BrianGarst.com

Malo periculosam, libertatem quam quietam servitutem.

Thursday

23

June 2016

Sotomayor Was Right on Utah v. Strieff Because She Articulated a Constitutional Principle, Not Because of Her Race

Written by , Posted in General/Misc.

I wasn’t a fan of Sotomayor’s appointment to the Supreme Court, and what I found particularly disappointing about her nomination, aside from her judicial philosophy, was the furor of identity politics which surrounded it. Nothing has really caused me to reassess that stance, though I have no problem giving credit where it is due. Sotomayor was right to dissent in Utah v. Strieff, and the mostly conservative majority was wrong. Unfortunately, the hyperventilating coverage of her dissent from the political left is again myopically focused on identity politics.

The facts of the case were not in dispute. The stop of Strieff was acknowledged by all to be illegal. The question was whether, upon happening to find an outstanding warrant, any evidence uncovered during the stop would then be admissible. The majority said it would. I find this troubling, and think it severely undermines Fourth Amendment protections by not punishing officers for undertaking illegal searches.

Sotomayor, along with Ginsburg and Kagan, were in the minority. One passage of Sotomayor’s dissent, not joined by the others, has gotten particular attention. It reads:

[T]his case tells everyone, white and black, guilty and innocent, that an officer can verify your legal status at any time. It says that your body is subject to invasion while courts excuse the violation of your rights. It implies that you are not a citizen of a democracy but the subject of a carceral state, just waiting to be cataloged. We must not pretend that the countless people who are routinely targeted by police are “isolated.” They are the canaries in the coal mine whose deaths, civil and literal, warn us that no one can breathe in this atmosphere. See L. Guinier & G. Torres, The Miner’s Canary 274–283 (2002). They are the ones who recognize that unlawful police stops corrode all our civil liberties and threaten all our lives. Until their voices matter too, our justice system will continue to be anything but.

Aside from the vague social justice-y “until their voices matter” bit, which has no legal or policy meaning that I can deduce, I think she’s generally on the money.  The leftwing coverage of the matter, however, has been atrocious.

Ethan Epstein at the Weekly Standard (I don’t know what his/the magazine’s opinion of the decision is, though I suspect it’s not the same as my own) accurately captures the vacuousness of much of the leftist coverage in his mocking headline, “You Won’t Believe What Happened When Justice Sotomayor Dissented.”

It’s not just the clickbait-style breathlessness of their coverage which is so exasperating, but also the weird fixation on Sotomayor’s personal characteristics instead of the quality of her opinion. The Nation, before changing its headline (hopefully due to realizing how stupid it was), declared “Sonia Sotomayor’s Epic Dissent Shows Why We Need People of Color on the Supreme Court.” (For those keeping track, “People of Color” is the current approved nomenclature, though it will no doubt be rotated out soon enough). The New Republic assessed, “Sonia Sotomayor just showed the value of having a ‘wise Latina’ on the court.” This apparent obsession is worth noting because it can lead to false conclusions on how to reach better judicial decisions.

Insofar as Sotomayor’s got it right, it was due not to her race but her defense of the clear intent of a key Constitutional protection. She is not, after all, the only minority on the court, and her fellow “POC” voted with the other side. In my original critique of the boosters of Sotomayor’s appointment, I noted how the reverence to identity is inconsistent, employed by the left when it serves ideological interests and tossed aside when it does not. They certainly have never respected the “lived experience” of Clarence Thomas.

To the point, if we want a SCOTUS more consistent in its defense of individual rights, it will not come from appointments based on whatever personal characteristics happen to be the most important according to the identity politics of the day. It will come through recognizing the proper role of the Court as a patrolman on the border of governmental power, a last safeguard against the persistent encroachment of state authority on individual rights through enforcement of clear Constitutional limits.

Saturday

28

May 2016

NYC Police Commissioner’s Circular Drug War Reasoning

Written by , Posted in General/Misc.

New York Police Commissioner William Bratton is confused by the fact that more and more states and their voters are embracing liberty minded drug policies.

In a radio interview yesterday, New York Police Commissioner William Bratton said violence associated with marijuana trafficking in his city should give pause to advocates of legalization. “In New York City,” Bratton told AM 970 host John Catsimatidis, “most of the violence we see around drug trafficking is involving marijuana, and I have to scratch my head as we are seeing many states wanting to legalize marijuana.”

I suppose his confusion is understandable given his apparent ignorance of the consequences of prohibition. What these other states know and Commissioner Bratton does not is that prohibition does not eliminate the market for a good, but rather drives it underground in the black market where crime is more likely to occur.

The negative effects of prohibition are not a secret. It is well understood, for instance, that the production and sale of alcohol is not an inherently violent trade, despite its close relationship with organized crime during Prohibition. This occurred for a multitude of reasons. Prohibition significantly increases the costs of a good, which creates a strong profit motive. But because entering the market requires breaking the law, only those comfortable with doing so move to capture those profits. And if they don’t mind breaking the law to make and sell a product, they’re less likely to care about breaking it to fight, often with violence, their competitors.

Prohibition also increases health risks for users. Product quality declines on the black market, where information on who produces what and how are necessarily hidden from consumers, and torts are not available to hold producers liable for subpar product. The Iron Law of Prohibition also states that, for reasons of economic efficiency, product potency increases in concert with the level of enforcement. Put another way, “the harder the enforcement, the harder the drugs.”

All of this is to say that what Commissioner Bratton sees are the products of prohibition itself, not justifications for it. Sadly, he is also providing a demonstration of how bad government tends to beget more bad government.

Sunday

1

May 2016

Panama Leaks: Exposing Private Information Serves an Ideological Agenda

Written by , Posted in Taxes
Coauthor(s): Dan Mitchell
Originally published in IFC Review

The public dump of millions of private correspondence and other legal documents as part of the so-called ‘Panama Papers’ leak predictably sparked a media frenzy. In the weeks since, politicians, high-tax advocacy groups, and their allies in the media, have sought to exploit the story as part of a long-running campaign to abolish financial privacy. The nature of the coverage suggests a clear intention to start a new round of attacks on the offshore financial community.

Given international developments over the last few years, including the OECD’s recently concluded BEPS project and the adoption of automatic exchange of taxpayer information as a supposed global standard, offshore financial centres might be tempted to think that things can’t get any worse. That would be a mistake. If there is one observation that can be made from the OECD’s war on tax competition over the last two decades, it is that they are forever moving the goalposts. Their victories are always soon followed by a new round of more ambitious demands.

The tone and tenor of the discussion in the aftermath of the leak has signalled an intention to press forward until all financial privacy rights have been eliminated. Consider the very choice of ‘Panama Papers’ as the name, even though it was comprised of documents from a single firm. Why not, say, call it the ‘Mossack Fonseca Papers?’ The answer is clear. Mossack Fonseca, which has so far not been shown to have committed any wrongdoing in its provision of ordinary legal services for international businesses, is not the target. Panama is.

As a so-called ‘tax haven’ – a designation earned for respecting privacy rights and adopting sensible tax policy – Panama represents precisely what the OECD and the European nations driving its agenda seek to eradicate. The President of Panama’s decision to grovel and beg forgiveness through a New York Times op-ed will not take the target off his nation’s back, just as previous appeasements have failed to satisfy the OECD in its ever more aggressive pursuit of low-tax jurisdictions.

A common tactic of both the reporters covering the leak and the grandstanding politicians decrying offshore banking has been to conflate tax evasion and legal avoidance. They falsely insinuate that the mere usage of offshore accounts is evidence of wrongdoing. The goal is to stir up a public outcry for ever more onerous rules and regulations, subverting tax competition and paving the way for higher global tax rates.

This false narrative has come at the expense of the real story. There is corruption. There is wrongdoing. And like all criminal activity, it is sometimes facilitated through use of otherwise legitimate and valuable services. Instead of obsessing about the latter, there should be greater discussion of the underlying causes of corruption itself.

What ought to be sparking public outrage is the fact that many nations still lack basic political and economic liberties. They provide a breeding ground political corruption, where the ruling classes are able to loot treasuries without recourse. Graft, embezzlement, bribery, and extortion are common place. If anything should have captured the world’s attention, it should be the continued existence of so many illiberal regimes from which law abiding citizens have every reason to want to protect their assets.

In so far as the Panama Papers helped expose that story, they perhaps in part can be applauded. Unfortunately, in their zeal to take down low-tax regimes, the International Consortium of Investigative Journalists caught the vast majority of honest and law-abiding customers of offshore services in the crossfire. Their private information should not be exposed to service an ideological agenda.

Wednesday

13

April 2016

Most Common Media Myths About the Panama Papers

Written by , Posted in Liberty & Limited Government, Media Bias, Taxes

The media has breathlessly reported on the massive data breach of Panamanian law firm Mossack Fonseca. Much of that coverage has involved the politicians and other figures whose activities revealed corruption, ethical lapses, or dishonesty and wrongdoing. That includes Icelandic Prime Minister Sigmundur David Gunnlaugsson, who has “stepped aside” for an unspecified period of time after his ownership of a holding company established by Mossack in the British Virgin Islands was discovered. There’s been no indication so far that there was anything legally wrong with the company or its activities, or that he pursued favoritism on behalf of his financial interests while in office. However, he failed to disclose his assets in Iceland’s parliamentary register of MPs’ financial interests and was not forthcoming with his constituency.

In other words, like most of the stories from the Panama Papers that are dominating the news, Gunnlaugsson’s is one of only tangential relation to the actual business of Mossack Fonseca. Had he been a private citizen with the exact same legal and business arrangements, no one would care. Where he erred was on his responsibility to disclose his holdings and maintain the trust of his citizens.

Nevertheless, his and other similar stories have been framed as proof that something must be done about “shady” offshore dealings. In fact, the entire media coverage from start to finish has been littered, either directly or through implication, with myths.

Here are a few areas where the media, and the public discussion surrounding the Panama Papers, has more often than not gotten it wrong:

Myth 1: Tax Avoidance and Tax Evasion Are Both Wrong

On the tax front (the instances of corruption representing a different matter entirely), most all of the media and political hand-wringing surrounding the Panama Papers has been due to a willful blurring of the lines between tax evasion and avoidance. Yet in reality there are significant legal and ethical differences between the two.

Tax evasion is a crime, and involves the deliberate disregard of tax obligations. Evasion can be committed by lying about assets or engaging in fraud. Banking in jurisdictions that respect privacy rights can be used by unscrupulous individuals as part of a strategy to commit tax evasion. But so can using cash. Both also have legitimate functions, making it unfair to treat everyone who uses privacy respecting services (or cash) as suspect and unwise to create rules on that assumption.

Tax avoidance is not a crime. It is, in fact, simply obedience to the law as it is written. Lawmakers bemoan those who seek to minimize their tax burdens when doing so shines a negative light on the quality of the laws they have written. But in other instances they encourage it. When politicians provide tax credits, for instance, it is with the understanding that those who use them are doing so to avoid paying more tax than they have to. And when they seek to discourage other activities through excise taxes, they are counting on people changing their behavior to avoid the tax. Politicians understand and even expect tax avoidance when it suits them, and decry it when it does not.

Most of what the media directly claims or indirectly implies to be tax evasion is merely legal avoidance. It is individuals choosing to do business in jurisdictions with less onerous tax codes. Not only is this legal, but it has concomitant positive benefits. Tax competition between jurisdictions serves as a check on political greed, and pressures governments to adopt tax policies designed to grow economies instead of just treasuries.

Myth 2: Offshore Financial Services Are Only Used for Wrongdoing

Opportunists who have long despised the ability of individuals to legally flee from confiscatory tax rates want to make the Panama Papers story about financial privacy. It’s not. That makes no more sense than if the story of Congressman William Jefferson, found with a stash of ill-gotten money in his freezer, had been spun as one primarily about cash or kitchen appliances.

Yes, bad people also use legal and financial services. Sometimes they even do so to help them conduct their illicit activity. They also sometimes use airplanes to meet with co-conspirators, or cash to conduct black market sales. That’s not an argument for depriving law abiding citizens of then use of either of those. The fact that corrupt politicians made use of the legal services of Mossack Fonseca does not mean that something must be done about Mossack Fonseca and similar firms. It suggests, if anything, that something must be done about political corruption.

The idea that anyone benefiting from the legal services of Mossack Fonseca, and others who specialize in meeting the needs of international clientele in establishing new businesses and trusts, simply does not match reality. They file incorporation papers. What is then done with those companies is on the people who actually manage them.

Myth 3: Indiscriminate Leaking of Private Financial and Legal Information, Especially of the Rich, Serves a Public Good 

While exposing potential corruption of politicians who might be looting their national treasuries or hiding potential conflicts of interest likely serves a public good, massive data leaks that include innocents are still a massive violation of privacy. The Panama Papers leak consists of confidential and legally protected communications, including those of the vast majority of innocent Mossack Fonseca clients caught up in the data for no other reason than that they used ordinary legal and tax planning services that a small number of elites may have been simultaneously misusing.

Whether or not the individuals who did nothing wrong but were exposed anyway are wealthy or not shouldn’t matter. They have the same expectation of privacy as the rest of us. Moreover, the implication that they are “hiding” their wealth even when all tax laws have been followed presumes a public right to individual financial information that does not exist. No one accuses an individual with an ordinary savings account who chooses not to broadcast their account balance as “hiding” their money. That information is simply their business and their business alone.

Sunday

20

March 2016

Garland SCOTUS Pick Good Politics, Bad Substance

Written by , Posted in Liberty & Limited Government, The Courts, Criminal Justice & Tort

President Obama made the relatively obvious strategic choice by nominating a “moderate” judge to fill the late Judge Antonin Scalia’s seat. Although it disappointed the hard left, in particular the race and gender obsessed identity politics crowd, Merrick Garland’s nomination will challenge Republicans’ resolve to deny Obama opportunity to fill the seat before he leaves office.

Had Obama simply appointed another die-hard leftist, Republicans would have risked nothing by waiting him out and seeing what happened during the election. If Hillary won they’d be no worse off, but if a Republican (not named Trump) won they’d get someone more to their liking. And the idea put forth by Democrats that stalling would spark an electoral backlash against the GOP is wishful thinking at best.

But now it’s trickier. Hillary will almost certainly appoint someone to the left of Garland, who Orrin Hatch in 2010 pushed Obama to nominate to the seat eventually filled by Elena Kagan. He and some other Senate Republicans have suggested they might take up Garland’s nomination during the lame duck session after the election. However, if a Democrat wins Obama will likely withdraw the nomination (which Sanders has already publicly asked him to do in the unlikely scenario that he is elected) and allow his predecessor to put forth a Progressive ideologue. That puts pressure on them to

A wildcard is Trump’s populist insurgency. If he is the nominee, Republicans can go ahead and assume Hillary will win – baring the increasingly unlikely scenario that she is indicted - and act accordingly.

Long story short, Obama has forced Republicans to weigh the risks and rewards of accepting his nominee instead of the no-risk position they’d have faced against a more hardline pick.

But while his nomination is good politics, what might the “moderate” Garland mean for liberty if confirmed? Sure, he has some level of bipartisan appeal, but they are mostly on issues in which the parties are both wrong.

As Ilya Shapiro explains, he is simply too deferential to government.

Garland has shown an alarming amount of deference to the government in his years on the important D.C. Circuit, which handles appeals from administrative agencies. I also fear that he won’t represent the check on ever-expanding federal power and executive actions to the same extent as Scalia. And if you’re a civil libertarian, his solicitude for law enforcement makes him much less appealing than other judges who had been under consideration.

Reason’s Damon Root made a similar case:

While Garland is undoubtedly a legal liberal, his record reflects a version of legal liberalism that tends to line up in favor of broad judicial deference to law enforcement and wartime executive power.

In the area of criminal law, for example, Garland’s votes have frequently come down on the side of prosecutors and police. In 2010, when Garland was reported to be under consideration to replace retiring Justice John Paul Stevens, SCOTUSblog founder Tom Goldstein observed that “Judge Garland rarely votes in favor of criminal defendants’ appeals of their convictions.”

Likewise, Garland voted in support of the George W. Bush administration’s controversial war on terrorism policies in the Guantanamo detainee case Al Odah v. United States, in which Garland joined the majority opinion holding that enemy combatants held as detainees at the U.S. military facility at Guantanamo Bay were not entitled to habeus corpus protections. The U.S. Supreme Court ultimately overruled that decision, holding in the landmark caseBoumediene v. Bush that Guantanamo detainees do enjoy habeus corpus rights.

Nevertheless, there is at least one issue likely to prove a major obstacle to Garland’s finding broad Republican support, and that is gun control.

Overall, however, deference to government is a common trap for Republicans, who fear “judicial activism” to the point that they would rather Congress and the Executive operate without significant judicial constraints. As such, they might see Garland as a real move in their direction from Obama, when in fact he’s more likely to be another ally of big government and a disappointment for civil liberties.

Wednesday

24

February 2016

No Investor Should Be Too Connected To Fail

Written by , Posted in Economics & the Economy, Free Markets, Government Meddling
Originally published in The Daily Caller

Should hedge fund managers be allowed to be too politically connected to fail? The answer might seem obvious, but the responsiveness of regulators and some lawmakers to the self-interested demands of Pershing Square manager Bill Ackman raise serious doubts. If Ackman succeeds in his current effort to enlist the forces of government in destroying another company for personal gain, it will at the least confirm the public’s worst fears about cronyism, and likely encourage others to pursue the same strategy.

Ackman has been waging war on Herbalife, which bills itself as “a global nutrition and weight management company.” Ackman, however, insists it is really a pyramid scheme. He began his onslaught by publicly shorting Herbalife’s stock – betting it would drop – to a tune of $1 billion in 2012, which is fine, but then spent millions more lobbying politicians and regulators to destroy the company, which is not fine.

Recently, The Wall Street Journal reported that probes by the FBI and the U.S. attorney’s office following nearly two years of investigations cleared Herbalife of allegations that it operates a fraudulent business model. That’s far from the end of the matter, however, as Ackman has put considerable resources into mobilizing as many federal agencies as possible to take on Herbalife.

As part of his anti-Herbalife blitz, Ackman not only set up websites and 1-800 numbers to troll for potential victims, but also lobbied the SEC and the FTC directly for government action. He even got three representatives and a senator, along with a number of state attorneys general, to write to the FTC on his behalf. They have responded by engaging in their own investigations.

Ackman’s campaign rests on Herbalife’s status as a multi-level marketer. MLMs recruit and use distributors to sell product, often to their friends and family as well as the broader public. Many MLMs are in fact pyramid schemes, but the structure itself does not necessarily demonstrate one way or another whether a company is legitimate. Key factors for making that determination include whether a business focuses more on recruitment than selling, and if products actually wind up with end users instead of stuck, along with their costs, with recently recruited distributors.

Among MLMs, including prominent brands like Avon and Tupperware, Herbalife and its $5 billion in sales last year is largest by capitalization and second by revenue. Does this and the fact that it has been around for 35 years mean that it can’t possibly be a pyramid scheme? Of course not, but those facts do make it less likely. And despite the considerable resources Ackman has pumped into finding evidence to bolster his campaign, the prosecutors and investors alike remain unconvinced.

While Herbalife stock has been more volatile since Ackman’s fight began, it hasn’t collapsed like he hoped despite numerous public presentations and, most recently, a mini-documentary of supposed Herbalife videos. Both the lack of stock decline and the recent acknowledgment by investigators that they have no legal case suggests his extensive efforts have turned up no smoking gun, but there’s still a chance his efforts with other agencies could result in regulatory action.

From the broader policy perspective the question at this point isn’t whether Herbalife is likely to survive in the long run or not, or even if it should, but whether federal agencies should be so easily bought and used as another investment tool.

Encouraging others to behave as Ackman has by rewarding his extensive lobbying would be good for neither government nor the market. The former would be made even corruptible, further compromising the public’s faith in a system that all too often seems to favor the wealthy, or more accurately the politically connected, over everyone else. The market would similarly suffer with the introduction of even more incentive to direct resources toward pleasing politicians and regulators instead of providing real value and satisfying customers.

Ackman may well end up right about the fate of Herbalife. Like any business it could fail, whether for reasons Ackman suspects or not, and he will cash in on his big bet. But if he’s wrong and Herbalife stock continues defying his expectations, the government shouldn’t step in to bail him out from the consequences of his failed prediction just because he has the resources and connections necessary to direct regulatory attention wherever he desires.

Monday

25

January 2016

Puerto Rico Must Save Itself

Written by , Posted in Economics & the Economy
Originally published in The Daily Caller

Puerto Rico’s fiscal mess has Congress working frantically to provide “relief.” The island territory is overloaded with debt and cannot meet its obligations, and House Speaker Paul Ryan set March as a deadline for Congress to provide a “responsible solution.” Now Washington is busy debating whether to simply bailout Puerto Rico or instead allow it to stiff creditors through bankruptcy. Few seem willing to consider that both options would create terrible precedent and undermine real reforms.

The economic downturn has obviously taken a toll, but like so many other distressed jurisdictions, Puerto Rico has been hampered by fiscal irresponsibility, mismanagement, and widespread corruption. Its politicians also spent frivolously, increasing spending by 100 percent between 1980 and 2013, far outpacing the 12 percent population growth during that period.

In five of the last six years, Puerto Rico’s government has ignored its constitutional requirement to pass a balanced budget. And in 14 of the last 15 years, it has failed to adhere to the budgets it passed. Today it has over $70 billion in outstanding debt.

Much of the problem is due to the island’s bloated and generously paid government workforce. Over two-thirds of the budget goes to payroll, with public sector workers earning on average more than twice Puerto Rico’s median household income. Governor Padilla has refused to further trim the government labor force.

Instead, Puerto Rico’s politicians have responded to the growing debt crisis in the worst manner possible by raising both taxes and spending year after year. And now Washington is preparing to reward their irresponsible overspending.

Some Republicans argue that allowing Puerto Rico or its government-owned subsidiaries, like its utility companies, to file for bankruptcy is a preferable alternative to a taxpayer bailout. But this is a false dichotomy. Neither option provides a responsible path forward.

A bailout would not only be unfair to mainland taxpayers, but would create a moral hazard and signal to other big spending states and municipalities that Washington will be there to rescue them from the messes of their own making. But a bankruptcy that allows the government to stiff its creditors poses the same problem, while only shifting the financial costs from federal taxpayers to bondholders.

Puerto Rico issued bonds with the understanding that default was not an option. It shouldn’t get to retroactively change the rules now. That doesn’t mean, however, that it can’t negotiate with creditors for better terms, such as happened earlier this year when the state-owned power company reached an agreement with a group of bondholders to restructure. Unfortunately, the island’s government overall has so far preferred gamesmanship to good faith engagement by withholding financial information, being excessively tardy in filing audited annual financial statements, and using restrictive NDA’s to prevent creditors from talking to one another.

What Puerto Rico needs is a fiscal correction and pro-growth reforms. That won’t happen so long as  Washington is intent on granting a reprieve from the consequences of bad policy.

There are some constructive things that Congress can do, however. Many of the counter-productive, European-style labor rules that inhibit hiring are of Puerto Rico’s own making, but Congress decades ago forced it to equalize its minimum wage laws with the federal level. Because the island’s standard of living is lower, the same minimum wage imposes a higher burden on Puerto Rican businesses than it would elsewhere. The island is also hurt by the Jones Act, which roughly doubles shipping costs by requiring that only American built, owned, and operated ships can operate between U.S. ports. Congress should lead by example and help kick start Puerto Rico’s pro-growth reforms by repealing costly federal regulations and mandates.

All eyes seem to be on Congress to do something about Puerto Rico, when that attention would largely be better directed at Puerto Rico itself. The island doesn’t need a Washington bailout regardless of the form it takes. It needs fiscal responsibly, and that won’t happen if politicians are allowed to worm out of their obligations through bankruptcy.

Friday

15

January 2016

Privacy Again At Stake in BEPS Fight

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

Problems with the OECD’s work on Base Erosion and Profit Shifting (BEPS) are numerous and will likely lead to a variety of negative consequences. Most obvious is the wasted effort put into a massive and costly undertaking seeking to address a problem that the organization’s own data on corporate tax revenues suggests isn’t serious or may not even exist. Also apparent is that the effort is a continuation of the war on tax competition by high-tax nations that resent low-tax jurisdictions that successfully compete for investment, and insofar as tax competition is good for economic growth BEPS is sure to be bad for it. Yet the BEPS project’s impact on privacy might be its most insidious outcome.

The rallying cry of the OECD and its proponents is transparency, e.g. the Global Forum on Transparency and Exchange of Information for Tax Purposes, but they don’t confine the word to its traditional meaning. BEPS in fact represents the latest in a worrying trend that has seen the commonly understood idea of transparency as it relates to public policy completely turned on its head.

Once used exclusively to refer to a key ingredient of good government whereby elected officials and government agencies were open and accountable to the people, tax crusaders have given transparency an Orwellian twist, distorting the idea to mean the elimination of privacy. They want the financial data of citizens naked and exposed to government, which makes their use of transparency an example of upside-down language designed to obscure the evisceration of a basic right.

Privacy’s role

This effort to make transparency an obligation of individuals and private institutions to the state, rather than the other way around, is concerning for a multitude of reasons. In terms of raw power, individuals are vastly outmatched by government. To avoid the kinds of abuses this has led to throughout most of human history, modern and civilized governments are encumbered by legal and democratic constraints, among them strict limits on the degree to which they can access private information.

For those trapped under corrupt regimes, the relationship between privacy and human rights has long been obvious. When your government is able to expropriate your wealth whenever it pleases, you by necessity must understand the importance of financial discretion.

But privacy matters even in Western nations that typically consider themselves above such problems. While outright theft is less likely, it’s not unusual for private information to be exploited by the ruling regime, particularly when it comes to their political opponents. Finally, there is the danger of governments and their typically poor security measures allowing criminals and bad actors inadvertent access to personal data.

Steady erosion of protections

Exploiting what are often exaggerated if not entirely made up crises has allowed governments to gradually erode privacy protections. In other areas – like surveillance and national security – citizens in many nations are starting to fight back, but the continued erosion of financial privacy has seen far less public attention.

When the OECD’s 1998 “Harmful Tax Competition” declaration of war on low-tax jurisdictions met with political backlash, its proponents shifted course to focus more on so-called transparency than low tax rates. The end goal is the same, however, as the elimination of privacy allows for greater use of worldwide tax systems or other back-door harmonization schemes.

The 9/11 terrorist attacks on the United States in 2001 provided an excuse to drastically increase surveillance on financial activities. But even though those involved in the attacks banked in the U.S. and used facilitators in Germany and the UAE, opportunist political rhetoric tellingly singled out tax havens in order to justify the new “transparency” push.

Terrorism quickly gave way to tax evasion as the dominant scare requiring curtailment of rights. What followed was a gradual but persistent effort to chip away at privacy protections, with smaller invasions giving way to bigger and bigger demands and culminating in the United States’ global financial surveillance law, FATCA, along with the current effort to establish automatic exchange of information as the new “global standard.”

Same strategy against new target

BEPS can only be understood as part of the same fight, but the effort also stands apart by focusing on corporate rather than individual taxpayers. This adds an additional economic consequence to its privacy invasions.

Of particular concern are the country-by-country reporting rules, as well as the master and local files. These proposed requirements necessitate that companies hand over information with little to no direct tax relevance, which is very troubling since it presumes that governments have a right to know the internal decision-making processes and strategic technology of companies. To make matters worse, giving this type of info to governments creates a huge risk that proprietary data will be leaked and/or stolen in ways that undermine the competitive edge of companies.

With such information being potentially required in every jurisdiction in which a company does business, improper dissemination is all but certain. It only takes one government with poor safeguards or malicious intent for proprietary information to end up in the hands of competitors. Just imagine what happens when the Chinese and Russian governments have access to sensitive information about the internal workings of Western-based multinationals.

But you don’t even need to assume bad intent. As recent events in the United States have shown, even the world’s largest tax agency can’t protect its citizens’ data from hackers or careless agents. It’s foolish to expect that in the case of BEPS, both it and every other nation will suddenly and without exception provide for the protection of corporate data.

Changing winds?

It’s already common to hear that financial privacy is dead, and given current trends that’s an understandable sentiment, but this isn’t necessarily the end of the story. FATCA, perhaps the biggest of the many current overreaches targeting individual taxpayers, is receiving significant pushback through legal challenges in multiple countries, as well as growing political opposition.

BEPS, too, is beginning to receive long overdue questioning. The process was deliberately rushed to obscure the true extent of its goals and the costs of its questionable means, but it’s not yet a done deal no matter what its boosters may claim.

Key figures in the U.S., including Senate Finance Committee Chairman Orrin Hatch and House Ways and Means Chairman Paul Ryan, have questioned the OECD’s work on BEPS, its ostensible benefit to the United States, and the ability of Treasury Department officials to implement its recommendations without Congressional action. Unless the partisan composition of the U.S. Congress drastically changes in the next election, BEPS is a non-starter in the U.S. for the near future. If other nations follow its lead, the bureaucratic spectacle of the last two years could lead to only limited action.

Conclusion

There’s an ongoing global war between tax collectors on one side and taxpayers and their financial institutions on the other. It is taking place on multiple fronts, and for the time being the tax collectors appear to be winning. If they prevail it won’t just be taxpayers that are defeated, however, but our very understanding of privacy itself.

Thursday

7

January 2016

Why Just Stop With Tariffs on China?

Written by , Posted in Economics & the Economy, Free Markets

Noted scholar and respected intellectual Donald Trump has unveiled another part of his plan to “make America great again:”

Donald J. Trump said he would favor a 45 percent tariff on Chinese exports to the United States, proposing the idea during a wide-ranging meeting with members of the editorial board of The New York Times.

…“I would tax China on products coming in,” Mr. Trump said. “I would do a tariff, yes — and they do it to us.”

Mr. Trump added that he’s “a free trader,” but that “it’s got to be reasonably fair.”

“I would do a tax. and the tax, let me tell you what the tax should be … the tax should be 45 percent,” Mr. Trump said.

Now, I know I’m just a simpleton, but something strikes me as off about this plan. Perhaps The Donald can help a poor confused sap make sense of all this.

Presuming he believes this tariff on goods coming in from China will benefit Americans, why does he not propose similar measures on goods from other countries?

But why stop there. If a tariff on goods coming into the U.S. is good for those within the U.S., then so too must a tariff on goods coming into a state be good for those within that state. Should Florida, then, tax goods made in Texas at 45%, or better yet, do so for goods made in any state other than Florida?

It seems to me that Donald Trump believes taxing goods when they cross borders makes us better off, so I’m having a hard time understanding why he isn’t compassionate enough to want to improve our lot even more by implementing that policy across the board. I mean, it’s all well and good to “make America great again,” but why not make it SUPER DUPER great? Hmm?

Wednesday

11

November 2015

Market Power

Written by , Posted in Economics & the Economy, Free Markets

The Week has a great story (hat-tip: Alex Tabarrok) about how Feeding America, which runs the largest network of food banks and is the third largest non-profit in the U.S., drastically improved its operations by adopting a market approach to solve its food distribution problem.

Supermarkets usually donate food directly to their local food bank. But large food manufacturers often donate to Feeding America headquarters, which then allocates this food across its nationwide network of food banks…

Before 2005, Feeding America allocated food centrally, and according to its rather subjective perception of what food banks needed. Headquarters would call up the food banks in a priority order and offer them a truckload of food. Bizarrely, all food was treated more or less equally, irrespective of its nutritional content. A pound of chicken was the same as a pound of french fries. If the food bank accepted the load, it paid the transportation costs and had the truck sent to them. If the food bank refused, Feeding America would judge this food bank as having lower need and push it down the priority list. Unsurprisingly, food banks went out of their way to avoid refusing food loads — even if they were already stocked with that particular food.

It shouldn’t be difficult to see the warped incentive structure and information shortfalls that would plague such a system. Indeed, the author notes:

This Soviet-style system was hugely inefficient. Some urban food banks had great access to local food donations and often ended up with a surplus of food. A lot of food rotted in places where it was not needed, while many shelves in other food banks stood empty. Feeding America simply knew too little about what their food banks needed on a given day.

After seeking the advice of four University of Chicago economists, Feeding America adopted an internal price and auction system to take advantage of the vastly superior ability of price signals to transmit information.

Here’s how the new system works:

Every day, each food bank is allocated a pot of fiat currency called “shares.” Food banks in areas with bigger populations and more poverty receive larger numbers of shares. Twice a day, they can use their shares to bid online on any of the 30 to 40 truckloads of food that were donated directly to Feeding America. The winners of the auction pay for the truckloads with their shares.

Then, all the shares spent on a particular day are reallocated back to food banks at midnight. That means that food banks that did not spend their shares on a particular day would end up with more shares and thus a greater ability to bid the next day. In this way, the system has built-in fairness: If a large food bank could afford to spend a fortune on a truck of frozen chicken, its shares would show up on the balance of smaller food banks the next day. Moreover, neighboring food banks can now team up to bid jointly to reduce their transport costs.

Note everyone was thrilled with the idea, however:

Initially, there was plenty of resistance. As one food bank director told Canice Prendergast, an economist advising Feeding America, “I am a socialist. That’s why I run a food bank. I don’t believe in markets. I’m not saying I won’t listen, but I am against this.”

But the Chicago economists managed to design a market that worked even for participants who did not believe in it. Within half a year of the auction system being introduced, 97 percent of food banks won at least one load, and the amount of food allocated from Feeding America’s headquarters rose by over 35 percent, to the delight of volunteers and donors.

I can’t help but wish for some follow-up with Ms. Prendergast to see if her experience with the market system, and its superiority over the prior approach, has caused her to rethink her preference for central planning over markets. I argue in my column at EveryJoe this week that greater exposure to functioning markets, such as those popular in the emerging sharing economy, poses a threat to the political left. So her answer could help determine if I’m right.