRS. But most need congressional approval, and politicians are in no rush to enact them. …Meanwhile business lobbyists and states with lots of registered firms, led by Delaware, have long stymied proposed federal legislation that would require more openness in corporate ownership. (Incorporation is a state matter, not a federal one.) …America is much safer for legally earned wealth that is evading taxes… It has shown little appetite for helping enforce foreign tax laws.

And here are some passages from a recent column in Forbes.

…foreign financial institutions are required to report the identities and assets of United States taxpayers to the IRS. Meanwhile, U.S. financial institutions cannot be compelled to reveal the same information to foreign countries. Additionally, the United States has not adopted the Common Reporting Standard. …So, the United States government obtains tax and wealth information from other countries, but fails to share information about what occurs in the U.S. with those other counties. …the U.S. is among the top five best countries for setting up anonymous shell companies. Tax havens deliver a set of benefits including secrecy, potential tax minimization, and the ability of the wealthy to access their monies from anywhere in the world. For a substantial percentage of the global super-rich, the United States is regularly unmatched.

Here’s some of what was reported by the U.K.-based Financial Times.

South Dakota is best known for its vast stretches of flat land and the Mount Rushmore monument… Yet despite its small town feel, Sioux Falls has become a magnet for the ultra-wealthy who set up trusts to protect their fortunes from taxes… Assets held in South Dakotan trusts have grown from $32.8bn in 2006 to more than $226bn in 2014, according to the state’s division of banking. The number of trust companies has jumped from 20 in 2006 to 86 this year. The state’s role as a prairie tax haven has gained unwanted attention… The Boston Consulting Group estimates that there is $800bn of offshore wealth in the US, nearly half of which comes from Latin America. …Bruce Zagaris, a Washington-based lawyer at Berliner, Corcoran & Rowe, says the US offshore industry is even bigger than people realise. “I think the US is already the world’s largest offshore centre. It has done a real good job disabling competition from Swiss banks.”

If this sounds like the United States is hypocritical, that’s a very fair accusation.

Indeed, it was the topic of an entire panel at an Offshore Alert conference. If you have a lot of interest in this topic, here’s the video.

This is an odd issue where I agree with statists (though only with regard to which jurisdictions are “havens”). For instance, the hard-left Tax Justice Network has calculated that the United States is not the biggest offshore jurisdiction. But America is close to the top.

In the TJN’s most-recent Financial Secrecy Index, the United States ranks #2. They think that’s a bad thing (indeed, one of their top people actually asserted that all income belongs to the government), but I’m happy we’ve risen in the rankings.

TJN also has specific details about U.S. law and I think they’ve put together a reasonably accurate summary.

The bottom line is that America is a haven, though it’s probably worth noting that we’ve risen in the rankings mostly because other nations have been coerced into weakening their human rights laws on financial privacy, not because the United States has improved.

At the risk of pointing out the obvious, TJN and I part ways on whether it’s good for the United States to be a tax haven.

I already explained at the start of this column why I like tax havens and tax competition. Simply stated, it’s good for taxpayers and the global economy when governments are forced to compete.

But there’s also a good-for-America argument. Here’s the data from the Commerce Department’s Bureau of Economic Analysis on indirect investment in the U.S. economy. As you can see, cross-border flows of passive investment have skyrocketed. It’s unknown how much of this increase is due to overall globalization and how much is the result of America’s favorable tax and privacy rules for foreigners.

But there’s no question the U.S. economy benefits enormously from foreigners choosing to invest in America.

All of which helps to explain why it would be a big mistake for the United States to ratify the OECD’s Multilateral Convention on Mutual Administrative Assistance in Tax Matters.

Unless, of course, one thinks it would be good to undermine American competitiveness by creating a global tax cartel to enable bigger government.

P.S. The OECD doesn’t like me, but I don’t like them either.

P.P.S. The TJN folks and OECD bureaucrats claim that their goal is to reduce tax evasion. My response is that a global tax cartel is a destructive way of achieving that goal. There’s a much better option available.

P.P.P.S. Rand Paul is one of the few heroes on this issue.

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