BrianGarst.com

Malo periculosam, libertatem quam quietam servitutem.

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.

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.

Thursday

8

October 2015

Getting Better All The Time

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

You wouldn’t know it from the popularity of Thomas Piketty’s anti-capitalism treatise, or the Pope’s routine railing against free markets, but the world is getting ever more prosperous. The dramatic decline in global poverty in the last few decades is nothing short of remarkable.

According to a recent World Bank report, extreme poverty is expected to fall below 10% by the end of 2015, which will be a first in human history. I mentioned a few other improvements in a recent EveryJoe column chastising the Pope for spreading economic ignorance:

Across a variety of metrics, life continues to get better and better. Extreme poverty – measuring those living on $2 per day or less – has been cut in half since 1981 and will be all but eliminated by 2030. Global GDP per person has never been higher. Pick a measure of human wellbeing and it’s virtually the same story over and over again: life expectancy is up, infant mortality rates have plummeted, women are better represented in governments than ever before, etc. etc.

The world is simply not the horrible place the pope describes. It is better than it ever has been and we have precisely those institutions that he savages to thank for it.

Over at Cato, Ian Vásquez ties the decline in global poverty to the spread of economic freedom:

w9iSjkutgZ1UwAAAABJRU5ErkJggg==

Using updated methodology, the World Bank recalculated poverty figures back to 1990. The new data track closely with previous Bank figures, which I use in the graph to show the fall in poverty since the early 1980s when 43 percent of the world’s population was extremely poor…The drop in poverty also coincides with a significant increase in global economic freedom, beginning with China’s reforms some 35 years ago and the globalization that followed the collapse of central planning in the late 1980s and early 1990s.

Much more could be said on that point, but there are any number of examples demonstrated the superiority of market freedom when it comes to producing wealth (Argentina versus Chile, Venezuela versus Singapore, etc.). Yet the more things get better, the more we seem to worry that they’re not. As the totality of social problems decreases, we devote more energy to those that remain. Which in many ways is healthy. A benefit of being better off overall is that we need not tolerate things which we had no choice but to accept in the past.

But we must be careful not to lose perspective. Exaggerating current problems can lead to poor policy choices if it causes us to disregard the means by which we achieved our current prosperity in the first place.

Wednesday

19

August 2015

BEPS Pivotal in Fight Over Tax Competition

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

At first glance the OECD’s Base Erosion and Profit Shifting (BEPS) project is difficult to understand.

There has been no decline in corporate tax revenues in recent years, and nations already possess a variety of tools to respond to erosion when needed. BEPS is thus drawing an inordinate  amount of global attention and resources for apparently low expected returns. The only way to thus explain the project is to recognize that it represents a new front in the OECD’s long running war on tax competition.

The BEPS project has proceeded swiftly following the initial 2012 communiqué from G20 leaders encouraging OECD action on BEPS. In just eight months the OECD returned a report declaring that, “Base erosion constitutes a serious risk to tax revenues, tax sovereignty and tax fairness for OECD member countries and non-members alike.” Only four months after that it followed up with an “Action Plan on Base Erosion and Profit Shifting” that identified the specific areas it intended to address.

Reports for about half of the items identified in the Action Plan were delivered in 2014, with the rest expected in fourth quarter 2015. What has already been released reveals an aggressive agenda clearly aimed at striking a blow against tax competition.

Why the rush?

Political processes typically move slowly, and it might be expected that a project as massive as BEPS with participation from across the globe would require a more deliberate pace. But BEPS has advanced with relative speed. The reason is that the OECD has learned from its past mistakes.

When the OECD released its infamous 1998 paper excoriating “Harmful Tax Competition,” the organization was caught by surprise at the backlash that developed. But it took time for that resistance to coalesce, and it was given a major boost when the United States presidency switched from a Democrat to a Republican in 2000.

A U.S. presidential election is again approaching in 2016, and with Barack Obama finishing his second term there is guaranteed to be a transition, with at least a fair chance of a similar party swap.

Such an outcome could turn the influential United States from a supporter of the OECD’s efforts to an opponent. The agency would rather advance the project beyond the presumptive point of no return before that can happen. Moving quickly likewise provides less time for the business community and other besieged parties to react with organized opposition.

It’s important to note that base erosion, if it really constitutes a problem, is fairly correctable through unilateral action. Transfer pricing rules offer governments considerable power to restrict corporate tax planning if desired, yet the OECD plan goes well beyond providing assistance in developing these rules. The most powerful tool, however, comes from the simple ability to set competitive tax rates.

Were the OECD merely providing tools and recommended practices to assist nations looking to address their own tax systems, they wouldn’t need to hurry the process. In that scenario individual governments could decide for themselves and without coercion whether to heed the BEPS recommendations whenever they happened to be ready. Because the OECD’s aims are much broader, they require not only for the recommendations to be successfully crafted, but eventually for them to be universally adopted as well. And that means getting to the finish line before the opposition even realizes what’s happening.

Homing in on tax competition

The OECD’s animosity toward tax competition by now has been well documented. To put it simply, politicians resent restrictions on the ability to tax and spend as they please.
As capital has grown increasingly mobile, the negative economic feedback from excessive taxation has simultaneously become sharper and more immediate.

Average corporate tax rates among OECD nations have been slashed by more than half since the 1980s, down from around 50 percent to almost 24 percent today. More nations have also switched to territorial systems. Of the 34 current members of the OECD, the number taxing corporations on a territorial basis has doubled since 2000, up to 28 of 34 in 2012.

Although these reforms have benefited the global economy, members of the ruling class tend to be firm believers in the power of government to direct economic growth. The more politicians have to spend, in this backwards view, the stronger will be the economy. The lack of decline in corporate tax revenues as a share of GDP despite major rate cuts, thanks to the dynamic growth effects of better tax policy, is met with denial. Revenues, they believe, would be even higher if rates had not been reduced.

On this understanding the OECD declared itself with the 1998 report to be the primary tool through which international tax collectors and bureaucrats would seek to mitigate tax competition’s impact on domestic policymaking. But because it initially faced political backlash, the OECD has waged the campaign against tax competition through various proxies – money laundering, tax evasion, and now base erosion and profit shifting.

OECD learns from past mistakes

Combating tax competition, unlike base erosion, requires governments working together in what amounts to a tax cartel. This is why it’s essential for the OECD to build a narrative of inevitability surrounding BEPS, and to conclude its work before opposition has time to puncture the narrative. It’s also why the eventual recommendations will be anything but suggestions.

Past efforts prove that when the OECD makes recommendations, they tend to be of the variety that cannot be refused. When developing policies to combat tax evasion, a previous but still popular stand-in for tax competition, the OECD has used a combination of blacklists, intimidation, and threats of sanctions to compel adoption of its preferred tax policies. Those policies naturally reflect the preferences of the OECD’s membership – primarily high-tax welfare states – and the G20 nations pulling its strings.

Although the OECD isn’t advertising the role of BEPS in restricting tax competition, they aren’t exactly hiding it either. The Action Plan lists the “Harmful Tax Competition” report as one of its only four references, alongside the G20 letter and the first BEPS report.

And shortly after the Action Plan notes without substantiation that “Globalisation means that domestic policies, including tax policy, cannot be designed in isolation,” its authors make the following stunning admission:

“While it may be difficult to determine which country has in fact lost tax revenue, because the laws of each country involved have been followed, there is a reduction of the overall tax paid by all parties involved as a whole, which harms competition, economic efficiency, transparency and fairness.”

That single passage includes two significant revelations. The first is that they don’t care whether or not there exists evidence of actual erosion. The second is that the OECD has staked out a normative position regarding nations’ domestic tax policies. Namely, that lower tax burdens reflected in “lost revenue” are presumptively harmful and even somehow unfair.

Conclusion

Corporate taxes are widely understood to be among the most economically destructive forms of taxation, providing just one of many reasons why rational policymakers might choose to find other sources of revenue. The BEPS project has as one of its core assumptions that they are wrong to do so because high corporate taxes are the ideal policy – a policy to which tax competition has become the primary obstacle.

Before the recent campaigns against tax competition, international cooperation on tax policy primarily focused on eliminating double taxation and ensuring that government greed didn’t choke the private sector and kill the goose that laid the golden egg. The OECD even assisted by helping facilitate these efforts.

Now, the OECD wants to turn back the clock and undo the tremendous gains brought about by tax competition.

At the same time as nations are negotiating historic new trade agreements to knock down barriers and further liberalize global commerce, the OECD is running in the opposite direction. BEPS threatens to erect substantial and costly new barriers to global commerce, and its proponents clearly hope that no one will notice until it’s too late.

Saturday

15

August 2015

Third Time Won’t Be the Charm in Greece

Written by , Posted in Big Government, Economics & the Economy, Foreign Affairs & Policy, Free Markets, Taxes

Greece is getting bailed out for the third time in just five years, proving yet again that lessons from political mistakes are rarely heeded. As I wrote last month in a column for EveryJoe:

The simple explanation is that Greece tried socialism and it predictably failed, as socialism is wont to do… More specifically, Greece has saddled its economy and its people with heavy taxes to fund a corrupt government weighed down by excessive pensions for their bloated workforce. A byzantine and oppressive regulatory system further stifles growth and prevents the economy from keeping up.

To put some numbers on the problem, Greek debt exceeds 177 percent of its GDP. That means Greeks would have to work almost two years to produce an equivalent amount of goods and services. It’s unfunded future liabilities, which includes generous pensions, tops 875 percent of GDP! Its yearly spending on pensions alone accounts for a whopping 16 percent of Greece’s GDP, and overall the government spends upwards of 50 percent.

If all this proves that Greece is suicidal, it was its entrance into the European Union that gave it the rope needed to hang itself. When it joined the EU, Greece suddenly had access to levels of credit it never had before thanks to the implicit backing of stronger EU economies like Germany. Creditors determined – correctly, apparently – that if Greece couldn’t pay its debt then they would be bailed out by the larger economies. And like a kid that got his hands on his parent’s credit card for the first time, Greece went nuts. In economic terms that’s called a moral hazard, and the latest bailout has only reinforced it.

This week’s announcement of yet another bailout will only exacerbate the moral hazard, and demonstrates the continued folly of the EU’s grand experiment with a common currency without a common fiscal policy.

Continuing to prop up Greece’s bloated government will not solve the problem. There are no good solutions, but the least bad option is for them to go bankrupt and solve the root of their problem, which is excessive government spending.

Instead, Germany and the rich EU nations are offering yet another loan to the demonstrably irresponsible, on condition that they raise taxes and cut spending. Unfortunately, only one of those conditions will help while the other will prove counterproductive. Leftist bleating about ‘austerity’ conflates tax hikes with spending cuts, but the former is bad for growth and saps the political will for belt tightening, while the latter is a proven path toward fiscal solvency.

What Greece needs is to tear down its bloated bureaucracy and insane regulatory regime, but that won’t happen so long as the EU continues acting as enabler.

Tuesday

30

June 2015

Don’t Cry Wolf on Religious Liberty Infringements

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

Respect for religious freedom has deep roots in American society. Many of those who came to America did so to escape religious persecution, and they brought with them a profound understanding of the importance of protecting such personal rights from oppressive rule, be it by the hand of monarchy or democratic majority. Thus why Constitutional protections for religious freedom were included in the First Amendment.

Yet many areas where religious freedom is said to be under attack are actually examples of a different sort of problem. No one should be forced to make a gay wedding cake, for instance, simply because they make their living as a baker (assuming they are their own employer). The idea that one must sell to all in order to sell to any contradicts basic Constitutional tenets, yet is an idea that has wormed its way into Constitutional doctrine thanks to the misguided idea of “public accommodations” in non-discrimination law, and long eviscerated protections for economic liberty. Focusing on the subset of cases where objections are made on the grounds of religious sensibilities misses the larger issue, which is that the freedom of association and basic liberty should allow all the right to choose with whom they do or do not engage in commercial exchange – for any reason, be it religiously motivated or not, that the individual sees fit.

But there are also ways in which religious freedoms are actually in danger of being undermined today. Under the direction of Houston’s first openly gay mayor, Annise Parker, the city last year subpoenaed sermons and other pastoral communication from local churches. They were ordered to turn over any communication relating to a contentious local non-discrimination law, as well as “all speeches and sermons related to Mayor Annise Parker, homosexuality and gender identity.” She backed down after national uproar over the flagrant abuse of power, but the episode is both illuminating and disturbing.

Religious concerns from the fallout of Obergefell are also not without merit, as admitted by U.S. Solicitor General Donald Verrili when he acknowledged during oral arguments that tax-exempt status “is going to be an issue” with the Court’s potential (and now real) ruling that the exclusion of same-sex couples from marriage (rightly) violates Constitutional protections. The ACLU has also decided that it’s no longer on board with the whole religious freedom thing now that Christians might be the one’s in need of legal protections. And given the proven vindictiveness of today’s cultural winners, more attacks ought to be expected.

Which is all the more reason why it’s a shame that Ted Cruz and some other Republicans, along with the Texas Attorney General, are insisting that county clerks in Texas or elsewhere ought to be able to be able to “opt out” of issuing same-sex marriage licenses if they have religious objections. This is a misapplication of religious liberty.

Look, we’re not talking about clergy or non-state wedding officiators here, who like bakers ought to be able to decide whether they wish to take part in a same-sex wedding or not. These are people whose job it is to process paperwork and issue wedding licenses. County Clerks are municipal employees, be they elected or appointed, and therefor agents of the state. And agents of the state don’t get to dictate actions of the state based on personal whims. If they won’t or can’t do the job required of them and fulfill their duties as public servants then they ought to resign.

Individuals have every right to not work at a place that requires issuing same-sex marriage licenses, but what they don’t have is the right to insist that they not be replaced by someone who will do the entire job and not just part of it. Anyone with true convictions should understand that sometimes upholding those beliefs means making sacrifices, including not working at places that as a fundamental part of the job necessitate violating those beliefs.

There are real threats to religious freedoms, and those who might wish to meet those threats with robust Constitutional protections shouldn’t try to expand the concept to its breaking point. I’m sure it’s not easy to have to choose between honoring ones principles or performing a duty that one currently under obligation to perform, but there’s no Constitutional right to not have to make tough choices.