BrianGarst.com

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Friday

19

December 2014

A Moral Panic Over ‘Rape Culture’

Written by , Posted in Culture & Society

The folks at EveryJoe have been kind enough to offer me a platform for a weekly column under the title Free Radical. It will feature many of the same topics I address here, though are likely to be a bit more in-depth.

The first column is up today, and takes a look at the troubling emergence of a new moral panic:

Rolling Stone reporter Sabrina Erdely’s sensational tale of a gang rape at a University of Virginia frat house has been unraveling practically since the day it was published. From the beginning, the article’s parade of sociopathetic characters – both the alleged perpetrators and the friends of Jackie, the pseudonymous accuser – were hard for many to believe. Other claims, such as the idea that Jackie was rolled around on broken glass for three hours without sustaining serious injuries requiring hospitalization, were simply nonsensical. It took only minimal scrutiny and the kind of basic fact-checking that should have preceded publication to poke major holes in the story, eventually forcing Rolling Stone to repeatedly backtrack and apologize.

Perhaps the final blow to the sordid tale came in the form of a Washington Post story featuring interviews with Jackie’s friends, who despite never being contacted by Erdely were portrayed as more concerned with their social status and popularity than getting Jackie help or justice. Not only do they refute that account, but they also claim that Jackie identified her alleged attacker to them, only to have it turn out that no such person attended the university or met the description provided.

Even more interesting than how Erdely botched the facts is why it happened.

Simply put, Jackie’s tale was too good to verify. It fit neatly the “rape culture” narrative that contends not only that the nation is suffering an epidemic of sexual assaults, but that the public is grossly indifferent to the plight of female victims, particularly on college campuses.

The rape culture narrative has become so ubiquitous that it has reached the level of a moral panic, with ideologues seeing signs of its influence everywhere. And like the moral panics that have come before, it is becoming a major threat to individual liberty.

You can find the entire piece here.

Wednesday

10

December 2014

Uncle Sam’s Global Tax Web is Indefensible

Written by , Posted in Taxes

I recently sent the following letter to the The New York Times. They indicated it would run, but I’ve given them enough time and it doesn’t look like that’s going to happen, so I’m publishing here.

To the Editor:

Roger Cohen offered a valiant defense for the United States’ global tax web (“Get Real, Boris Johnson!” Nov. 28), but in the end proved only that it is indefensible. In his effort to shame American expat and London Mayor Boris Johnson for rightfully defying Uncle Sam’s greedy fiscal imperialism, the strongest argument he could muster was that “it’s the law.”

Thankfully, modern man has long progressed past the stage of believing that questions of right and wrong, or moral and immoral, can be so easily dispatched through consultation with lawyers. Cohen is correct, to be sure, that Uncle Sam has proclaimed the entire globe his financial playpen, but that is to our shame, and not Johnson’s for daring to stand on the very same principle upon which this nation was founded.

It’s also true that Johnson could renounce his American citizenship, but Uncle Sam has thought of that too. Yet even double taxing through an exit tax on after-tax earnings, plus an outrageous $2,350 fee, has not prevented record numbers from saying enough is enough.

Brian Garst
Director of Government Affairs
Center for Freedom & Prosperity

Tuesday

25

November 2014

Case for Criminal Justice Reform Goes Well Beyond Ferguson

Written by , Posted in The Courts, Criminal Justice & Tort

Last night’s announcement that Officer Darren Wilson would not be charged in the shooting of Michael Brown has been followed by violent riots in Ferguson, as well as more peaceful demonstrations throughout the nation. Opinion among the commentary class has unsurprisingly polarized and cleaved along traditional lines, with the left all in an identity politics and the right firmly entrenched in a law and order mentality. Both, I think, are missing the significance of the events taking place.

First, I want to make clear that the looting, destruction and violence taking place in Ferguson should not and cannot be excused. The responsibility for these crimes rests entirely with the individuals committing them, and in an ideal world they would be held firmly accountable for their actions.

Second, I think the specific facts of the incident in question must be separated from the broader social and policy questions. On the facts, I’ll just say that I think the overall outcome that Officer Wilson will not be criminally punished is probably correct, though the standard for gran jury indictment is typically so low that allowing a trial would have been acceptable, even welcome, under the circumstances.

The evidence suggests that officer Wilson was indeed attacked inside his vehicle and that, at some point, Brown disengaged and Wilson pursued. The crux of the case is whether Brown was surrendering or turning to fight at the time he was shot. Perhaps no one knows with absolute certainty whether the shooting was unavoidable, not even Wilson, but the forensic evidence from my understanding is consistent with Wilson’s story, and most of the evidence ambiguous to the point that Wilson would have most likely been acquitted, and rightly so according to the high standards we ought to require for actual conviction.

Regardless, the grand jury verdict has not settled the discussion. While the divisive voices of identity politics are wrong to break this episode entirely down to that of a racial injustice, so too are their critics who see in Ferguson’s aftermath only mindless riots and a need for the restoration of order through force and escalation.

That the right decision was most likely reached in the case doesn’t change the fact that, as Walter Olsen says, “our system for dealing with police use of deadly force is broken.” Illustrating the point, consider the typical outcome for a grand jury. The old saw is that a good prosecutor can get a grand jury to indict a ham sandwich, and in federal cases (where data is available), grand juries opt to indict 99.99 percent of the time. The single variable that turns the statistic completely around is when a police officer is the potential defendant. Under those circumstances grand juries almost never indict. Possible explanations include excessive deference on part of jurors to police, or disinterest on the part of prosecutors at potentially angering the very police upon which their profession relies on having good relations. In either case, the number of incidents of police misconduct that go unpunished poses a serious problem.

We are seeing the consequence of that problem play out now. The communities that most often come into contact with the police – poor, urban, and minority – trust them the least. This not only makes policing those communities more difficult, but when tensions reach a high enough level it can boil over into social unrest and violence. Simply put, if the police were more believable, and public perceptions generally indicated faith in the ability of the criminal justice system to punish police misconduct, what’s happening in Ferguson right now would not be occurring.

Because the thin blue line works more often than not to protect incompetent, corrupt or malicious officers, broad swaths of the public simply do not trust the system to return a just verdict, even in a case such as this where the outcome was seemingly appropriate. That’s a problem that requires serious institutional changes both in terms of what the law says, such as ending the Drug War, and how it is enforced, including reversing the militarization of police forces, ending practices such a civil asset forfeiture that pit the interests of police against the public, building better relations between departments and the communities they serve, and, perhaps most importantly, consistently and transparently punishing officers who break the law. Until these things are done, we can expect what has occurred in Ferguson to happen again and again.

Friday

21

November 2014

Ignoring the President is Healthy for the Republic

Written by , Posted in Culture & Society, Liberty & Limited Government, Media Bias

President Obama’s immigration speech wasn’t carried live on the four major networks – NBC, ABC, CBS and Fox. He never officially requested the time from the networks because initial inquiries suggested the requests would all be denied. The White House is peeved, and its freelance propagandists in the media are none too happy either.

John Nichols of The Nation, for instance, is livid that networks didn’t jump at the opportunity to upend their schedules and force the President’s speechifying down their viewers throats. Inexcusably, networks chose “relentless profiteering” over being dutiful agents of the President’s political apparatus. That, he says, is “one important part of why this great democracy is not working as well as it could.”

Balderdash. The fact that private life goes on largely undistributed by the political machinations of a self-indulgent President is a sign of a restoring vitality in our republic.

A king might expect citizens to drop whatever they are doing to attend to every egotistic whim of the crown. An American president not only needs no such luxury, but ought not seek it. Except in the most serious of emergencies, the proper role of the president is to attend to enforcement of the law. Outside military affairs he is simply a chief executive, a glorified bureaucrat putting the ideas of Congress into practice. Certainly, he has a role in crafting law as well, but more so by exercise of political power than granted authority. But that political power has limits, as President Obama has experienced.

Americans should not have much tolerance for a President who seeks to grab society by the horns and steer it wherever he pleases. That has never been the American way, where individual rights and preferences are held in reverence.

Nichols ties the decision of the networks into what he sees as a broader battle for civic engagement:

Former Federal Communications Commission member Michael Copps has repeatedly warned in recent years of the threat posed to democracy by the “diminished and too often dumbed-down civic dialogue” that emerges when those who broadcast on the people’s airwaves fail to serve the people’s interest.

Copps explains, “Our country confronts challenges to its viability in some ways reminiscent of the 1930s, making it a national imperative that every American be empowered with the news and information essential for knowledgeable decision-making. Without that, the challenges go misunderstood, untended, unresolved. When our media, our press and our journalism catch cold, democracy catches pneumonia.”

Senator Bernie Sanders, I-Vermont, sees the network neglect of a particular presidential address as just one measure of a broader crisis for democracy that results when media are no longer “educating the American people so that we’re debating the real issues.”

When these elites worry that Americans are no longer being educated about the “real issues,” what they mean is that they are no longer having their thinking done for them by those who know better. There is more information available than ever before, and it is no longer filtered through a regimented point of view. In a world of cable television and 24/7 news stations, the “network” distinction is all but irrelevant. Those who cared to see the speech easily could do so. What troubles Nichols and his ilk is that there were other choices available at all.

What they see as evidence of some crisis in political engagement, I see as a healthy awareness of the limited importance of collective action. What has always made America great is recognition that the everyday decisions of millions of free and productive people outweigh the preferences of a tiny, centralized few. The private must maintain supremacy over the public. The more that people tune out Washington’s self-indulgent and excessively frequent demands for attention, the more time is available for them to live their lives, exercise their liberty, and pursue their own happiness.

Monday

17

November 2014

No, The World Is Not Running Out of Chocolate

Written by , Posted in Free Markets

A Washington Post headline blares “The world’s biggest chocolate-maker says we’re running out of chocolate.” No such thing is happening, but this is a good opportunity to talk about prices and how they work.

First, the story. It begins hysterically:

There’s no easy way to say this: You’re eating too much chocolate, all of you. And it’s getting so out of hand that the world could be headed towards a potentially disastrous (if you love chocolate) scenario if it doesn’t stop.

Indeed, there are reasons to believe that supply is decreasing:

Chocolate deficits, whereby farmers produce less cocoa than the world eats, are becoming the norm. Already, we are in the midst of what could be the longest streak of consecutive chocolate deficits in more than 50 years. It also looks like deficits aren’t just carrying over from year-to-year—the industry expects them to grow. Last year, the world ate roughly 70,000 metric tons more cocoa than it produced. By 2020, the two chocolate-makers warn that that number could swell to 1 million metric tons, a more than 14-fold increase; by 2030, they think the deficit could reach 2 million metric tons.

The problem is, for one, a supply issue. Dry weather in West Africa (specifically in the Ivory Coast and Ghana, where more than 70 percent of the world’s cocoa is produced) has greatly decreased production in the region. A nasty fungal disease known as frosty pod hasn’t helped either. The International Cocoa Organization estimates it has wiped out between 30 percent and 40 percent of global cocoa production. Because of all this, cocoa farming has proven a particularly tough business, and many farmers have shifted to more profitable crops, like corn, as a result.

So they’re on to something, right? Seems “disastrous” indeed! Not so fast.

The article presumes that demand exists in a vacuum and is entirely divorced from prices. Current demand is simply a reflection of how much chocolate we want to eat, the thinking goes, and therefore reduction in supply means that some will go without. The horror!

The reality is far more mundane. Demand is actually very price dependent, and cannot be interchanged with desire. People have always desired more chocolate than is produced, just not at the actual price of chocolate. Consider this thought experiment: how much chocolate would people eat if the cost were zero? Surely, a lot more than they do now. It would make little sense to claim chocolate to be running out in this scenario, though, seeing as how it is constantly being produced, though some would have trouble acquiring it. That’s because it would be under-priced.

What happens in reality is that prices reflect demand vis a vis supply, such that an equilibrium price develops where the demand from willing buyers equals the supply from willing sellers. Some of the people who would eat chocolate at zero cost would not do so at $1, and more would not do so at $5, or $10, etc. In other words, the fact that more chocolate is being eaten than produced simply means that the current price is below the equilibrium price. Price increases would cause demand to decline and, if increased enough, entirely end the “deficit” caused by over consumption.

Prices don’t just influence consumers. Higher prices would encourage production of more cocoa, as well as efforts to find new and cheaper ways to do so. In fact, the Post article acknowledges later on, where after the initial emotional blitz the author becomes more sober in his analysis, that these forces are already coming to bear:

Efforts to counter the growing imbalance between the amount of chocolate the world wants and the amount farmers can produce has inspired a bit of much needed innovation. Specifically, an agricultural research group in Central Africa is developing trees that can produce up to seven times the amount of beans traditional cocoa trees can.

In other words, it’s just run of the mill market forces at work. There’s no cause for panic. Chocolate is not going anywhere, though it might cost you a little bit more for a while.

Wednesday

5

November 2014

Are International Bureaucrats Winning the War Against Low-Tax Jurisdictions and Fiscal Competition?

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

The onset of globalisation in the 1980s triggered a period of unprecedented global economic growth. Expanding markets matched new consumers with producers to the benefit of both. Such positive developments are not just measured with stat sheets and charts, but with real advances in human welfare. Even the smallest sustained increase in the rate of economic growth quickly compounds to produce visible benefits for people across the globe. This cuts both ways, however, as any threat to future growth is also a threat to the welfare of billions of people.

A less appreciated benefit of globalisation has been the increased ability of capital, taxpayers and citizens to flee poorly governed or overtaxed jurisdictions for more attractive alternatives. Escaping from a jurisdiction with excessive taxes or bad regulations not only provides a real boost in wealth for the individual or business that relocates, but it also pressures bad governments to adopt policies more conducive to economic growth, while simultaneously rewarding governments with good policy.

This process is called tax competition and it almost certainly is partly responsible for the dramatic reduction in tax rates around the world between 1980 and 2008. Triggered by the Thatcher and Reagan tax cuts, nations across the globe lowered top personal income tax rates from an average of more than 67 per cent to less than 42 per cent. Corporate tax rates also have plummeted during that time period, dropping from an average of 48 per cent to 24 per cent, with perhaps Ireland deserving some of the credit. There has also been an explosion in the number of jurisdictions with flat tax regimes, and we have also seen big reductions in the double taxation of dividends and capital gains, as well as the reduction or elimination of death taxes and wealth taxes.

To be blunt, the net result of this tax competition is that politicians have been forced to restrain their appetites for high tax rates. This has been very good news for the productive sector of the economy, which presumably helps explain why the global economy recovered from the doldrums and malaise of the 1970s.

Politicians naturally dislike any restrictions on the ability to tax, particularly where it limits vote buying. It is little surprise, then, that international scheming to undo globalisation’s impact on capital and taxpayer mobility began almost as soon as its effects became apparent. Even worse, after decades of attacks, intentional bureaucrats are now making significant strides toward undoing the gains taxpayers have made over recent decades.

Push Back Through the OECD

Acting primarily through the Organisation for Economic Cooperation and Development (OECD), politicians from high tax nations began pushing even before the end of the century for policies designed to prevent the free flow of capital and citizens. This effort became somewhat visible in 1998 with release of an OECD report entitled, “Harmful Tax Competition: An Emerging Global Issue.”

So-called ‘tax havens’ received considerable attention in the report, but the OECD’s language made clear that any type of tax competition was undesirable, regardless of whether it could be classified as tax evasion, tax avoidance, or tax planning. The OECD and its masters at various finance ministries and treasury departments around the world, recognised that limiting the ability of taxpayers to shift economic activity to low-tax jurisdictions was critical if they wanted to reduce the pressure on high tax nations to lower their own rates.

The United States at the time was not yet on board with the agenda of other OECD members. In fact, as a primary beneficiary of tax competition, the US was a leader in the backlash that erupted, especially following the release of another report in 2000 that created a blacklist of supposed tax havens. Hundreds of members of Congress stood up for tax competition and threatened the OECD with a loss of funding, while the Treasury Department in Washington also expressed some disdain for the project. The net result of all this opposition was that the OECD campaign was stymied.

But it was only a temporary victory for tax payers. Tax collectors would continue targeting tax competition, but they became less open and honest about their true goals.

The organisation’s new public focus became the elimination of tax evasion. The OECD created the Global Forum on Transparency and Exchange of Information for Tax Purposes ostensibly for this purpose, but it has revealed a larger agenda on several occasions.

For instance, at the Global Forum’s 2009 meeting in Mexico City, organisers covertly inserted into their draft “summary of outcomes” a bombshell assertion that legal tax planning and avoidance techniques – such as relocating to low-tax jurisdictions to take advantage of better rates – should be considered to be “harmful tax practices” on par with illegal evasion. The entire operation, in other words, was exposed as a bait and switch. Nations were brought in under the illusion of fighting tax evasion, but the real goal was to eliminate any ability of capability to move for tax reasons.

Once again the tax collectors were rebuffed when attendees revolted, with China surprisingly playing a leading role in torpedoing the effort.

That also was only a temporary victory. The OECD eventually succeeded through threats of blacklisting and other forms of intimidation in forcing low-tax jurisdictions to play their game. Finally, an elaborate system of peer reviews was established to grade supposedly wayward nations on how well they complied with demands to alter their tax structures to the benefit of high tax nations.

And comply they did. The OECD dictated that jurisdictions sign a certain number of Tax Information Exchange Agreements (TIEAs) or face repercussions. Low-tax jurisdictions dutifully jumped through the hoops and signed the agreements. But suddenly now it is not enough. Having tasted a few smaller victories, the OECD has once again moved the goal posts and seems determined to cripple tax competition once and for all.

A Turning Point in the Fight

Emboldened by the success of the Global Forum, tax collectors saw in the global financial crisis and its political aftermath a golden opportunity. Politicians looking at stagnant tax revenues due to underperforming economies are desperate to fill funding gaps, and they lack the political courage to control spending. The easy alternative is to tell themselves that huge pots of gold can be found just by chasing a few evasive rainbows.

The campaign to expand the burden of government got a big boost with the Obama Administration giving strong support for anti-tax competition proposals. The dramatic, post-crisis shift in posture by the United States had an unfortunate impact. Rather than being defenders of tax competition, the politicians in Washington instead swung a wrecking ball at the international financial community in the form of the Foreign Account Tax Compliance Act (FATCA). This unpopular bit of fiscal imperialism provided momentum for the latest frenzied push to completely upend the global financial order. The OECD admits using FATCA’s upheaval as an opportunity to press its radical agenda, citing FATCA as “a catalyst for the move towards automatic exchange of information in a multilateral context.”

With the ink barely dry on the numerous tax agreements implementing the OECD’s previously desired standard for sharing information upon request, the organisation decided that more was needed – much more. Reflecting the tax-hungry nature of its member governments, the OECD is now effectively saying that all the work done to meet its demands to this point have been for naught. Instead, jurisdictions are expected to sign up for full, automatic information sharing. Or else.

The OECD’s recently released Standard for Automatic Exchange of Financial Information in Tax Matters amounts to the dropping of a nuclear bomb on financial institutions and low-tax jurisdictions for the ostensible purpose of catching a few tax cheats. It may even stop a bit of tax evasion, but not without doing a tremendous amount of collateral damage.

Financial privacy is being obliterated. The US in implementing FATCA and the OECD in its new reporting standard have made clear that the idea of personal privacy rights when it comes to finances are now passé. What you have, where you have it, and what you do with it are presumptively the government’s business. Anyone who isn’t troubled by this reality has not spent much time studying the numerous historical examples of governmental abuse and violation of fundamental human rights.

The End Game

Beyond its destruction of personal privacy, the OECD’s new standard represents the culmination of the organisation’s war on tax competition. Having successfully convinced the world of the dire threat posed by a few wayward tax dollars not reaching the hands of greedy politicians, they have now perfectly positioned themselves to control the global flow of capital and taxpayers. Far from a simple tool to combat tax evasion, that power represents the ability to turn back the clock on globalisation.

Although the United States is the only nation that currently taxes income earned beyond its borders, it is only a lack of capability, rather than desire, holding back other nations from doing the same. Once a global financial surveillance system is established, that will no longer be the case. OECD tax policy head Pascal Saint-Amans calls this move a “watershed moment for international tax policy.” Whereas globalisation was a watershed moment for taxpayers, Monsieur Saint-Amans and other international bureaucrats are happy that governments will be the big winners.

A world in which politicians can follow taxpayers and capital all over the globe is a world in which tax competition loses its power to benefit taxpayers and the economy. There is no escape from onerous tax rates if those rates can simply follow taxpayers wherever they go. And if taxpayers cannot escape bad tax policy, politicians have little incentive for pro-growth reforms.

At every step in the process, the OECD has relied on the acquiescence of low-tax jurisdictions, financial institutions, and international businesses, along with the apathy of global taxpayers, in order to propel their agenda. It need not be this way. Eliminating tax competition benefits a bureaucratic elite few at the expense of the taxpaying many. It is time for the many to say that enough is enough.

Tuesday

4

November 2014

Don’t Abolish Midterms Just Yet

Written by , Posted in Big Government, Election Time, Waste & Government Reform

A New York Times op-ed by a Duke professor and a student argues that midterm elections are passé. A cynic might conclude something about the timing of this realization – that it coincides with an election in which the party favored by academia (and the New York Times) is likely to receive an electoral shellacking. But the argument is worth taking at face value, so let’s consider it on the merits.

Schanzer and Sullivan say that midterms once made sense, but that times have changed. For one, they argue that the need for close electoral accountability has diminished thanks to modern technology:

Twitter, ubiquitous video cameras, 24-hour cable news and a host of other technologies provide a level of hyper-accountability the framers could not possibly have imagined. In the modern age, we do not need an election every two years to communicate voters’ desires to their elected officials.

Perhaps. Communicating with elected officials is certainly easier than ever before, as is taking the pulse of the electorate, but does greater access to public desires translate into legislative results? I find that politicians are most concerned about public views come election time. Longer terms for House members would thus reduce incentives for representatives to adhere to public desires.

Reading between the lines, one gets the impression that’s precisely what the authors want. They worry over the fact that “Americans’ confidence in the ability of their government to address pressing concerns is at a record low,” and grumble that the “main impact of the midterm election in the modern era has been to weaken the president.” Indeed, it appears to be any obstacle to an imperial presidency that most motivates the authors.

“The realities of the modern election cycle,” they complain, “are that we spend almost two years selecting a president with a well-developed agenda, but then, less than two years after the inauguration, the midterm election cripples that same president’s ability to advance that agenda.”

In other words, this appears to boil down to the standard statist complaint over “gridlock.” Though they also throw in some identity politics for good measure:

Another quirk is that, during midterm elections, the electorate has been whiter, wealthier, older and more educated than during presidential elections. Biennial elections require our representatives to take this into account, appealing to one set of voters for two years, then a very different electorate two years later.

Again, a cynic might note that the kind of voters the authors would prefer politicians stop appealing to tend to favor an ideology and party that academia (and the media) loathes. But not to worry, they have a solution:

There’s an obvious, simple fix, though. The government should, through a constitutional amendment, extend the term of House members to four years and adjust the term of senators to either four or eight years, so that all elected federal officials would be chosen during presidential election years. Doing so would relieve some (though, of course, not all) of the systemic gridlock afflicting the federal government and provide members of Congress with the ability to focus more time and energy on governance instead of electioneering.

For many, anything that limits the energy politicians spend on governance – that is, the time spent imposing their whims on the rest of us – is likely to be a good thing. Gridlock, in other words, is a feature rather than a bug.

Political tools tend to be blunt instruments, and attempts to solve societal problems through the political process are often hamfisted and counterproductive. Certainly some problems need political solutions, but there is good reason for the process to be arduous and time consuming. The impulse of individual politicians in the face of any problem is to preen and overreact in order to demonstrate that they are “doing something.” It is up to institutions, then, to slow things down and force deliberation into the process. If midterm elections contribute to that process, then they are a net positive.

Friday

31

October 2014

U.S. Rule on Beneficial Owners is Tip of the Iceberg

Written by , Posted in Economics & the Economy, Free Markets, The Nanny State & A Regulated Society
Originally published in Cayman Financial Review
Download PDF

The Treasury Department issued a proposed rule in late July that will impose greater regulatory obligations on U.S. banks. Put forward by the Financial Crimes Enforcement Network (FinCEN) under the Bank Secrecy Act, the rule requires financial institutions to identify beneficial owners of legal entities. If adopted, the rule will bring the United States one step closer to joining Europe’s high-tax nations as firmly opposed to financial privacy and tax competition.

The proposed rule has been years in the making. FinCEN first suggested the requirement to identify beneficial owners in a March 2012 Advance Notice of Proposed Rulemaking. The Advance Notice was met with serious objections over its broad and costly requirements to identify the beneficial owners of legal entity customers. But in a rare move, regulators appear to have listened and the new proposed rule is less onerous than its predecessor. However, they are careful to make clear that the rule represents the minimum standard and may be added upon.

Compared to that of the Advance Notice, the proposed rule offers a narrower definition of beneficial ownership, excludes certain types of legal entities, and provides a simplified procedure through use of a standard self-identification form for revealing owners. The changes are no doubt a relief to the many institutions that were concerned about the cost of complying with the Advance Notice, but in the long run it may not matter. The current rules will more than likely serve as the proverbial camel’s nose under the tent, with future obligations – and associated compliance costs – growing ever higher through additional amendments and regulations.

Beneficial ownership reporting rules long sought

There have been efforts in the past to require identification of beneficial owners in the United States. These efforts often have come in the form of attacks on the efficient and attractive incorporation laws of states like Delaware and Nevada. Senator Carl Levin – a frequent opponent of tax competition and financial privacy – has repeatedly introduced the Incorporation Transparency and Law Enforcement Assistance Act, for instance, which was endorsed by then-Senator Barack Obama.

Levin’s legislation directly attacks U.S. states that make incorporation fast and convenient, citing disapprovingly the fact that “many States have established automated procedures that allow a person to form a new corporation or limited liability company within the State within 24 hours of filing an online application, without any prior review of the application by a State official.”

Accordingly, the legislation alleges, these states and offshore jurisdictions are “inviting terrorists and other wrongdoers to form entities.” Needless to say, no evidence is ever offered to show that these vehicles are systematically abused.

The notice of proposed rulemaking makes clear that it is intended to complement legislation, such as that proposed by Senator Levin, requiring collection of beneficial ownership information when legal entities are formed. It also cites U.S. obligations for information sharing under FATCA as a justification for the rule, which raises the possibility that information received by banks under the regulation will at some point be shared automatically with officials and without need for suspicion or regard for due process.

Deliberately undermining American competitiveness

The United States has long benefited from tax competition. In addition to hosting several states with favorable incorporation laws, it also exempts reporting and taxation of certain types of foreign income. These policies encourage economic growth by not subjecting capital income to extra layers of taxation, which helps to attract $13 trillion in foreign indirect investment to the American economy. At the same time, these same policies have made it intellectually difficult for statist activists and politicians in America to attack foreign jurisdictions that use similar strategies to attract investment.

A desire to overcome the hypocrisy handicap on the part of American-based anti-tax competition campaigners is a large motivation behind Levin’s Incorporation Transparency bill, but there’s never been enough political support for eliminating such a significant source of growth to the U.S. economy. Achieving the same ends through regulation sidesteps the political obstacles and frees U.S.-based campaigners to more effectively attack offshore financial centers, such as through Senator Levin’s other anti-tax competition legislation, the Stop Tax Haven Abuse Act.

Adopting FinCEN’s beneficial ownership reporting rules also will in this way more closely align the United States with high-tax European nations and other large OECD members. The biggest threat it poses, in other words, might not come from additional U.S. legislation, but from greater American support for international rules designed to eviscerate financial privacy and hamstring low-tax jurisdictions.

The OECD’s efforts to undermine tax competition are well documented, and have recently reached fever pitch with proposed standards for automating information exchange between nations. Under the Bush administration, the United States generally stood opposed to the OECD campaign, and their opposition dramatically slowed the organization. The Obama administration, on the other hand, ideologically supports OECD efforts to indirectly harmonize tax rates by preventing individuals from benefiting from better tax policy in other nations.

With FinCEN’s proposed rules, Obama administration regulators are making clear their intent to bring the U.S. into better alignment with European tax collectors. Low-tax jurisdictions should take notice, as this will only further embolden the OECD to press harder in its quest to protect the fleeing tax bases of high-tax nations at the expense of the global economy.

Wednesday

15

October 2014

Tuesday

14

October 2014