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tax competition Archive



September 2016



Washington Can’t Permit EU-Led Open Season On U.S. Companies

Written by , Posted in Taxes

To justify its recent $14.5 billion ruling against Apple, the EU claimed that Apple benefited from “a significant advantage over other businesses that are subject to the same national taxation rules.” If they had provided any evidence of a special carve-out for Apple, this might be easier to believe. Instead, the likely explanation is that the EU is stepping up its war on tax competition as part of its long-standing pursuit of harmonization of tax rates across the continent and ultimately the globe.

The European Commission says Apple owes $14.5 billion plus interest in back taxes to Ireland. What makes the ruling particularly unusual is the fact that Ireland itself disagrees. They don’t want to collect the money. They would rather continue to be a nation with an attractive corporate tax code so that they can benefit from tax competition, rather than short-shortsightedly treating companies as ATM machines.

At issue is whether Ireland granted illegal “state aid” to Apple, which is prohibited under the EU treaty. Such aid is admittedly the wrong way to do tax competition. Jurisdictions should compete through the overall tax and regulatory code, not through special carve-outs. But even where they get it wrong, sovereign nations must be free to administer their own tax codes for tax competition to exist.

The EU surely knows this, which is why their ongoing efforts to move control of tax policy away from individual jurisdictions and towards Brussels is deeply disturbing. The Apple ruling fits a pattern of seeking to eliminate tax competition on the continent, where nations like France and Germany have in the past pressured Ireland to raise its 12.5% corporate tax rate. They wrongly fear a “race to the bottom” that would leave national treasuries empty, instead of recognizing that taxpayers and politicians alike benefit from the higher economic growth induced when destructive taxes are kept low.

It is not at all clear that Apple did in fact receive special dispensation. Those facts will continue to be litigated, as both Apple and Ireland plan to appeal the ruling. They insist that the company was merely given rulings that offered clarification as to how the tax law would be applied in their case, which is both a common and desirable practice because it provides certainty. Adding uncertainty through broad retroactive tax rulings won’t just impact the U.S. companies that Europe wrongly thinks can provide their financial salvation, but it will make the continent less attractive to businesses going forward.

Ultimately, it is up the the United States to defend its businesses against these opportunistic tax grabs. The bipartisan criticism of the EU ruling is a good first start. But politicians must stop demonizing businesses to distract from their own failures to spend responsibly. The U.S. should also lead by example and end its own greedy worldwide tax system.

We’ve seen through the OECD BEPS project what happens when Washington, and in particular Congress, allows European bureaucrats to dream up global tax rules unmolested. It inevitably leads to a byzantine system of arcana designed to keep the government bureaucrats and  accountants employed while squeezing the maximum amount of tax revenue possible out of the global economy. If U.S. politicians continue to sit on the sidelines, these threats will only multiply.

Unfortunately, years of politically motivated attacks on corporations have made large multinationals like Apple seem like low-risk targets. Voters are not going to take to the streets on behalf of the likes of Apple, Google, or Amazon. After pounding on and on about big business not paying its “fair share,” Washington is in an awkward place now that the EU has said “we agree” while helping themselves to the coffers of an American company. Yet if Washington doesn’t act, Apple will just be the first of many.



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.



September 2013



End the Federal Subsidy for Big State Governments

Written by , Posted in Big Government, Liberty & Limited Government, Taxes

The relationship between federal and state governments – the division of power between the two levels being known as federalism – is an integral part of the American constitutional system. Federalism uses separate and competing spheres of sovereignty to check the growth and power of government as a whole.

Unfortunately, that system has been steadily eroded by a series of policies that have empowered the federal government, weakened states, made states dependent upon the largess of Washington, or encouraged excessive growth of state governments. As Curtis Dubay of the Heritage Foundation writes in a recent Issue Brief, the latter is accomplished in part through a federal deduction for state and local taxes that shields residents in high tax states from feeling the full cost of their bloated local governments.

Dubay writes:

The tax code allows taxpayers to deduct certain state and local taxes, including income taxes, sales taxes for residents of states that (wisely) go without an income tax, real estate taxes, and personal property taxes. State and local income taxes makes up about 95 percent of all state and local tax deductions.

…The harmful unintended consequence of the deduction is that it encourages state and local governments to raise their taxes. Higher taxes allow state and local governments to grow larger because they spend up to the maximum amount of revenue they can collect.

The deduction encourages state and local governments to raise their taxes because it transfers a portion of their tax burdens from their residents to the federal government. For instance, for every dollar a state taxes a family paying the 33 percent federal marginal tax rate, the family effectively pays only $0.67 of the state tax, because the deduction on the family’s federal taxes reduces their federal tax bill by $0.33.

This reduction in the “price” of the state’s taxes encourages states to raise their taxes higher than they otherwise would, because taxpayers offer less resistance since they do not pay the full cost of the higher taxes. Taxpayers are more willing to accept higher taxes because of the deduction in the same way consumers are more willing to buy a product or service when prices fall.

Dan Mitchell has similarly pointed to the faults in the state and local tax income tax dedication, as well as potential wrong headed solutions to its distortions:

Under current law, state and local income taxes are fully deductible, but state and local sales taxes are only temporarily deductible. The right policy is to get rid of any deductibility for any state and local tax…

Not surprisingly, the crowd in Washington doesn’t take this approach. Instead, they want to extend deductibility for the sales tax. And they may even be amenable to raising other taxes to impose that policy.

…This is a very misguided policy. It means that greedy politicians such as Governor Brown of California or Governor Cuomo of New York can raise tax rates and tell voters not to get too upset because they can deduct that additional burden. This means that a $1 tax hike results in a loss of take-home pay of as little as 65 cents.

But you don’t cure one bad policy with another bad policy. A deduction for state and local sales taxes just augments the IRS-enforced preference for bigger government at the state and local level.

Dubay further explains how eliminating the deduction would benefit tax competition and limited government:

These data show that while taxpayers in high-tax states pay a hefty amount of state and local taxes, they also see that burden reduced the most because of the deduction. If tax reform eliminated the deduction, these taxpayers would see the biggest increase in their effective state and local taxes. They would likely put the most pressure on their state and local governments to stop tax increases and apply the most pressure on those governments to reduce their high taxes.

Like Mitchell, he also notes that offsetting elimination of the deduction is essential to reform:

Eliminating the state and local tax deduction should be done only within the context of overall tax reform. Congress should not eliminate it (for instance, through “loophole closing”) without other offsetting tax changes. To do so would be an unnecessary tax increase.

The state and local tax deduction is just one of many policies distorting the federalist system and encouraging excessive government growth. Federal mandates, grants, handouts and other tax preferences also undermine tax competition and need reform.



January 2011



States War on Business

Written by , Posted in Big Government, Economics & the Economy, Free Markets, Taxes, The Nanny State & A Regulated Society

Why any entrepreneur would try to make a living for themselves in a state like New York or Illinois is beyond me. Maybe it’s just because I’ve never really gotten the allure of big cities, but why would anyone subject themselves to the rule of such petty bureaucratic tyrants?  The big government regulatory states have no respect for those seeking to earn a living, so not find somewhere that does?  Take this story:

…”They told us we had to move or we’d be towed,” Loera explained as the cops rigged the food truck to the tow truck.

They gave Paty’s truck a $55 summons saying it was not allowed to sell merchandise from a metered spot, Loera said. His mother, Patricia Monroy, who does not speak English, made the ultimate decision to stay put once her family translated what the cops were saying.

“My mother felt like she was not breaking the law,” Loera said. “We still had 45 minutes on the meter.”

…Loera had reached out to the Street Vendor Project after his Nov. 30 arrest, and members of the organization joined Paty’s for Tuesday’s return to raise awareness on issues vendors face: harassment from law enforcement and city offices, a harsh ticketing system and excessive punishment and regulations confusing to vendors and cops alike.

But no one anticipated the towing.

“Even if they were breaking parking rules — and I don’t think they were because I don’t think food is merchandise — that’s why they get a ticket. But that’s not a worth a tow,” Basinski said.

…The food truck was careful to follow parking rules, Loera said. It arrived on the Upper East Side about 10:15 a.m., changing spots about 11 a.m. and again an hour later.

Loera and his mother, who was tearing as the truck was being towed, hopped in a cab to follow it. They did not want a repeat of the last towing, when all of their perishables and other items — including its generator — had been removed from the truck, Loera said.

After they paid the $370 to get their truck back in November, they had to take out a $5,000 loan so they could restart the business that provides the livelihood for six families, Loera said.

And what was the basis of the complaints against the truck?

Paty’s had faced the ire of several residents on Community Board 8, who complain about food trucks in the area. They worry the trucks are illegally hogging metered parking spots and that they are unfairly competing with struggling brick-and-mortar stores.

Hogging metered spots? I’m sorry, but weren’t they paying for them just like anyone else? If the prices aren’t reflecting market value, then raise them. But there’s no basis to complain about people who are paying those prices. Unfair competition? Unfair that they made products that people wanted more than other products? How dare they!

Silly immigrants, they thought they were coming to America because it was free, but there’s no place in America for earning an honest living by providing services that people want. If you aren’t working for the government, your work isn’t legitimate.

Other states, like Illinois, are content to just tax their business into leaving. Some states understand the incentives created by tax and spend policies run amok. Take this statement by Wisconsin Governor Scott Walker:

Wisconsin is open for business. In these challenging economic times while Illinois is raising taxes, we are lowering them. On my first day in office I called a special session of the legislature, not in order to raise taxes, but to open Wisconsin for business. Already the legislature is taking up bills to provide tax relief to small businesses, to create a job-friendly legal environment, to lessen the regulations that stifle growth and to expand tax credits for companies that relocate here and grow here. Years ago Wisconsin had a tourism advertising campaign targeted to Illinois with the motto, ‘Escape to Wisconsin.’ Today we renew that call to Illinois businesses, ‘Escape to Wisconsin.’ You are welcome here. Our talented workforce stands ready to help you grow and prosper.

The Associated Press, on the other hand, sneers at the idea that high taxes will drive anyone out of Illinois (Hat-tip: Tax Foundation):

But economic experts scoffed at images of highways packed with moving vans as businesses leave Illinois. Income taxes are just one piece of the puzzle when businesses decide where to locate or expand, they said, and states should be cooperating instead trying to poach jobs from one another.

It’s true that taxes are just one piece of the puzzle, but it’s not like Illinois has paired its high tax policies with a business-friendly regulatory regime. Nor is this a small change, as Illinois has moved from the 21st to the 46th highest corporate tax rates among states. I’ll ignore for now the assertion that states should not be competing to produce good policy, and point out instead this story (Hat-tip: Reason):

The founder of Jimmy John’s said he has applied for Florida residency and may recommend that his corporate headquarters move out-of-state as a result of the Illinois tax increases enacted last week.

Jimmy John Liautaud told The News-Gazette on Tuesday that he is angry about the moves, which boosted the individual income tax from 3 percent to 5 percent and the corporate income tax from 7.3 percent to 9.5 percent.

“All they do is stick it to us,” he said, adding that the Legislature and governor showed “a clear lack of understanding.”

A lack of understanding apparently shared by the alleged economists unearthed by AP.

Is it any wonder why these states are economic and fiscal basket cases?



July 2010



LeBron's Migration Mirrors That Of The Broader Public

Written by , Posted in Economics & the Economy, Taxes

Basketball is not my sport of choice, so I had no vested interest in the outcome of the recent drama surrounding LeBron James.  Even though I still consider Florida my home state, I don’t care that he’s chosen to play in Miami.  I am, however, struck by the degree to which LeBron’s decision mirrors that of so many ordinary Americans and businesses.  Namely, I note that he’s spurned high tax jurisdictions for income-tax free Florida.

Obviously, LeBron made his decision on more than just economic factors, though it’s fair to say that pay and other monetary factors mattered to some degree.  Although the sports community narrative involves James joining basketball super stars Wayne and Bosh – as well as some cries about the fairness of this team construction – the fact that all came together in Florida shouldn’t come as any surprise.  From 1999-2008, more Americans have migrated to the zero-income-tax-having Sunshine State than any other.  Meanwhile, the other states involved in the LeBron saga – Ohio, Illinois and New York – are 3 of the bottom 6 in net migration, with more Americans fleeing New York than any other state in the union.

These patterns should not come as any surprise when you contrast Florida’s lack of an income tax with the top marginal rates of Ohio (7.93%), Illinois (3.0%) and New York (12.62%).  But perhaps more importantly is the degree to which businesses are motivated by the same considerations.  Corporate taxes and regulatory environments shape corporate decisions every day, with states like New York and California increasingly driving businesses away as they look for more favorable environments.  This kind of tax competition is an important check on bad government policy, but it can be painful when you’re in one of the states being driven into the ground by short-sighted politicians.  While LeBron James just might have considered these factors in his decision, that ordinary Americans and businesses do is without question – and the consequences for high tax jurisdictions are as clear as Cleveland’s outrage.