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Tuesday

20

June 2023

The OECD’s International Tax Overhaul Reaches A Pivotal Moment

Written by , Posted in Taxes
Originally published in IFC Review

Efforts to radically reorganise global corporate taxation passed a major milestone when the European Union unanimously agreed to implement Pillar 2, the 15 per cent global minimum tax component of the Organisation for Economic Cooperation and Development’s (OECD) dual-pillared campaign, at the end of last year. While the 138 nations then in the “Inclusive Framework on Base Erosion and Profit Shifting (BEPS)” reached agreement in October 2021 on the minimum tax, along with the Pillar 1 system reallocating tax rights to jurisdictions in which companies make sales but have no physical presence, there were questions regarding if and when domestic implementation would begin to follow.

Can low-tax jurisdictions finally rest easy? Sure, they will have to adjust to the new minimum tax and other rules, but is the bureaucratic hand-wringing from the G20 and OECD finally at an end? Perhaps it is, but how often is a crocodile really appeased if you feed it just one hand?

First, there’s the whole business of finalising specific rules and seeing them implemented in participating nations. This process is not guaranteed to succeed, with challenges surrounding the details of Pillar 1 looking particularly daunting. But even beyond that, history simply doesn’t lend itself to the idea that the high-tax jurisdictions driving the OECD agenda will be satisfied with gains from completing the BEPS project.

Motivations Behind BEPS

The whole effort began with a fairytale; namely, that corporate tax revenues were dwindling and something just had to be done or nations would be left impoverished. This is the so-called “race to the bottom” repeated ad nauseam by tax ministers and an unquestioning media. The evidence never supported this claim, as corporate tax revenues as a share of GDP among developed nations have stayed fairly level over time.

Corporate tax rates, on the other hand, have certainly changed. Tax competition brought about by cuts from Reagan and Thatcher led to decades-long reductions in statutory corporate tax rates across the developed world. The process also saw an explosion in the number of flat tax regimes and reductions in other particularly damaging taxes such as those on estates and wealth. But growth effects from adopting less economically destructive tax systems ensured that revenues did not similarly plummet.

Why did reductions in corporate tax rates that didn’t result in similar reductions in revenues prove so upsetting to tax collectors that they undertook a two-decades long war on tax competition? Part of the explanation is an ideologically driven preference for higher tax rates regardless of their revenue impact, but is that enough to explain the doggedness of the OECD’s quest to eradicate tax competition? Perhaps. But more parochial interests might also provide some insight.

The OECD claims to be operating in the interests of its collective membership. But any agreement reached on international taxes is guaranteed to have winners and losers, and I don’t think anyone will be surprised when the winners turn out to be the same bloc of European nations driving the organisation’s agenda.

Moreover, while claims of a race to the bottom and a subsequent dirth of tax revenues have proven false, it’s still likely the case that they might be able to collect more revenue if not for the fiscally disciplinary role of tax competition, and are thus resentful.

Just how much more are we talking? A recent IMF paper[i] claims that the reform “modestly raises global tax revenues,” and the OECD estimates Pillar 2 will raise around US$220 billion spread among all governments. There’s reason to suspect that figure is overstated, but even if it’s not, it pales in comparison to the over US$22 trillion spent collectively by OECD nations each year. Estimates produced by nations looking at the impact of domestic implementation range from 3-10 per cent increases in average corporate tax collection. Corporate taxes, however, make up a relatively small share of revenue for most governments—less than 10 per cent on average among OECD members.

Quite frankly, the estimated revenue figures are nothing less than an indictment of the entire endeavour.

Have bureaucrats really been hyperventilating for decades about a “race to the bottom” for their massive and very costly solution only to raise a measly one per cent of the wealthiest nation’s annual spending? The level of political dishonesty this reveals ought to be criminal.

When you consider all the evidence, it’s clear that European welfare states are concerned not just with growing corporate tax collections, but also in redistributing that revenue for their benefit. They want offshore financial centres and other nations that seek to provide regimes hospitable to business to host less of the overall economic activity so that their bloated welfare states can get more.

Will Others Follow The EU?

According to its claims, the OECD is a consensus-based organisation. It makes use of this concept to counter arguments against imposing onerous requirements on OFCs and low-tax countries. But it’s disingenuous. Low-tax jurisdictions still routinely find themselves blacklisted by the EU and attacked by its member countries despite spending years and large sums of money to comply with OECD standards. The OECD employs peer reviews to assess how well offshore jurisdictions abide by its regulatory and information sharing requirements, but no such procedure is in place for high-tax countries that engage at the OECD level in bad faith by reaching agreements only later to impose unilaterally more stringent requirements.

Given this reality, it’s fair to ask if and when smaller jurisdictions will stop playing by the rules of the game as imposed by and for the advantage of European welfare states. Will OFCs and low-tax jurisdictions ever coordinate among themselves to build a political counterweight to the emerging global tax cartel, or is perpetual appeasement the only remaining strategy?

At least for the near future, the United States is unlikely to follow Europe’s lead. Efforts to implement the agreement last year failed in the narrowly controlled Democratic Senate. It has even less chance after Republicans took power in the House and a competitive presidential election now looms. Several Republican leaders recently wrote a forceful letter contending that the Biden administration acted beyond its authority in the OECD negotiations, promising “Congress [will not] sit idly by as U.S. companies and profits are taxed in a manner inconsistent with U.S. law and our bilateral tax treaties.”

It will take more nations than just the EU to make the system work. The key element of Pillar 2, and the most galling from a perspective of fiscal sovereignty, are the “top-up” taxes in which participating nations increase tax collection on behalf of non-participating nations that tax profits at less than 15 per cent.

While appearing a clever mechanism that would allow the OECD to put the final nail in the coffin of tax competition, “top-up” taxes should be understood as just a raid on corporate coffers by another name. Economic activity in one jurisdiction doesn’t suddenly become a valid basis for taxation by an uninvolved jurisdiction simply because the one hosting the activity chooses not to tax it.

It’s nothing less than a frontal assault on the Westphalian system. No amount of false consensus will ever give it legitimacy.

The path to implementing Pillar 1, meanwhile, looks even more fraught. The agreement putting a moratorium on digital service taxes expires at the end of the year, and nations may start imposing their own taxes if the OECD has not by then completed a multilateral convention. Incompatible expectations among participants might make the details of a final rule impossible to agree upon. One interesting question then arises: If Pillar 1 falls apart, is there even enough momentum for Pillar 2 to reach the critical mass it needs?

What Comes Next

As if the variables presented thus far don’t paint a chaotic enough picture, another organisation lurks in the shadows. The United Nations agreed last year to a resolution expanding the organisation’s role on international tax. The move represents a direct challenge by developing nations to the work of the OECD as directed by rich welfare states. It’s likely that whatever comes from the United Nations will be worse as a matter of policy, but its mere emergence is an existential threat to the tax division of the OECD as it shatters the myth of consensus the organisation relies upon.

Of course, the UN has a long track record of dysfunction and incompetence, so it’s entirely possible that nothing comes of its upstart tax efforts and the OECD continues its work as planned. Let’s say it even succeeds despite the many remaining challenges. What follows?

Notably there are other ways for nations to compete than just on tax. Which makes you wonder, if the OECD gets everything it wants on taxation and there’s no advantage left for nations imposing little to no corporate tax, will they be satisfied? Or will a “regulatory race to the bottom” become the next manufactured crisis, with the inevitable calls for regulatory harmonisation following soon thereafter?

Saturday

20

May 2023

Accounting Board Should Resist Politicizing Tax Disclosure Rules

Written by , Posted in Taxes
Originally published in DC Journal

The politicization of governmental, industry and social institutions is a growing concern. Widespread distrust in institutions is straining social order and undermining the stability of American society. Unfortunately, the Financial Accounting Standards Board (FASB) has decided to risk its credibility by proposing tax-disclosure requirements that serve the interests of politicians rather than the investors it exists to inform.

The FASB is a private sector, non-profit organization that develops financial accounting and reporting standards used by organizations that adhere to the Generally Accepted Accounting Principles (GAAP). It is recognized by the U.S. Securities and Exchange Commission as the accounting standard setter for public companies, giving its standards the force of law. Its mission is “to establish and improve financial accounting and reporting standards to provide useful information to investors.”

The proposed changes to international tax disclosures undermine that mission.

The new rules would require businesses to provide jurisdiction-by-jurisdiction reporting of effective income tax rates. However, this information would come with no context to render it beneficial to investors. After all, similar effective tax rates between two or more jurisdictions can reflect very different tax strategies and cash-flow risks, and those political and economic environments need to have nothing in common. To the typical investor, the proposed disclosures are thus more noise than signal.

It’s important to remember that the purpose of these disclosures is only to provide investors with decision-useful information. Imposing significant compliance costs to accommodate disclosure requirements that fail to benefit investors is not within the scope of the FASB’s or SEC’s authority.

If not to benefit investors, for what purpose are the updated disclosure rules being considered? It seems noteworthy that some congressional Democrats, including Bernie Sanders and Elizabeth Warren, have authored multiple letters to FASB urging that GAAP rules be updated to their benefit. Specifically, they argue that the additional tax disclosures “will inform future policy debates and lead to better outcomes.”

This is an open admission that FASB is being pressured to serve political interests. But what “better outcomes” do they even have in mind? Higher taxes, of course. They favorably cite the efforts of the G-20, which has pushed the Organisation for Economic Co-operation and Development to form a global tax cartel aimed at harmonizing tax rates by intimidating and punishing low-tax jurisdictions.

Far from benefiting investors as some congressional Democrats claim, the new disclosure requirements would disadvantage U.S. firms and harm shareholders compared to their international competitors. It would provide foreign tax collectors, including those in jurisdictions with competing state-owned enterprises, an irresistible opportunity to craft rules aimed specifically at extracting profits from U.S.-owned firms.

The threat of abusive or inappropriate use of taxpayer data is why nations typically require tax information exchange agreements with specific protocols governing the use of taxpayer information before such data can be demanded by foreign tax authorities. Unilaterally imposing requirements on U.S. firms to broadcast this information not only obliterates these protections but does so in an uncompetitive, one-sided fashion.

It’s not unusual for the FASB to be responsive to government requests from the SEC, which has statutory authority to set requirements for financial statements but has chosen since the FASB’s establishment in 1973 to rely on the accounting industry to maintain those standards. However, the purpose of those requests was ostensibly to clarify or improve reporting standards for the benefit of investors, per FASB’s mission. The new tax disclosure rules would have the opposite effect. 

The FASB should not succumb to political pressure to serve the interests of tax hikers. The proposed requirements for jurisdiction-by-jurisdiction reporting should be withdrawn.

Thursday

22

December 2022

Congress Should Give Taxpayers the Gift of Ending Rum Subsidies

Written by , Posted in Big Government, Taxes
Originally published in Washington Examiner

While most of the country is preparing for the festive season by hanging decorations, budgeting shopping trips, and scheduling family get-togethers, a flurry of activity is commencing in Washington, D.C., for a different kind of yearly ritual — the debate over tax extenders. Before Santa arrives, Congress hopes to compile its own naughty and nice list. But instead of handing out either presents or lumps of coal, legislators might be deciding whose special tax provisions scheduled to expire can stay for another year and who will go without.

The whole business of yearly tax extenders ought to be put to rest. While not every individual provision is bad, those that are worth keeping should be made permanent. Everything else should be allowed to expire for good.

Consider the “Rum Cover-Over,” which is weird Washington jargon for laundering excise taxes through the federal government and back to the relevant jurisdiction of production. In this case, it means that of the $13.50 per proof-gallon of federal taxes collected on distilled spirits, $13.25 from rum produced in Puerto Rico and the U.S. Virgin Islands is returned to the two territories. The permanent cover-over rate is $10.50, but since 1999 an additional $2.75 has been added on a “temporary” basis that has been extended ever since.

When the program was created in 1917, the aim was to help financially stabilize the island territories. But as usual, unintended consequences have soured the effort.

The normal effect of excise taxes is to lower demand, which is why lawmakers often apply them to unpopular goods. But when the revenue collected is attached to a desirable goal, or at least one perceived so by lawmakers, it leads to a perverse incentive for lawmakers to encourage more consumption for the sake of increasing tax revenue.

With the Rum Cover-Over, there is an even worse incentive problem. Revenues collected from Puerto Rico and the U.S. Virgin Islands are returned to each, but on top of that, the much larger rum tax receipts collected from everywhere else are also shared between the jurisdictions, distributed based on the relative production between the two. This means that if one jurisdiction produced 75% of their total combined rum output, it gets 75% of the outstanding tax revenue for that period.

This has, unsurprisingly, led to an arms race of rum production between Puerto Rico and the U.S. Virgin Islands, subsidized by redirecting an ever-growing share of cover-over revenue directly to producers. So, while the legislative intent was to benefit the islands, its actual effect over a century later is a massive distortion of markets and the lining of industry pockets.

Rum producers long ago figured out that they can play the two territories against one another to maximize their take of the grift. Now, as much as 40-50% of the funds provided through the Rum Cover-Over program are used to subsidize production. Together, two large global distillers — Bacardi and Diageo — receive $300 million in corporate handouts each year. And according to the Congressional Budget Office, the program will cost $7.1 billion over the next 10 years.

We’d all be better off if yearly congressional traditions benefited taxpayers themselves instead of providing taxpayer-funded gifts for favored interests. Paring back the Rum Cover-Over by letting the recurring “temporary” increase expire is a modest start. More significant reform to limit subsidies to producers, or even full repeal, would be a true Christmas miracle.

Friday

2

September 2022

The Coming Crypto Regulations And Their Dangers

Written by , Posted in Cryptocurrency & Digital Assets
Originally published in IFC Review

Although created well over a decade ago, the cryptocurrency industry is still very much nascent. That said, the pace of adoption has rapidly accelerated in recent years, forcing policymakers to finally think about how to establish a legal and regulatory framework for the sector.

The full list of issues implicated by mainstream adoption of cryptocurrency that lawmakers will need to address are too numerous to list, but what follows are four of the most significant areas in which they are being forced to provide rules and guidance, along with the ways in which their efforts may be warped to serve either other industry participants or governments themselves instead of consumers and the economy as a whole.

Stablecoins

Stablecoins have a vital role in the functioning of the current cryptocurrency ecosystem. Intended to maintain the value of a reserve asset, such as the US dollar, they are frequently used by traders as they enter and exit positions. Stablecoins are also used for borrowing and lending through decentralised finance, for money transfers, or as a less volatile option than other cryptocurrencies to escape from unstable or tyrannical governments.

Different types of stablecoins offer their own pros and cons and may require different regulatory approaches. Asset-backed stablecoins like Tether (USDT), Circle’s USD Coin (USDC), and MakerDAO’s DAI are over-collateralised – by fiat reserves in the case of USDT and USDC, and by other cryptocurrencies in the case of DAI. The latter is an example of a decentralised stablecoin that operates solely through interaction with smart contracts. In contrast, centralised coins like USDT and USDC are seen by some crypto natives as more vulnerable to abuse or mismanagement.

Algorithmic stablecoins are another type of coin that seek to maintain their peg through the regulation of supply rather than backing by fiat or crypto assets. Before its famous implosion in May and the loss of its peg, Terra’s UST was the third largest stablecoin by market cap and the most successful algorithmic stablecoin to date. That success, in turn, meant its eventual collapse – in what some suspect was a coordinated attack – was all the more devastating to the market. Crypto hedge fund Three Arrows Capital was heavily invested in Terra and subsequently bankrupted. Lenders Voyager Digital and Celsius have also gone under.

What are regulators likely to make of all this? The answer depends upon the degree to which lawmakers might seek to exploit events to their favour.

Whether Terra was deliberately attacked or merely poorly conceived doesn’t much matter. In the end a financial innovation was attempted and ultimately found wanting. That could be considered the market working as intended, albeit messily.

The policy risk is that lawmakers become risk-adverse and overregulate to the point of stifling innovation. A Biden administration report issued late last year warned of potential systemic risks to the US financial system and called for “legislation [to] provide for supervision on a consolidated basis; prudential standards; and, potentially, access to appropriate components of the federal safety net,” but also that “would prohibit other entities from issuing payment stablecoins.”

Stablecoins were always going to end up in the sights of regulators sooner rather than later given their broad financial implications. The fact that money-issuing is in direct competition with a function on which governments prefer to maintain a monopoly, however, raises concern that lawmakers may be motivated by more than just consumer protection or the health of financial sectors.

The UK is promising legislative action soon, and among US lawmakers, there appears consensus that the lack of regulatory clarity is a problem. Whether that problem is addressed through modest steps, like recent legislation introduced by Sen. Pat Toomey to mandate audits, or a more sweeping overhaul – and assertion of broad government control over the issuance and management of stablecoins – remains to be seen.

Securities Or Commodities

The question of whether or when to treat cryptocurrencies as securities is hardly new but remains far from settled. For instance, the inability of US agencies to craft and articulate clear guidance often leaves Americans singled out by crypto companies fearful of being tangled up in an onerous and arbitrary system of regulation by enforcement.

The ongoing prosecution of Ripple is a case in point. Its native token, XRP, is alleged by the Securities and Exchange Commission (SEC) to be an unregistered security. But the agencies’ case is muddied by inconsistent statements, opaque criteria, and persistent government defiance of judicial orders. As a result, no one has any clue what constitutes a security in the US when it comes to cryptocurrencies, which is not a competitive place for any country to be in.

The SEC also has denied every request to establish a spot Bitcoin Exchange Traded Fund (ETF), allowing only for futures ETFs thus far. Many want access to a fund that holds actual Bitcoin and that can be bought and sold in tax-advantaged retirement or investment accounts, and there’s reason to believe that providing a spot ETF in the US would open the market to institutional and retail investors currently on the sidelines.

Part of the problem is a lack of clear lines of authority. If Bitcoin is a commodity, for instance, then the Commodity Futures Trading Commission has primary jurisdiction, and the SEC would need to collaborate to approve an ETF. But given that the SEC has said that its concerns involve potential for market manipulation and consumer protection, and that one way they see to address those concerns would be for exchanges to essentially open all their data to the SEC, it appears to be more a question of expanding the financial surveillance state and protecting agency power.

Tired of the agency’s games, Grayscale Investments has a lawsuit pending against the SEC regarding its continued denial of spot approvals. A ruling is expected within a year and could even force the legislators to act in a more concerted manner rather than waiting for a court to act for them. It’s worth noting that Canada, Singapore, Brazil, and Australia have approved spot ETFs without issue.

The best thing for the market and its participants would be clear and simple rules that don’t impose onerous compliance burdens. The consistent refusal of the SEC to provide any such rules, or even comply with judicial orders to supply deliberative documents, raises questions about whose interest the agency is serving.

Anti-Money Laundering

At the end of June, the EU announced initial agreement on anti-money laundering rules for cryptocurrency transactions. The rules would require customer identity verification for all transfers, no matter the size, when made between regulated service providers. However, after significant industry backlash following a proposal in March to expand the bill to include transactions between unhosted wallets, meaning those managed by individuals instead of through an exchange or other provider, they were left out of the final proposal.

For now, the EU won’t require money laundering checks on all payments to private wallets. But there’s no reason to think regulators won’t push for more once they get the current proposal across the line. The history of anti-money laundering rules is one of constant expansion despite considerable evidence that the rules simply do not work.

Financial crime expert Ronald Pol concluded in a study published last year that global anti-money laundering efforts could be “the world’s least effective policy experiment.” Compliance costs for banks and other businesses, as much as US$180 billion per year according to a survey of professional published by LexisNexis, dwarf the amount of illicit money captured.

Efforts to impose this failed regime on cryptocurrency are explainable in two primary ways. First, legacy financial institutions, having largely given up on improving their own situation, want to saddle crypto start-ups with the same onerous rules that have so bloated much of today’s financial infrastructure and left it unrewarding for consumers. Second, governments see crypto as a threat to long-standing efforts to impose perpetual and pervasive financial surveillance.

The EU has for decades propelled global efforts to eradicate financial privacy and require jurisdictions to enable widespread surveillance, often under the guise of furthering tax collection. So aggressive has been this effort that it has all but consumed the agenda of the Organisation for Economic Cooperation and Development in recent decades.

Contrary to much conventional wisdom, there’s little evidence that cryptocurrency is much used for moving illicit funds. Most coins are ill-suited for it given that every transfer is publicly posted. All it takes is one connection of an individual to a particular account and entire transaction histories can be reconstructed. Government-issued cash currencies are much more attractive to serious criminals.

Decentralised Finance

The emergence of decentralised finance (DeFi) probably represents the most consequential development in the sector since Bitcoin’s creation. Smart contracts that operate on transparent rules allow for lending and borrowing without need for middlemen and all the costly infrastructure that they require.

Right now, DeFi is primarily used by crypto investors to leverage the value of other crypto assets without disposing of them. But it’s only a matter of time until the gap between real world assets and digital representation is bridged and anyone has access to these tools.

Lawmakers will face significant challenges attempting to accommodate such disruptive technology in a sector as heavily regulated as finance. First, they’ll need to acquire the expertise necessary to even understand the issues at play. Then they’ll need to navigate an influx of special interest pressure from an industry that may not be keen to allow emergence of a technology that renders much of their existing infrastructure worthless while offering consumers faster service and higher returns.

Moreover, how does the tendency of regulators to impose the responsibility of enforcement on private actors work when an industry is automated and decentralised? And how will the “code is law” ethos of crypto stand up to scrutiny from existing legal systems?

Conclusion

There are many more legal and regulatory issues surrounding cryptocurrencies than mentioned here. Most countries, for instance, treat cryptocurrencies as assets, but El Salvador and the Central African Republic consider Bitcoin to be legal tender. What knock on effects will we see if and when other countries follow suit? But how the aforementioned issues are approached by lawmakers and regulatory authorities, and whether they prioritise innovation and growth over government control and self-interest, will determine how the next decade of cryptocurrency development unfolds.

Thursday

2

April 2020

Will The US Find An Effective Response To OECD “Digital Tax” Effort?

Written by , Posted in Taxes
Originally published in IFC Review

Negotiations within the Organisation for Economic Cooperation and Development (OECD) to reach agreement on new rules governing taxation of cross-border economic activity have been underway for some time now, yet only in recent months has the Trump administration adopted a consistently combative stance, particularly with regard to nations pursuing their own unilateral digital services taxes (DST).

The lack of a comprehensive response to the OECD’s rapid march toward a radical rethinking of the principles of corporate taxation, and even statements offering support for the initiative, suggests that the Trump administration lacks a full appreciation of the agenda of the OECD and its dominant European membership, as well what that means for both US interests and the global economy.

Contextualising The OECD Focus On Digitalisation

While the digitalisation project seemed to emerge suddenly, along with an aggressive self-imposed timeline, it is best understood as the latest front in a decades-long war against tax competition that reflects the OECD’s evolution from an agency primarily concerned with encouraging trade and eliminating double taxation to one preoccupied with advancing the interests of rich, European welfare states.

An out-growth of the Base Erosion and Profit Shifting (BEPS) project, the OECD’s digital tax initiative has arguably surpassed the rest of BEPS in scope and significance, as it seeks nothing less than a fundamental rewrite of the principles of international taxation. No longer would physical presence serve as the foundation for tax obligations should the OECD get its way. Instead, taxing rights would be allocated by some yet-to-be-determined formula based on where customers, or end users, are located. Replacing the physical presence standard with a destination-based system would reduce the efficacy of jurisdictions providing low tax rates to attract mobile capital, resulting in higher global tax burdens.

This is what the members driving the OECD agenda have long desired. In 1998 the OECD released a report called “Harmful Tax Competition: An Emerging Global Issue.” The authors were open about their goals to eliminate tax competition because it “may hamper the application of progressive tax rates and the achievement of redistributive goals”. Essentially, tax competition thwarts the policy preferences of high-tax welfare states.

The Trump Administration Takes Notice

The OECD identified two avenues to pursue as part of the digital tax project. Both Pillar 1, which seeks to reallocate corporate profits based on sales instead of physical location, and Pillar 2, which seeks a global minimum tax rate, serve to limit the effects of tax competition. The Trump administration, however, is primarily treating the issue as a raid on American tech companies rather than a systemic attempt to alter the global tax landscape. In so far as France and others are designing their DSTs to almost exclusively hit American firms, they’re not wrong that US-based firms are being singled out. But they risk missing the big picture.

Earlier this year, as France worked toward implemented a DST, the Trump administration threatened significant retaliatory tariffs. This approach was not unreasonable as the DST is itself a form of tariff, and the US Trade Representative concluded, after an investigation. that it was discriminatory. The threats of retaliation succeeded in getting France to back off, at least until the end of the year.Treasury Secretary Steven Mnuchin even expressed support for the minimum global corporate tax rate, defying the traditional position of Republican administrations in favour of tax competition. “It’s something we absolutely support,” he said in Paris, “that there’s not a chase to the bottom on taxation.” This mirrors the language of OECD loyalists who have long complained that competition would lead to an elimination of corporate tax revenues despite all empirical evidence to the contrary.

The tech industry’s position is to oppose DSTs at the national level while pushing for an OECD agreement. As Mark Zuckerberg explained on behalf of Facebook, “We want the OECD process to succeed so that we have a stable and reliable system going forward”. This seems to be the logic that has guided the Trump administration’s response thus far. Unfortunately, the industry position is myopic and plays right into the hands of the high-tax nations.

It’s understandable that businesses seek consistency over a patchwork of changing tax systems, even at the cost of higher tax burdens. But the US is not a business and thus can afford to consider the larger picture. Simply put, acceding to the OECD process amounts to rewarding high-tax nations for using threats and coercion to hijack the global agenda.

Playing Hardball With The OECD

The OECD purports to be a consensus-based organisation. It uses this idea to deflect criticisms that come from placing onerous burdens on IFCs and low-tax jurisdictions. But it’s an illusion. Despite jumping through years of costly hoops to satisfy OECD requirements, IFCs still find themselves blacklisted by the EU and attacked by its member nations. The OECD uses peer-review to judge the degree to which IFCs comply with its regulatory and information sharing requirements, but no such process exists for high-tax nations who engage at the OECD level in bad faith by reaching agreements only to then unilaterally impose stiffer requirements.

Even the threat of such action distorts the multilateral process. High-tax European nations have hung the Sword of Damocles over the global economy in the form of threats to impose unilateral taxes on the gross receipts of international businesses. The OECD is dependent upon these threats to advance its agenda, as they drive otherwise reluctant parties to the bargaining table. To emphasise the point, Director of the OECD’s Centre for Tax Policy and Administration Pascal Saint-Amans warned, “There’s no plan B. There is a plan C – for chaos. And I believe that”. Translation: Agree to our terms, or else.

Despite benefiting from high-tax nations controlling the agenda through threats to impose confiscatory taxes, the arrangement erodes the OECD’s credibility over time. IFCs ought, by now, to see that they will not satisfy the rich welfare states until they are completely unable to compete. The US should similarly recognise that engaging in the OECD process at this point only serves to perpetuate a cycle of bad faith negotiation.

The Trump administration attempted to thread the needle with a “safe harbour” proposal that would essentially have allowed multinational corporation to choose the current rules or the new international tax system featuring apportionment and global minimum taxes. Almost needless to say, this went nowhere. Corporate avoidance of confiscatory taxes is precisely what the high-tax cabal seeks to eliminate.

There is a better approach available to the Trump administration. It should reach out and coordinate with IFCs and low-tax jurisdictions, and together they should inform the OECD that it has strayed well beyond its original mission and make clear that they refuse to agree to any attempt to move toward tax harmonisation. This will force the OECD to confront the hypocrisy of its self-proclaimed consensus model, while also effectively calling the bluff of France and other nations threatening to place tariffs on foreign digital services. Let them and their citizens bear the brunt of the economic pain they desire instead of outsourcing the dirty work to the OECD.

Friday

2

August 2019

Blacklists, Unilateral Action Test the Credibility of the OECD

Written by , Posted in Taxes
Originally published in Cayman Financial Review

If you read any new tax policy reports produced by the Organisation for Economic Cooperation and Development (OECD), or listen to its public communications, you are likely to encounter the word “consensus” repeatedly. Sensitive to historic criticisms, the organisation works hard to portray its activities as fundamentally cooperative in nature.

For the OECD and other international organisations that might claim authority to adjudicate particular policy questions, this is not merely public relations. Their very legitimacy is at stake.

The loss of credibility on an issue of primary focus, like international tax rules for the OECD, would spell doom for their relevancy and effectiveness. To understand the importance of this emphasis on consensus, and how recent events have brought it into question, let’s briefly review key developments in OECD history.

OECD focuses on tax competition

The OECD mission is “to promote policies that will improve the economic and social well-being of people around the world”. For a while, this meant in practice that it primarily facilitated trade and addressed double taxation issues. At the tail end of the last century, however, mission creep saw the OECD shift its focus to restricting tax competition, culminating in release of the 1998 report ‘Harmful Tax Competition: An Emerging Global Issue’.

Among other things, authors of the report worried that tax competition “may hamper the application of progressive tax rates and the achievement of redistributive goals”, and considered it harmful if a country was “poaching” investment through use of attractive tax policies.

The report was heavily criticised, particularly within the United States. Congress wrote letters and called hearings, with some questioning the wisdom of annual dues payments to the OECD. Once in office, the Bush administration stridently opposed the anti-tax competition effort. Low-tax jurisdictions also resented the assault on their fiscal sovereignty. Eventually, the OECD was forced to relent. While the project was not exactly abandoned, it never came close to the scale its supporters once envisioned. But instead of quitting, the OECD retooled and revamped its efforts.

How the OECD eventually succeeded

Today, OECD documents and officials routinely reference tax competition in a negative light, bemoan a so-called “race to the bottom”, or otherwise fret over the prospect of low or zero tax rates on certain income. One of the proposals under consideration with the OECD’s work on digitalisation is a global minimum tax, the Holy Grail for high tax nations. So how did we get from the retreat after the Harmful Tax Competition report to the current low point?

Two factors largely explain how the OECD was able to turn things around. First, they stopped challenging tax competition head on and went at it sideways. They made their focus tax transparency and promoted information sharing, knowing full well that this would enable tax administrators to expand their reach into other jurisdictions, leading to pressure for new OECD initiatives to coordinate their efforts. Only after this process was firmly entrenched did they become so emboldened as to begin targeting tax competition openly, such as with the BEPS project.

Second, the OECD undercut the primary objection of low-tax jurisdictions by bringing them into the process. This is where the importance of consensus was introduced. No longer could the targeted jurisdictions complain about violations of fiscal sovereignty if they were part of the decision-making process, the thinking went. The desire to emphasise this arrangement explains goofy project names like the Inclusive Framework on BEPS.

Mitigating the stigma of the OECD as a collection of rich welfare states dictating policy to smaller nations has proven effective. To comply with various OECD ‘standards’, low-tax jurisdictions have drastically altered their laws, joined the requisite number of tax treaties and submitted themselves to the OECD peer-review process. Silly as its name may be, the Inclusive Framework can tout a membership of 130 nations. From the OECD’s perspective, this has all worked wonderfully, except for one looming problem.

A one-sided consensus

Even though low-tax jurisdictions have spent years jumping through the OECD’s hoops, they find themselves targets once again as high-tax nations launch new attacks. Years after the OECD removed the last nation from its list of Uncooperative Tax Havens, the EU in 2017 unveiled a list of Non-Cooperative Tax Jurisdictions, a.k.a. ‘tax havens’. At its unveiling, the list consisted of 17 blacklisted and 47 grey-listed jurisdictions. By June 2019, it was still 11 blacklisted and 36 grey-listed.

Just as the EU’s tax haven blacklist undermines the Global Forum on Transparency and Exchange of Information for Tax Purpose, another proposed list sought to undercut the Financial Action Task Force (FATF). A so-called “dirty money blacklist” targeted 23 countries for failing to meet their standards on money laundering and terrorist financing, the domain of the FATF.

Although the European Commission failed to get the support of its member nations, more activity on the issue is expected. The EU’s tax haven list failed when it was first introduced as well, so the setback provides only small comfort.

The problem is not just that low-tax nations face a sort of double jeopardy, where they might satisfy the OECD but still find themselves labelled “non-cooperative” by the EU or others. It is also that threatening more extreme measures is a way for high-tax nations to dictate terms to the OECD. We are witnessing that very process unfolding on the issue of digital taxes.

In promising a report by the end of 2020, the OECD has adopted an extremely aggressive timeline for its work to reach a “consensus” solution to taxing digital activity, one even Pascal Saint-Amans, the director of the OECD’s Centre for Tax Policy and Administration, thinks “may prove difficult”. They have no choice to be hasty, as France and other high-tax nations have placed Damocles Sword over the global economy by establishing or pursuing their own digital services taxes.

A promise to remove the tax and replace it with the international standard once one is reached is not enough to mitigate the effect of imposing their own tax. They have already forced a negotiation timeline that might have otherwise allowed for more discussion and debate.

If a “consensus solution” is reached that is less burdensome than their current rules, they can just keep them anyway should they choose. Despite this, the OECD pretends that France is just one member no different than any other, negotiating on equal footing and in good faith.

The fundamental issue is that the OECD’s enforcement mechanisms only really work in one direction. There is no peer review process for determining whether a participant nation is making more onerous demands on its neighbours than those it agreed to within the OECD process. There’s no blacklist of rogue blacklisters.

The perception of consensus is thus one big illusion. Low-tax jurisdictions can feel like they have some say in the OECD process, but each high-tax nation gets to decide for itself whether to respect the agreed upon standard or demand more. Just how inclusive can such a process ever be? Unless the OECD polices nations that impose burdens on top of the agreed upon standards, it will never truly be a consensus-based organization. But so long as it can maintain the fiction of inclusion, it will at least remain a powerful tool for high-tax nations in their war on tax competition.

Monday

22

July 2019

Don’t Expand “Buy American,” End It

Written by , Posted in Economics & the Economy

Last Monday President Trump signed yet another “Buy American” Executive Order proposing significant changes for procurement rules. The EO encourages the Federal Acquisition and Regulatory (FAR) Council to expand the scope of the Buy American Act, a Hoover-era mandate that appeals to Trump’s mercantilist sensibilities, by making it more difficult for products to be classified as American made.

Enacting new standards to determine whether a product qualifies as “domestic” or “foreign,” if agreed to by FAR Council, could upend the supply chains of federal contractors. The EO order calls for the Eisenhower-era standards that consider a product to be “domestic” if more than 50% of the components (by cost) are of U.S. origin to be updated to a 55% requirement, and for the FAR Council to consider whether it should be increased over time until the requirement is for at least 75% U.S. components. However, it is also proposes a separate standard of 95% U.S. sourced components for iron and steel products. That’s a huge potential change for contractors

It matters whether a good is labeled “foreign” or “domestic” because the latter are given a “price evaluation preference,” where foreign sourced products are considered 6% (or 12% if the domestic competition is a small business) more expensive than they actually are. This means awarding contracts to firms with domestic source goods in some cases even when they are not offering the best price. Trump’s EO seeks to increase those price advantages from 6% to 20%, and from 12% to 30% for small businesses, potentially saddling taxpayers with much higher costs.

Cato’s Daniel Ikenson has previously explained the folly of “Buy American”:

When we artificially reduce the pool of qualified suppliers or the variety of eligible supplies that can satisfy procurement requirements, projects cost more, take longer to complete, and suffer from lower quality. Only a basic understanding of supply and demand is required to see that limiting competition for procurement projects ensures one outcome: taxpayers get a smaller bang for their buck.

Sure, some U.S. companies will win bids, hire new workers, and generate local economic activity. What will be less visible — but every bit as real — are the contracts denied numerous other U.S. businesses and workers because the resources have been stretched and depleted to satisfy restrictive procurement rules. Some U.S. companies and some U.S. workers may benefit, but the real value of public spending  — the actual products and services procured — will decline.

According to Trump, “The philosophy of my administration is simple. If we can build it, grow it or make it in the United States, we will.” This mindset, by ignoring the insights of comparative advantage, leaves us worse off than if competition was allowed to occur the same across national boarders as it does within them.

Think about your individual household. It is likely that a greater proportion of your food intake could be grown at home (for most, it’s currently zero percent). But would farming that food really be the most valuable use of your time? Any time spent farming is time not spent producing something else of value. For most, the decision not to grow food at home is the rational choice. We’d all be worse off if those people were forced by politicians, either directly or through manipulation of incentives, to make a different choice. Just because we can farm at home, in other words, doesn’t mean we should (but if you like it, go for it!).

As explained by Econlib:

The magic of comparative advantage is that everyone has a comparative advantage at producing something. The upshot is quite extraordinary: Everyone stands to gain from trade. Even those who are disadvantaged at every task still have something valuable to offer. Those who have natural or learned absolute advantages can do even better for themselves by focusing on those skills and buying other goods and services from those who produce them at comparatively low cost.

A consequence of this is that the more entities with which we have to trade the fewer different activities we each need to do, i.e. the more we are able to specialize. Consider a household again, this time adding a new roommate who is really good at folding clothes. Previously, the tenets each took turns doing the laundry. But since the new roommate is so much better at the task than anything else, they’ve now got laundry duty to themselves. Another roommate who used to clean dishes and share laundry duty now just does the dishes. There are more dishes to clean than before because there is another person using them, but they no longer need to fold laundry at all. They’re perfectly capable of doing so, mind you, but it’s not the most efficient arrangement when considering each roommate’s comparative advantage.

Similarly, just because Americans are capable of doing more of something, doesn’t mean we should. Contra Trump, not everything that can be built or grown in the United States should be. As more and more of the world becomes connected, others will gain comparative advantages at tasks we used to do at home. Instead of doing those tasks, we’ll do other tasks where we have the comparative advantage. And everyone will be better off.

The great thing about this process⁠—or one of them, anyway⁠—is that it doesn’t require planning. Prices do pretty much all the work, showing us who is able to produce a particular good at the lowest opportunity cost. Unless, of course, politicians add distortions or otherwise muck it up with misguided “Buy American” protectionism.

Cross-posted at CF&P.

Monday

4

February 2019

OECD Not Up to Fighting Modern Trade Challenges

Written by , Posted in Big Government, Foreign Affairs & Policy, Free Markets
Originally published in Cayman Financial Review

The global trade system is under assault thanks in large part due to the election of Donald Trump as U.S. president. His pledge to “put America first” has been carried out through tariff hikes, U.S. withdrawal from the Trans-Pacific Partnership (TPP), an attempt to replace NAFTA with a new agreement featuring added protectionism, particularly on the automotive industry, and threats to withdraw from the World Trade Organization.

The danger is exacerbated by the concurrent global rise of illiberal populism, along with its distrust of foreigners and skepticism of multilateral trade agreements. It would be beneficial for there to exist a global body focused on responding to these anti-trade headwinds.

Unfortunately, the most obvious choice – the Organization for Economic Cooperation and Development (OECD) – has drifted so far from its original mission as to no longer be up to the task.

Future of global trade uncertain

It is possible that the Trump administration represents an aberration, both within the U.S. and globally. It is likely, for instance, that the next U.S. president will be more favorable toward trade, which opinion polling shows has gained popularity among the American electorate under Trump, though whether Democrats maintain their newfound appreciation for free trade after Trump remains to be seen.

And perhaps the rest of the world will continue making progress on economic liberalization without the U.S., as happened when the other nations involved in the TPP negotiations formed their own pact after the U.S. withdrew its signature.

But other more concerning possibilities exist. Populist movements are spreading, particularly in Europe where support for populist parties has been steadily growing for 20 years, well before the emergence of Trump. Should they gather enough momentum, the liberal global order may be in real trouble.

The yellow vest protest in France have turned violent, and while hard to pin down ideologically, appear increasingly hostile to “globalism.” Populist candidates have also recently won elections in Brazil, Italy, and Hungary, among others. Trade has not played a significant role in all these cases, with cultural or other domestic issues often proving more salient, but the very rise of illiberalism is inherently threatening to open trade.

The OECD response to these developments, unfortunately, has proven disappointing. Instead of returning to its roots by refocusing on its core mission to foster economic cooperation and open global markets, the OECD has gotten only more ideological and doubled-down on its misguided commitment to expansive government.

The OECD became tax bullies

Pervasive mission creep at the OECD began in earnest with its efforts to limit what it considers “harmful tax practices.” In Cartelizing Taxes: Understanding the OECD’s Campaign against “Harmful Tax Competition,” published by the Columbia Journal of Tax Law, Andrew Morris and Lotta Moberg trace how the OECD’s involvement in tax policy evolved from an “initial focus on finding solutions to problems that impeded international economic activity to a focus on protecting a few states’ abilities to collect revenues at the expense of other states.”

The shift from primarily reducing the friction between the different trade and tax policies of member nations to actively pressuring non-OECD members – in particular, low-tax jurisdictions and offshore financial centers – into adopting policies favorable to the high-tax membership of the OECD has proven consequential. For global tax policy, it has meant a steady erosion of financial privacy rights and the proliferation of intergovernmental information sharing, first on demand but more recently on an automatic basis.

It has also produced a massive global undertaking on corporate taxation through the Base Erosion and Profit Shifting (BEPS) project. Even though global corporate tax revenues had not declined, the OECD insisted BEPS was urgently needed and for years now has devoted considerable resources to the project, with no letup in sight. And the newest tax-related obsession of the OECD is digitalization, itself an outgrowth of BEPS, as the OECD is deeply concerned with the prospect that any future economic activity might occur unimpeded by the frantic grasping of tax collectors.

Expanding well beyond tax

Since Morris and Moberg published their study in 2012, the OECD’s ideologically-motivated drift has only accelerated. That same year, the OECD started its “Inclusive Growth” project in partnership with the left-wing Ford Foundation. Inclusive Growth, which prioritizes relative measures of prosperity like inequality over absolute welfare, has become a top focus of OECD activity, providing the framework through which a growing number of policy analyses and recommendations are delivered. This in turn has allowed the organization to expand into all manner of policy areas, such as climate change, gender politics, healthcare and diversity.

Its work on tax policy has also degraded, with it increasingly recommending destructive changes. The Framework for Policy Action on Inclusive Growth, for instance, lauds “redistributive fiscal policy,” and calls for higher death, gift, and capital gains taxes. Such recommendations often place the OECD’s increasingly prominent political arm at odds with its own economists.

Conclusion

Morris and Moberg concluded that the OECD “offers an arena for networking and informal opportunities for changing sentiments without media scrutiny,” and noted the convenience offered by an organization incorrectly considered to consist solely of “technocrats not under the political influences that many of their peers in other organizations are.” They predicted, “as long as politicians show a willingness to pursue policies through the OECD, the people of the organization will seek to expand the mission of the organization and form it to an even more attractive arena for making policies.”

Boy, were they right. In blowing past the boundaries of its founding mission and diving into contentious domestic policy debates, the OECD has undermined its authority on trade. While it has by no means dropped trade from its agenda, the OECD today lacks the focus and drive necessary to face the growing challenges to globalization. As a result, there is a gaping void in the space the OECD once occupied at a time when the world desperately needs a force capable and willing to fight to preserve and strengthen real economic cooperation.

Wednesday

31

October 2018

OECD vs. OECD: Political Appointees Diverge From Economic Experts

Written by , Posted in Big Government, Economics & the Economy, Taxes
Originally published in Cayman Financial Review

One of the major challenges in combating the OECD’s work to undermine tax competition and eliminate financial privacy is that the organization operates in relative obscurity compared to its better-known counterparts like the UN, IMF and World Bank. Outside of the technocrats who work on wonky tax issues and who are more likely to identify with their fellow bureaucrats than taxpayers, decision makers know little about the organization.

What knowledge that lawmakers and their staff do possess is typically limited to the organization’s original mission to promote economic cooperation and its role as a repository for world economic statistics and the accompanying analyses it provides. The OECD’s activist arm has successfully repurposed the credibility earned through these activities to advance with little resistance an ideological agenda that is often not only against the interests of taxpayers, but that is at odds with the findings of the organization’s own analysts.

The OECD generates hundreds of studies each year on economics, taxes and trade, among other topics. While the authors of these papers ultimately speak only for themselves and not the organization, it seems reasonable to expect that those promoting best policy practices would pay heed to the findings of the OECD’s own expert scholars. Sadly, that often is not the case.

On corporate taxes

When it comes to taxing corporations, the OECD’s Centre for Tax Policy and Administration has been leading the charge to ensure that tax collectors are able to reach into corporate coffers as deep and often as desired. To justify its Base Erosion and Profit Shifting (BEPS) program, the OECD sounded the alarm on disappearing corporate tax revenues, due to firms working to minimize their tax burdens, despite the OECD’s own report showing that average corporate tax revenues across the OECD have increased over time.

OECD ministers cited “massive revenue losses” from “aggressive tax planning schemes” in their push to mobilize support for the BEPS project. Even if their own evidence did not refute this claim, why is the issue such a high priority given that they have published work from economists on multiple occasions showing the limits of corporate income taxes?

In “The capacity of governments to raise taxes,” Oguzhan Akgun, David Bartolini, and Boris Cournède acknowledge the constraints of a Laffer Curve for corporate income taxes. They estimate the revenue maximizing effective marginal rate at roughly 25 percent, but also point out that “estimates of revenue-maximizing rates should not be seen as policy objectives or recommendations, as they imply high levels of economic distortions or tax avoidance.” That is a stark contrast from the logic of BEPS, which assumes that avoidance has nothing at to do with high tax rates, and that with sufficient effort, its impact can be significantly reduced in order to allow for taxes to be raised even further.

That study was published in 2017, so perhaps the BEPS-pushers can be excused for not being aware of it in 2013. But it is hardly the first OECD work to tackle the subject. In 2008, Åsa Johansson, Christopher Heady, Jens Arnold, Bert Brys, Cyrille Schwellnus and Laura Vartia found in “Tax and Economic Growth” that “corporate taxes are found to be the most harmful for growth, followed by personal income taxes, and then consumption taxes.”

Nevertheless, Secretary-General Angel Gurría editorialized that “corporate tax rate competition … raises challenging questions for governments seeking to strike the right balance between maintaining a competitive tax system and ensuring they continue to raise the revenues necessary to fund vital public services.”

The OECD claims that its missions is to “promote polices that will improve the economic and social well-being of people around the world.” And yet, its most ambitious international tax project is all about making it easier for nations to raise taxes in the most economically destructive manner.

On size of government

The OECD offers unsolicited advice to countries on just about every public policy question imaginable. Most of the time, this advice consists of calls for higher taxes and more government spending.

For instance, last year’s review of Costa Rica’s tax system called for “raising more tax revenue,” even though the nation’s government already consumes 23 percent of GDP. It even found that high tax burdens contributed to the nation’s informal economy, but instead of calling for cuts, suggested other measures to force more workers into being caught in the tax net.

In Revenue Statistics in Asian Countries 2016, the OECD made the astonishing claim that “the minimum tax-to-GDP ratio of 25 percent [is] deemed essential to become a developed country.” That is news to Singapore, which maintains a roughly 14 percent tax-to-GDP ratio and is among the world’s wealthiest nations. In the 2017 edition, it was lamented that “some countries have experienced a decline in tax revenues,” and thus “further efforts are needed to increase tax revenues.”

And in Economic Policy Reforms 2017, the OECD called for the United States to undertake new spending on mass transit, broadband, job training, and paid parental leave, among other things. In its annual economic surveys, the OECD regularly calls for various new spending programs and tax increases for almost every nation.

The OECD uses various euphemisms to obscure the meaning of its recommendations from any ordinary citizens that might stumble upon its arcane jeremiads. Raising taxes is “increasing tax mobilization.” New spending is “fiscal easing.” Running deficits is “making full use of available fiscal space.” Nevertheless, the ideological preferences of the organization are clear for those who pay attention. And they conflict even with the findings of the organization’s economists.

In “The Effect of the Size and the Mix of Public Spending on Growth and Inequality,” Jean-Marc Fournier and Åsa Johansson report that “larger governments are associated with lower long-term growth,” and they also acknowledge that there is a lot of pre-existing research, including other OECD works, showing that economic growth is harmed by government spending. For instance, a 1997 study found that “a cut in the tax-to-GDP ratio by 10 percentage points of GDP (accompanied by a deficit-neutral cut in transfers) may increase annual growth by ½ to 1 percentage points.” And a 2001 study reported that “The overall tax burden is found to have a negative impact on output per capita.”

Conclusion

The OECD is an organization divided. The growth of globalization and the emergence of international tax issues allowed it to carve out a role as the primary multilateral forum in international tax policy. But that has come at a cost. No longer is the organization simply focused on expanding economic development. Focused on serving the interests of the tax collectors that serve as representatives from its member nations, it is now an enforcer for high-tax regimes. And instead of strictly following the evidence, its policy recommendations reflect the dominant political values of its taxing-and-spending membership.

Thursday

7

June 2018

Eliminate Schedule B to Protect Public Debate

Written by , Posted in Liberty & Limited Government
Originally published in Morning Consult

A healthy democracy needs its citizens capable and willing to express their political preferences even, or especially, when they conflict with the views of those in power. Tellingly, robust protections for speech were listed first among the Bill of Rights and have long been a cornerstone of our republic. Supporting like-minded organizations working to inform and shape the public debate has proven to be a valuable means by which millions of Americans express their political preferences. Unfortunately, invasive donor reporting requirements instituted by the Internal Revenue Service threaten to chill this critical democratic tool.

Schedule B requires 501(c) organizations to include certain contributors’ names and addresses with their annual Form 990 reports. Yet the IRS has acknowledged that this information has no enforcement value. Instead, its collection creates opportunities for abuse and chills speech and civic participation.

Like the secret ballot, respecting donor privacy and thus anonymous speech and association is essential to prevent majoritarian abuse and intimidation that subverts democracy. This was a lesson learned in the civil rights era after the shameful attacks on the NAACP and its supporters.

Although officials pledge to keep the collected information confidential, there’s good reason to question the ability of the government to protect sensitive taxpayer information given the history of inadvertent disclosures and information leaks at the IRS. For example, an IRS official wrongly included the Schedule B donor information provided by the National Organization for Marriage in response to an individual’s request for its Form 990. The information was subsequently shared with an adversarial organization that then made it public.

The NOM leak became a national story and potentially influenced an election when an entity associated with then-presidential candidate Mitt Romney was found to be among those donating to the group. In a twisted sort of irony, the same law that the official violated, intending to protect taxpayers, was used by the agency to shield the perpetrator from scrutiny and deny victims any opportunity to learn more about the incident.

Similarly, as part of the investigation into the targeting of conservative organizations by the IRS, Lois Lerner was found to have illegally shared confidential Form 990 taxpayer information with the Federal Election Commission. The classified information disclosed by Edward Snowden further demonstrated that data collected by one government agency is vulnerable to illegal access and exploitation by any other.

For minority viewpoints, public exposure can lead to intimidation or other private consequences. We saw this when Brendan Eich was forced out as Mozilla CEO after it was revealed he donated in support of California Prop 8.

Not long after that, an effort by then-California Attorney General Kamala Harris to collect donor information was found to be unconstitutional as applied to the Americans for Prosperity Foundation and the Thomas More Law Center, though a similar challenge by the Center for Competitive Politics failed. In ruling on the Thomas More Law Center challenge, the district court found that “in the context of a proven and substantial history of inadvertent disclosures,” the state’s government could not assure donor confidentiality.

The federal government performs no better on that score. In 2015, the IRS admitted that “organized crime syndicates” used an exploit to gain access to the past tax returns of more than 100,000 taxpayers. Unsurprisingly, the Government Accountability Office for years has found the IRS deficient in its protection of sensitive financial and taxpayer data. The most recent audit found that “continuing and newly identified control deficiencies limited the effectiveness of security controls for protecting the confidentiality, integrity, and availability of IRS’s key financial and tax processing systems.”

Several years ago, the IRS was said to be considering dropping the unnecessary Schedule B reporting requirement, which it was never required by statute to collect in the first place. Unfortunately, the agency did not follow through under President Barack Obama, but IRS acting Commissioner David Kautter recently told a Senate panel that he was in discussions with the Treasury secretary about scrapping the requirement. The Trump administration should do what the Obama administration would not and ensure the right of Americans to participate in the political process without fear that they will be made vulnerable to targeting based on their political views.

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About Me

profileI serve as Vice President of the Center for Freedom and Prosperity, a non-profit think tank dedicated to preserving tax competition and free markets. This site features my personal views, which are not reflective of CF&P.

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