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financial privacy Archive

Wednesday

13

April 2016

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COMMENTS

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.

Friday

2

December 2011

0

COMMENTS

Government Policy, Not Laziness, Responsible for Scaring Away Foreign Investors

Written by , Posted in Taxes

President Obama recently told a group of CEO’s that America had “been a little bit lazy” about “selling America and trying to attract new businesses into America.” Is this the case, or has the quality of the product simply declined? America’s descent in the Heritage Index of Economic Freedom would certainly tend to suggest that it’s the latter. The reality is that laziness is not to blame for any increasing unattractiveness to foreign investors; government policy is.

There are two looming policies, in particular, that are threatening foreign investment in the US. One of those is the Foreign Account Tax Compliance Act (FATCA), passed in 2010 in an effort to raise revenue for the HIRE Act through greater tax enforcement. The other is an IRS proposed regulation which would require reporting of interest payment information on foreign depositor accounts, despite the fact that the US has no use for the information. Both policies are misguided, counterproductive, and will drive investment out of the US.

FATCA is designed to compel foreign financial institutions to become deputy tax collectors for the IRS. By 2014, these institutions will be expected to have implemented expensive new data collection and reporting systems, and those that have not complied will face a 30% withholding tax on US source payments to the institution. As if those costs aren’t enough, FATCA also conflicts with local privacy laws in many countries, placing FFIs in an impossible position. Already, institutions are deciding that it makes more sense to simply drop their US clients and disinvest in US markets than to continue jumping through IRS hoops. The result is billions in lost foreign investment, and there is only more to come.

As I recently co-wrote in a piece with Dan Mitchell:

The FATCA legislation is the product of a misguided school of thought within the US political class which believes that there are vast sums of unpaid taxes which the IRS would be able to collect if only the rest of the world would stop hiding it from them.

…The rationale behind FATCA is simple in its destructiveness. Even though the US has a very high compliance rate for tax laws compared to the rest of the world, US politicians decided that more enforcement was needed to get more money to fund more spending and bigger budgets in Washington. Throwing aside any semblance of cost-benefit analysis, they then decided to spare no expense to capture every last dollar of potential tax revenue. Unfortunately, FATCA was not a wise approach. Ordinary Americans will suffer from the ensuing damage to the economy. Foreign financial institutions will endure higher regulatory burdens and compliance costs. And the FATCA law creates a powerful disincentive for foreign investment in the US. FATCA thus has the net impact of potentially reducing both economic prosperity and government tax revenues.

The other policy disaster on the horizon is a regulation proposed by the IRS which would require domestic banks to collect information and report on the interest payments made to foreign depositor accounts. The IRS would then share this information with foreign regimes. They assure us that sharing would only take place with countries that have tax treaties with the US, but that list is not only capable of changing at any time, but already includes the dictatorship in Venezuela, and crime and corruption plagued Mexico. What’s more, these payments are not taxable under the US tax code – a policy which Congress has explicitly chosen in order to foster foreign investment in the US – and so the rule serves no direct domestic interest.

recent Congressional hearing I attended on the issue covered a variety of arguments against the regulation. Members were concerned about the human rights implications for foreign depositors, particularly from Latin America, who face kidnapping and extortion threats back home, but most importantly the capital flight this concern would cause should the rule pass. Years ago, the Mercatus Center did a study estimating $88 billion in lost foreign investment. That was on a rule more limited in scope, so today’s proposal would be even more destructive.

The tax bureaucrats seem intent on plowing forward, even as Congress is mobilizing against the IRS on the issue (bills to prevent the rule from being implemented have been introduced in both the House and Senate – thanks to the leadership of Florida Rep. Bill Posey and Sen. Rubio, as well as Texas Senators Hutchison and Cornyn – and have a combined 28 co-sponsors). The IRS’s objective quite likely is to please foreign tax collectors who are complaining loudly about the burdens we are demanding their institutions take on with regard to FATCA.

President Obama thinks we have been lazy in selling America. But his administration has been anything but lazy in making America a harder sell to foreign investors. Rather than compound the mistake of FATCA with another one, while simultaneously driving out much needed foreign investment, we should revisit the initial legislation and look instead at making the tax code less complex and more economically competitive. Then we should tell the IRS that their job is only to enforce US tax laws, not to take it upon themselves to decide that America’s interests are outweighed by the tax information demands of the likes of Hugo Chavez.

Cross-posted at Big Government.

Wednesday

6

April 2011

0

COMMENTS

Why is the IRS Putting Foreign Tax Collectors Ahead of U.S. Interests?

Written by , Posted in Taxes

It’s easy to complain about the IRS, but more often than not the bureaucrats are simply carrying out the bad policies imposed by Congress. There certainly are some egregious cases of IRS abuse, but it’s typically the fault of lawmakers for enacting bad law.

But such is not the case with a regulation currently under consideration which would require that American banks put foreign tax law above U.S. tax law. The regulation deals with the obscure issue of reporting requirements for bank deposit interest paid to foreigners, but the economic impact would be significant. Worst of all, the IRS is seeking to overturn existing law. In some ways, this is the tax equivalent of the EPA’s notorious power grab scheme to impose cap-and-trade with regulatory edicts.

A bit of background. On January 7th, the IRS proposed this regulation (REG-146097-09) to force American financial institutions to report any interest payed to foreigners. Typically, U.S. tax authorities only require information used for U.S. tax purposes. And since Congress wants to attract this investment to the American economy, the law has clearly stated for 90 years that foreigners won’t get taxed, leaving no need to collect any information about this income. But now, as part of global efforts to undermine tax competition and usurp fiscal sovereignty, the IRS is unilaterally asserting the right to demand this information. Only it’s not to enforce American law, but in order to hand the information over to foreign governments so that they can tax this U.S.-source income.

There is good reason why investors would want to protect their personal information.

In many places corruption runs rampant. If you know that any information acquired by your government may be sold to criminal gangs who look to kidnap children of business owners, then financial privacy also becomes a matter of human rights, or even life and death. Or if you live in Venezuela, you need to protect your assets from a thuggish dictator who might expropriate them on a whim. If foreign investors can no longer count on the U.S. as an attractive destination for their investment, one which protects their human rights, they will look elsewhere.

If the IRS is allowed to implement the regulation, it will undoubtedly harm the US economy. Foreigners have more than $4 trillion invested in American financial institutions, according to the Treasury Department, and all told there is more than $10 trillion invested in the U.S. economy by foreigners. Much of this investment capital would leave American shores if the IRS gets its way. A study by the Mercatus Center on a previous version of the proposal, which was more narrowly targeted and applied to just 15 countries, found that $87 billion would leave the US economy. That figure would likely be much higher today.

Despite the likely economic impact of the regulation, the IRS amazingly concluded that it was not a “significant regulatory action,” and thus did not conduct a cost-benefit analysis as required by Executive Order 12866. The order quite clearly defines a “significant regulatory action” as one having “an annual effect on the economy of $100 million or more or adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local, or tribal governments or communities.” With trillions in foreign investment at stake, the IRS would have us believe that this regulation does not have an annual impact of $100 million or more, or would not “adversely affect in a material way the economy.” This disregard of legal requirements is something to expect from a banana republic, but it’s becoming disturbingly common as government gets more power in America.

Not only is the IRS dishonestly ducking Executive Order 12866, it is also blatantly flouting the expressed will of Congress. The last time the IRS tried to impose this reporting requirement, over 100 members of Congress voiced their objection, and it was eventually allowed to die without implementation. This time around, and lead by Congressman Posey, the entire bi-partisan Florida delegation in the House has already objected. Many more are expected to do so in the near future. Senator Marco Rubio, for instance, has just recently joined his Florida colleagues to condemn the regulation, noting that it “violates the long-standing intent of Congress not to require the reporting of interest earned by nonresident aliens,” and would “put our financial system at a fundamental competitive disadvantage.” Every time that Congress has addressed this issue, it has specifically chosen to keep America an attractive destination for foreign investment by not taxing interest paid to non-resident foreigners.

It is not too late to speak up. The deadline for public comments on the proposed regulation is the end of the day April 7th. If you think that the IRS should respect the will of Congress and not place the interests of foreign tax bureaucrats above the US economy, you can give your two cents to the IRS here.
Cross-posted at Big Government.