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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
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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

Monday

13

October 2014

Sunday

5

October 2014

Minimum Wage Follies

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

The great Krugtron the Invincible argues the minimum wage can be increased without much consequence. He says there’s “hardly any cost to raising it,” and that “we can raise these wages without losing lots of jobs.” Notice the weasel language. We can raise it without losing “lots” of jobs, but regardless of what he subjectively considers to reach the “lots of jobs” threshold, there will unarguably be a lose of some jobs.

Bringing in some data, Antony Davies at the Mercatus Center demonstrates that as relative minimum wages have increased, so to has unemployment rates for those with anything less than a college diploma.

Min wage vs Unemployment by edu

So Krugman’s job is safe, but plenty of those poor folks he claims to champion will feel the warm, fuzzy benefits of his proposal all the way to the unemployment line.

In the latest episode of Hotnomics, host Emerald Robinson looks closer at the numbers and lays out the evidence against raising the minimum wage.

Friday

19

September 2014

Is Secession Acceptable Again?

Written by , Posted in Culture & Society, Foreign Affairs & Policy, Liberty & Limited Government

An interesting aspect of yesterday’s vote for Scottish independence is that it has Americans discussing political separation without all the unwanted historical baggage of the Civil War and race relations. That is, there have been substantive discussions even among Americans on the pros and cons of Scotland leaving the United Kingdom (they ultimately voted to stay) without anyone claiming the very idea of secession to be racist, as so often happens when it is considered within the United States.

Even though the Scottish vote resulted in affirmation of the union that forms the United Kingdom, the orderly acceptance of the vote stands in stark contrast to the threats of violence that come in response to even idle talk in the US. Just suggest that a state might leave the union, and you won’t have to wait long for indignant statists to wag their fingers and sarcastically warn about “how well that went last time.” In other words, try to leave the union and they’ll wage war upon you and burn your cities to the ground. In the name of unity, naturally.

If the British, who once fought a war to prevent the American colonies their independence, can agree that they want no unwilling subjects and indicate they would have accepted without bloodshed the will of the Scottish people to secede, then is it not time for Americans to stop threatening violence at long-shot prospects of political separation?

Thursday

18

September 2014

Is Government Threat of Punishment Keeping Private Universities from Cutting Tuition?

Written by , Posted in Big Government, Economics & the Economy, Education

Federal policies unquestionably deserve some blame for skyrocketing tuition costs. Washington subsidizes student borrowing, and colleges in turn raise prices to capture federal dollars. Higher prices put pressure on Washington to increase subsidies and the cycle repeats.

But there are obviously other forces at work as well. In a typical market you would expect competition to drive prices down, for instance. However, cutting prices doesn’t have the expected effect. Ike Brannon explains:

[W]hy don’t private colleges simply reduce tuition and reap the benefits? Indeed, a few colleges have done precisely that, and have been rewarded with a sharp spike in applicants the first year or two afterwards.

However, the gains from such a tuition reduction are short-lived: the typical pattern from a unilateral price cut is that by the third year the market has forgotten the gauzy rhetoric behind the price reduction and perceives the cut-rate tuition as an indicator of an inferior good, and applications decline.

Colleges in this way act as a Veblen good, meaning demand is proportional to price, rather than inversely proportional as we would expect from the law of supply and demand. Colleges with higher tuition are perceived as more prestigious and of higher quality and afford their alumni bragging rights. Thus, slicing tuition in a vacuum can reduce demand.

But one college president proposed a solution that would benefit consumers. Unfortunately, the government sprung to action and threatened him with legal repercussions:

Private colleges can cut tuition and avoid such a death spiral, but only if they do so in concert. However, the specter of a few dozen private colleges organizing to reduce prices — which might seem like an unmitigated good to parents — risks the ire of the Justice Department, which launched an investigation when a college president suggested such an idea at a public conference. College presidents don’t like being told by an officer of the government that they’re risking jail time, and any nascent discussions quickly ceased.

The government has criminalized “price fixing” in the name of protecting consumers. But as we see here, good intentions mean little once government bureaucrats with tunnel vision are brought into the equation. Regardless of the rule’s intent, prosecutors are prepared to punish colleges for potentially agreeing to lower tuition despite both its obvious benefit to consumers and the action’s alignment with stated policy goals.

Government policies helped create the problem of exorbitant tuition costs, and now it is actively working to prevent others from solving it. To quote Ronald Reagan, “government is not the solution to our problem; government is the problem.”

Saturday

30

August 2014

Risks Come in Many Forms

Written by , Posted in Big Government, Culture & Society, Foreign Affairs & Policy, Gun Rights, Liberty & Limited Government, The Nanny State & A Regulated Society

The New York Times editorial board has some sound advice for Great Britain as it worries about the threat of home grown terrorists. It’s a serious problem, and one which the UK has largely invited on itself through a failed experiment in cultural appeasement that has only served to embolden extremism. Be that as it may, NYT editors are right to warn against overreactions that undermine civil rights by concluding that, “scrapping civil liberties should not be the first line of defense in a democracy.”

Terrorists pose a safety risk, and mitigating that risk should be done with respect to civil liberties rather than trampling them. But there are a great many risks in society, and unfortunately the NYT editorial board fails to consistently apply this principle on other issues. They have no problem curtailing rights for the illusion of security when doing so confirms their ideological biases, such as limiting speech in the name of removing money from politics, or scrapping the Second Amendment in the name of reducing violence.

In fact, just a day before sternly warning the Brits against overreacting to their homegrown extremism problem, the very same New York Times editorial board overreacted to a single gun accident caused by the irresponsibility of parents and an instructor that allowed a young girl who couldn’t handle the weapons and its kickback to shoot an Uzi, ultimately resulting in the instructor’s death. Not only did they use the unusual incident to finger wag at defenders of the Second Amendment and note in horror all the various ways in which gun enthusiasts enjoy their hobby, but they also demanded the restriction of rights in response. Citing a similar incident over half a decade ago (giving indication to  how rare these events are) where a young child accidentally killed himself at a gun range, the NYT editors praised his state of Connecticut for reacting by banning access to certain guns even at gun ranges for those under 16, regardless of the level of supervision, precautions taken, or capabilities of the shooter. They then lamented that there will be no “swift action in Arizona, where the gun culture is deeply entrenched.”

Rights are precarious things. They are at their most vulnerable when the populace is scared. The New York Times recognizes this when it comes to foreign threats, but fails to understand that domestic panics over extremely low risks of harm are just as dangerous.

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About Me

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

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