Archives: 09/2012

Just as ‘Fair Trade’ Means Protectionism for the Benefit of Special Interests, ‘Fair Tax Competition’ Means Tax Harmonization for the Benefit of Politicians

Very few people are willing to admit that they favor protectionism. After all, who wants to embrace a policy associated with the Great Depression?

But people sometimes say “I want free trade so long as it’s fair trade.” In most cases, they’re simply protectionists who are too clever to admit their true agenda.

In the Belly of the Beast at the European Commission

There’s a similar bit of wordplay that happens in the world of international taxation, and a good example of this phenomenon took place on my recent swing through Brussels.

While in town, I met with Algirdas Šemeta, the European Union’s Tax Commissioner, as part of a meeting arranged by some of his countrymen from the Lithuanian Free Market Institute.

Mr. Šemeta was a gracious host and very knowledgeable about all the issues we discussed, but when I was pontificating about the benefits of tax competition (are you surprised?), he assured me that he felt the same way, only he wanted to make sure it was “fair tax competition.”

But his idea of “fair tax competition” is that people should not be allowed to benefit from better policy in low-tax jurisdictions.

Allow me to explain. Let’s say that a Frenchman, having earned some income in France and having paid a first layer of tax to the French government, decides he wants to save and invest some of his post-tax income in Luxembourg.

In an ideal world, there would be no double taxation and no government would try to tax any interest, dividends, or capital gains that our hypothetical Frenchman might earn. But if a government wants to impose a second layer of tax on earnings in Luxembourg, it should be the government of Luxembourg. It’s a simple matter of sovereignty that nations get to determine the laws that apply inside their borders.

But if the French government wants to track - and tax - that flight capital, it has to coerce the Luxembourg government into acting as a deputy tax collector, and this generally is why high-tax governments (and their puppets at the OECD) are so anxious to bully so-called tax havens into emasculating their human rights laws on financial privacy.

Now let’s see the practical impact of “fair tax competition.” In the ideal world of Mr. Šemeta and his friends, a Frenchman will have the right to invest after-tax income in Luxembourg, but the French government will tax any Luxembourg-source earnings at French tax rates. In other words, there is no escape from France’s oppressive tax laws. The French government might allow a credit for any taxes paid to Luxembourg, but even in the best-case scenario, the total tax burden on our hypothetical Frenchman will still be equal to the French tax rate.

Imagine if gas stations operated by the same rules. If you decided you no longer wanted to patronize your local gas station because of high prices, you would be allowed to buy gas at another station. But your old gas station would have the right - at the very least - to charge you the difference between its price and the price at your new station.

Simply stated, you would not be allowed to benefit from lower prices at other gas stations.

So take a wild guess how much real competition there would be in such a system? Assuming your IQ is above room temperature, you’ve figured out that such a system subjects the consumer to monopoly abuse.

Which is exactly why the “fair tax competition” agenda of Europe’s welfare states (with active support from the Obama Administration) is nothing more than an indirect form of tax harmonization. Nations would be allowed to have different tax rates, but people wouldn’t be allowed to benefit.

For more information, here’s my video on tax competition.

And if you want information about the beneficial impact of “tax havens,” read this excellent column by Pierre Bessard and watch my three-part video series on the topic.

P.S. The Financial Transaction Tax also was discussed at the meeting, and it appears that the European actually intend on shooting themselves in the foot with this foolish scheme. Interestingly, when presented by other participants with some studies showing how the tax was damaging, Mr. Šemeta asked why we he should take those studies seriously since they were produced by people opposed to the tax. Since I’ve recently stated that healthy skepticism is warranted when dealing with anybody in the political/policy world (even me!), I wasn’t offended by the insinuation. But my response was to ask why we should act like the European Commission studies are credible since they were financed by governments that want a new source of revenue.

Oklahoma Challenges Obama’s Illegal Employer Tax

Yesterday, the attorney general of Oklahoma amended that state’s ObamaCare lawsuit. The amended complaint asks a federal court to clarify the Supreme Court’s ruling in NFIB v. Sebelius, but it also challenges an IRS rule that imposes ObamaCare’s employer mandate where the statute does not authorize it: on employers in the 30 to 40 states that decline to implement a health insurance “exchange.”

Here are a few excerpts from Oklahoma’s amended complaint:

The Final Rule was issued in contravention of the procedural and substantive requirements of the Administrative Procedures Act…; has no basis in any law of the United States; and directly conflicts with the unambiguous language of the very provision of the Internal Revenue Code it purports to interpret…

Under Defendants’ Interpretation, [this rule] expand[s] the circumstances under which an Applicable Large Employer must make an Assessable Payment…with the result that an employer may be required to make an Assessable Payment under circumstances not provided for in any statute and explicitly ruled out by unambiguous language in the Affordable Care Act.

Plaintiff believes…that subjecting the State of Oklahoma in its capacity as an employer to the employer mandate would cause the Affordable Care Act to exceed Congress’s legislative authority; to violate the Tenth Amendment; to impermissibly interfere with the residual sovereignty of the State of Oklahoma; and to violate Constitutional norms relating to the relationship between the states, including the State of Oklahoma, and the Federal Government.

As for the latest claim to be made in defense of the IRS rule – that an Exchange  established by the federal government under Section 1321 is an Exchange “established by the state under Section 1311” – the complaint says this:

If the Act provides or is interpreted to provide that an Exchange established by HHS under Section 1321(c) of the Act is a form of what the Act refers to as “an Exchange established by a State under Section 1311 of [the Act],” then Section 1321(c) is unconstitutional because it commandeers state governmental authority with respect to State Exchanges, permits HHS to exercise a State’s legislative and/or executive power, and otherwise causes the Exchange-related provisions of the Act…to exceed Congress’s legislative authority; to violate the Tenth Amendment; to infringe on the residual sovereignty of the States under the Constitution; and to violate Constitutional norms relating to the relationship between the states, including the State of Oklahoma, and the Federal Government.

Oklahoma does not yet list any private-sector employers as co-plaintiffs, but that may change.

Since this IRS rule also unlawfully taxes 250,000 Oklahomans under the individual mandate – a tax that in 2016 will reach $2,085 for a family of four earning $24,000 – the attorney general has an awful lot of individual Oklahomans that he could add to its plaintiff roster.

Jonathan Adler and I first wrote about President Obama’s illegal taxes on employers in the Wall Street Journal and again in the USA Today. Since parts of those opeds have been overtaken by events, I recommend reading our forthcoming Health Matrix article, “Taxation Without Representation: The Illegal IRS Rule to Expand Tax Credits Under the PPACA.” Yes, all 82 pages of it.

The ‘No More Solyndras Act’ Charade

Last week, the House passed the “No More Solyndras Act” on a mostly party-line vote. However, instead of terminating the Department of Energy loan guarantee program that subsidized Solyndra and other boondoggles, the bill allows applicants who filed before the first of this year to still receive handouts.

The DOE will still have $34 billion in remaining lending authority to issue new loan guarantees. And as Taxpayers for Common Sense (TCS) explains, there are going to be plenty of opportunities for taxpayers to get fleeced again:

It was recently revealed that approximately 50 applications sit active in the queue. The projects include an $8.3 billion loan guarantee for nuclear reactor project in Georgia and a nearly $2 billion loan guarantee for a liquid coal facility in Wyoming. There’s a $1.7 billion loan guarantee for a coal gasification plant in Indiana plus more than 15 solar projects in the pipeline!

Some of these applicants are clear losers for taxpayers. This bill would allow a $2 billion loan guarantee for a uranium enrichment project to remain on deck, ready to receive a loan guarantee despite the fact that the company has received a delisting notice from the New York Stock Exchange. Talk about taxpayers striking out, the United States Enrichment Corporation (USEC) is currently in line to receive a loan guarantee for its enrichment facility in Piketon, OH. On the other hand USEC hit a home run with a $100 million giveaway in the continuing resolution.

What’s really disgraceful is that an amendment from Rep. Tom McClintock (R-CA) that would have completely terminated the loan guarantees wasn’t even allowed to be debated and voted on. According to TCS, the House Rules Committee “sidelined” McClintock’s amendment. Why? Because the Republican leadership was apparently only interested in using the bill to score political points against the administration. Having a bunch of its own members argue and vote against completely killing the notorious corporate welfare program (again) would have been an embarrassment.

As Rep. McClintock said on the House floor, the bill should be renamed “The 50 More Solyndras and Then We’ll Stop Wasting Your Money — Really — We Promise Act.”

‘Do Indians Rightfully Own America?’

Bryan Caplan at Econlog revisits an old libertarian chestnut about land ownership, and following the lead of Murray Rothbard analyzes it in a priori fashion with little attention to the devices that Anglo-American law long ago evolved to adjudicate claims of ancient title, such as statutes of limitations and repose, laches, and adverse possession. But in fact we don’t need to consider these questions in a historical and empirical vacuum. Not only has Indian title been the subject of an extensive legal literature since the very start of the American experiment – much of it written by scholars and reformers highly sympathetic toward Native Americans and their plight – but Indian land claims resurged in the 1970s to become the subject of a substantial volume of litigation in American courts, casting into doubt (at least for a time) the rightful ownership of many millions of acres, until the past few years, when the U.S. Supreme Court finally brought down the curtain on most such claims.

The short answer to the question “Do Indians Rightfully Own America” is, “No, they don’t.” Last year I told a part of that story in Chapter 10 of my book Schools for Misrule, focusing on the modern litigation and its origins among advocates in law reviews, legal services groups and liberal foundations, while UCLA law professor Stuart Banner lays out a much richer and more comprehensive story, concentrating on events before the present day, in his excellent 2007 book How the Indians Lost Their Land.

I’m grateful to Richard Reinsch of Liberty Fund’s Liberty Law Blog for crafting a response to Caplan that draws at some length on my arguments in Schools for Misrule. The history may surprise you: it helps explain, on the one hand, how Indian casinos came to dot the land, and, on the other, how land claims by American tribes have emerged as a flashpoint for the assertion of human-rights claims against the United States by United Nations agencies. You can read Reinsch’s account here.

Hooray for the Rankings!

The following is cross-posted from SeeThruEdu.com, a new blog analyzing higher education:

Heaven knows there are oodles of problems with American higher education – and you’ll get them all thoroughly dissected, diagnosed, and wellness plans delivered at SeeThruEdu – but I want to start my blogging here on a positive note. At least, a relatively positive note: American higher education is way closer to a free market than our moribund elementary and secondary system, and there’s no better sign of that than the oft-maligned U.S. News and World Report college rankings released last week.

Just like higher education generally, the U.S. News rankings have huge problems. Heck, Emory University admitted to having sent inflated SAT and ACT scores, as well as class ranks, to the publication for years. As a result, in the latest rankings Emory moved…not one bit. The school stayed as number 20 among “national universities,” and U.S. News apparently just accepted the data Emory submitted this time based on the school having “confirmed” them. More broadly, the rankings are based far more on inputs such as endowment funds, and dubious academic reputation surveys, than measures of what students actually learn.

But the good news isn’t the perfection of the U.S. News rankings. It’s what their very existence signifies: Higher ed consumers have real power, and institutions are sufficiently independent that they can both compete with one another and specialize in the needs of different students. It’s why not only do the U.S. News rankings exist, they are essentially the magazine’s flagship publication.

And college rankings are hardly restricted to U.S. News. Countless rankings and reviews are out there, giving prospective students and their parents myriad ways to slice and dice their options. No doubt the best of these – because of who’s in charge of them – comes from fellow SeeThruEdu blogger, and higher ed gadfly extraordinaire, Richard Vedder, whose Forbes.com rankings assess schools using alumni success and costs. The Princeton Review will tell you where students have their noses most to the grindstone, or most obscured by beer-filled Solo cups. And the Associated Press just profiled two new entrants, one which ranks schools based on “revealed preference” – which schools students choose when accepted to multiple institutions – and one based on alumni satisfaction. And there are many, many more!

Unfortunately, part of the reason rankings are in such incredible abundance is that there is way too much consumer power in higher ed, if by power we mean money. Basically, students can demand all sorts of extravagant things (I need my massages and water park!) because third-parties –  most notably the federal government – give them wads of cash to do so. Indeed, higher education is massively inefficient as a result of humongous subsidies both directly to schools and to students. But that will be the subject of many, far less giddy posts from me in the future. For now, a bit of a happy note: Hooray for the college rankings! Things in higher education could actually be worse!

When ‘Free Speech’ as a Concept Vanishes

A sign mentioned in the New York Times coverage of the ongoing protests in the Muslim world crystallized a question that had been nagging at the back of my head since the attacks on the American embassies in Libya and Egypt. The sign read: “Shut up America!” and “Obama is the president, so he should have to apologize!”

What a strange non-sequitur, to Western ears! What does the president—or the U.S. government in general—have to do with some crude, rinky-dink YouTube video produced by an apparent con man? Surely, like the overwhelming majority of Americans, Barack Obama would never even have been aware of the trailer for “Innocence of Muslims” if it hadn’t become the bizarre focus of controversy abroad. Even if the video was more catalyst than cause of the outrage, commenters all along have remarked how absurd, almost surreal, it seems that one shoddy YouTube—surely one of many containing harsh criticism of Islam or its prophet—could trigger such a massive reaction. If people hadn’t died, it would be comical.

But perhaps it makes a little more sense against the backdrop of regimes where the government exerts far more control over what citizens may read or publish online—and where whatever lip service might be paid to “free speech,” it’s understood to be within tightly constrained parameters. If information is allowed to circulate widely for any prolonged period, it is safe to assume that some government official—or at least, some private intermediary operating under threat of government sanction—has made an affirmative decision to permit that circulation. All public speech carries a kind of tacit government endorsement.

While, depressingly, even some in the West have seen the current violent protests as a demonstration of the dangers of unfettered free speech, there’s a sense in which it shows just the opposite: Free speech acts as a crucial guarantor of social peace by making us each individually responsible for our  opinions. When government presumes to censor some speech on the grounds that it’s too offensive or inflammatory, it implicitly renders a verdict on all the speech it doesn’t censor too—and at least in theory, it renders that verdict in the name of all its citizens collectively.  When a general principle of respecting free speech is observed, by contrast, there’s no implication that “we” find speech acceptable just because it’s permitted. In addition to all its other great benefits, free speech liberates us from symbolic responsibility for the misguided views of our fellow citizens. Perhaps instead of rushing to curtail our own, we should be working harder to explain that ideal to people for whom it’s sadly alien.

Observations on the Mortgage Market: 2011 HMDA Data

Yesterday the financial regulators released data on the 2011 mortgage market, as collected under the Home Mortgage Disclosure Act (HMDA).  Setting aside my belief that HMDA should be repealed and the data collection ended, the release, summarized here by the Federal Reserve, does offer a number of insights into both the mortgage markets and mortgage regulation.

The headline take-away is mortgage loans have fallen to 16 year lows, particularly among home purchase mortgages.  One of the reasons, not so much discussed, is that lenders are a whole lot less willing to hold mortgages on their own books.  In 2006, lenders actually held about 39% of purchase mortgages on their balance sheets.  By 2011, that percentage had fallen almost in half to 21%.  Now there have been a few exceptions.  Wells Fargo, for instance, is actually holding more purchase mortgages on their books in 2011 than in 2006.  Most lenders, however, have greatly reduced their balance sheet exposure.  Take at one extreme, Citibank, which went from holding over half (52%) in 2006, to just 8% in 2011.  While lenders are clearly, and understandably, trying to minimize their interest rate risk, I believe another fact is trying to control both their credit and legal (not to mention political) risk of holding mortgages.

If you aren’t holding mortgages, then the other option is to sell them, either to other banks or to Fannie/Freddie.  Here we see the impact of the GSEs increasing their credit standards (appropriately in my opinion).  Go back to 2001 and lenders were selling almost half their “unconventional” mortgage originations to the GSEs, by 2011 this had fallen to just over a third.  One does not see a similar trend in GSEs purchases of conventional mortgages, which remains just above a third in both 2001 and 2011.

Despite the increased concentration in banking, in general, share purchased by the Top 10 bank originators changed little between 2006 and 2011, increasing slightly from 35.2% to 36.9%.  The other trend to catch my eye was that most of the decline in mortgage activity from 2010 to 2011 was among low or moderate income households.  Purchase lending for high income was almost flat.

These are just some initial thoughts.  Still digesting what is a pretty large data dump.