Tag: Competitiveness

Facebook Billionaire Gives Up Citizenship to Escape Bad American Tax Policy

It is very sad that America’s tax system is so onerous that some rich people feel they have no choice but to give up U.S. citizenship in order to protect their family finances.

I’ve written about this issue before, particularly in the context of Obama’s class-warfare policies leading to an increase in the number of Americans “voting with their feet” for places with less punitive tax regimes.

We now have a very high-profile tax expatriate. One of the founders of Facebook is escaping to Singapore. Here are some relevant passages from a Bloomberg article.

Eduardo Saverin, the billionaire co-founder of Facebook Inc. (FB), renounced his U.S. citizenship before an initial public offering that values the social network at as much as $96 billion, a move that may reduce his tax bill. …Saverin’s stake is about 4 percent, according to the website Who Owns Facebook. At the high end of the IPO valuation, that would be worth about $3.84 billion. …Saverin, 30, joins a growing number of people giving up U.S. citizenship, a move that can trim their tax liabilities in that country. …“Eduardo recently found it more practical to become a resident of Singapore since he plans to live there for an indefinite period of time,” said Tom Goodman, a spokesman for Saverin, in an e-mailed statement. …Singapore doesn’t have a capital gains tax. It does tax income earned in that nation, as well as “certain foreign-sourced income,” according to a government website on tax policies there. …Renouncing your citizenship well in advance of an IPO is “a very smart idea” from a tax standpoint, said Avi-Yonah. “Once it’s public you can’t fool around with the value.” …Renouncing citizenship is an option chosen by increasing numbers of Americans. A record 1,780 gave up their U.S. passports last year compared with 235 in 2008, according to government records. …“It’s a loss for the U.S. to have many well-educated people who actually have a great deal of affection for America make that choice,” said Richard Weisman, an attorney at Baker & McKenzie in Hong Kong. “The tax cost, complexity and the traps for the unwary are among the considerations.”

What makes this story amusing, from a personal perspective, is that Saverin’s expatriation takes place just a couple of days after my wayward friend Bruce Bartlett wrote a piece for the New York Times in which he said that people like me are exaggerating the impact of taxes on migration. Here are some key excerpts from Bruce’s column:

In recent years, the number of Americans renouncing their citizenship has increased. …This led William McGurn of The Wall Street Journal to warn that the tax code is turning American citizens living abroad into “economic lepers.” The sharply rising numbers of Americans renouncing their citizenship “are canaries in the coal mine,” he wrote. The economist Dan Mitchell of the libertarian Cato Institute was more explicit in a 2010 column in Forbes, “Rich Americans Voting With Their Feet to Escape Obama Tax Oppression.” …[T]he sharp rise in Americans renouncing their citizenship since 2008 is less pronounced than it appears if one looks at the full range of data available since 1997, when it first was collected. As one can see in the chart, the highest number of Americans renouncing their citizenship came in 1997. …The reality is that taxes are just one factor among many that determine where people choose to live. Factors including climate, proximity to those in similar businesses and the availability of amenities like the arts and cuisine play a much larger role. That’s why places like New York and California are still magnets for the wealthy despite high taxes. And although a few Americans may renounce their citizenship to avoid American taxes, it is obvious that many, many more people continually seek American residency and citizenship.

I actually agree with Bruce. Taxes are just one factor when people make decisions on where to live, work, save, and invest.

But I also think Bruce is drinking too much of the Kool-Aid being served by his new friends on the left. There is a wealth of data on successful people leaving jurisdictions such as California and New York that have confiscatory tax systems.

And there’s also a lot of evidence of taxpayers escaping countries controlled by politicians who get too greedy. Mr. Saverin is just the latest example. And I suspect, based on the overseas Americans I meet, that there are several people who quietly go “off the grid” for every person who officially expatriates.

The statists say these people are “tax traitors” and “economic Benedict Arnolds,” but those views are based on a quasi-totalitarian ideology that assumes government has some sort of permanent claim on people’s economic output.

If people are leaving America because our tax law is onerous, that’s a signal we should reform the tax code. Attacking those who expatriate is the fiscal version of blaming the victim.

President Obama’s Corporate Tax Reform Rearranges the Deck Chairs on the Titanic

American companies are hindered by what is arguably the world’s most punitive corporate tax system. The federal corporate rate is 35 percent, which climbs to more than 39 percent when you add state corporate taxes. Among developed nations, only Japan is in the same ballpark, and that country is hardly a role model of economic dynamism.

But the tax rate is just one piece of the puzzle. It’s also critically important to look at the government’s definition of taxable income. If there are lots of corrupt loopholes – such as ethanol – that enable some income to escape taxation, then the “effective” tax rate might be rather modest.

On the other hand, if the government forces companies to overstate their income with policies such as worldwide taxation and depreciation, then the statutory tax rate understates the actual tax burden.

The U.S. tax system, as the chart suggests, is riddled with both types of provisions.

This information is important because there are good and not-so-good ways of lowering tax rates as part of corporate tax reform. If politicians decide to “pay for” lower rates by eliminating loopholes, that creates a win-win situation for the economy since the penalty on productive behavior is reduced and a tax preference that distorts economic choices is removed.

But if politicians “pay for” the lower rates by expanding the second layer of tax on U.S. companies competing in foreign markets or by changing depreciation rules to make firms pretend that investment expenditures are actually net income, then the reform is nothing but a re-shuffling of the deck chairs on the Titanic.

Now let’s look at President Obama’s plan for corporate tax reform.

  • The good news is that he reduces the tax rate on companies from 35 percent to 28 percent (still more than 32 percent when state corporate taxes are added to the mix).
  • The bad news is that he exacerbates the tax burden on new investment and increases the second layer of taxation imposed on American companies competing for market share overseas.

In other words, to paraphrase the Bible, the President giveth and the President taketh away.

This doesn’t mean the proposal would be a step in the wrong direction. There are some loopholes, properly understood, that are scaled back.

But when you add up all the pieces, it is largely a kiss-your-sister package. Some companies would come out ahead and others would lose.

Unfortunately, that’s not enough to measurably improve incomes for American workers. In a competitive global economy, where even Europe’s welfare states recognize reality and have lowered their corporate tax rates, on average, to 23 percent, the President’s proposal at best is a tiny step in the right direction.

Mitt Romney and Bain Capital Were Right to Utilitize So-Called Tax Havens

I’m not a big fan of Mitt Romney. I hammered him the day before Christmas for being open to a value-added tax, and criticized him in previous posts for his less-than-stellar record on healthcare, his weakness on Social Security reform, his anemic list of proposed budget savings, and his reprehensible support for ethanol subsidies.

But I also believe in being intellectually honest, so I’ll defend a politician I don’t like (even Obama) when they do the right thing or when they get attacked for the wrong reason.

In the case of Romney, some of his GOP opponents are criticizing him for job losses and/or bankruptcies at some of the companies in which he invested while in charge of Bain Capital. But I don’t need to focus on that issue, because James Pethokoukis of AEI already has done a great job of debunking that bit of anti-Romney demagoguery.

In this post, I want to focus on the issue of tax havens.

Regular readers know that I’m a big defender of these low-tax jurisdictions, for both moral and economic reasons, and I guess that reporters must know that as well because I’ve received a couple of calls from the press in recent weeks. But I suspect I”m not being called because reporters want to understand international tax policy. Instead, based on the questions, it appears that the establishment media wants to hit Romney for utilizing tax havens as part of his work at Bain Capital.

As far as I can tell, none of these reporters have come out with a story. And I’m also not aware that any of Romney’s political rivals have tried to exploit the issue.

But I think it’s just a matter of time, so I want to preemptively address this issue. So let’s go back to 2007 and look at some excerpts from a story in the Los Angeles Times about the use of so-called tax havens by Romney and Bain Capital.

While in private business, Mitt Romney utilized shell companies in two offshore tax havens to help eligible investors avoid paying U.S. taxes, federal and state records show. Romney gained no personal tax benefit from the legal operations in Bermuda and the Cayman Islands. But aides to the Republican presidential hopeful and former colleagues acknowledged that the tax-friendly jurisdictions helped attract billions of additional investment dollars to Romney’s former company, Bain Capital, and thus boosted profits for Romney and his partners. …Romney was listed as a general partner and personally invested in BCIP Associates III Cayman, a private equity fund that is registered at a post office box on Grand Cayman Island and that indirectly buys equity in U.S. companies. The arrangement shields foreign investors from U.S. taxes they would pay for investing in U.S. companies. …In Bermuda, Romney served as president and sole shareholder for four years of Sankaty High Yield Asset Investors Ltd. It funneled money into Bain Capital’s Sankaty family of hedge funds, which invest in bonds and other debt issued by corporations, as well as bank loans. Like thousands of similar financial entities, Sankaty maintains no office or staff in Bermuda. Its only presence consists of a nameplate at a lawyer’s office in downtown Hamilton, capital of the British island territory. … Investing through what’s known as a blocker corporation in Bermuda protects tax-exempt American institutions, such as pension plans, hospitals and university endowments, from paying a 35% tax on what the Internal Revenue Service calls “unrelated business income” from domestic hedge funds that invest in debt, experts say. …Brad Malt, who controls Romney’s financial trust, said Bain Capital organized the Cayman fund to attract money from foreign institutional investors. “This is not Mitt trying to do something strange,” he said. “This is Bain trying to raise some number of billions from investors around the world.”

There are a couple of things worth noting about these excerpts.

1. Nobody has hinted that Romney did anything illegal for the simple reason that using low-tax jurisdictions is normal, appropriate, and intelligent for any business or investor. Criticizing Romney for using tax havens would be akin to attacking me for living in Virginia, which has lower taxes than Maryland.

2. Jurisdictions such as Bermuda and the Cayman Islands are good platforms for business activity, which is no different than a state like Delaware being a good platform for business activity. Indeed, Delaware has been ranked as the world’s top tax haven by one group (though American citizens unfortunately aren’t able to benefit).

3. America’s corporate tax system is hopelessly anti-competitive, so it is quite fortunate that both investors and companies can use tax havens as vehicles to profitably invest in the United States. This helps protect the economy and American workers by attracting trillions of dollars of investment to the U.S.

These three points are just the tip of the iceberg. Watch this video for more information about the economic benefit of tax havens.

Last but not least, here’s a prediction. I think it’s just a matter of time until Romney gets attacked for utilizing tax havens, though the press may wait until after he gets the GOP nomination.

But when those attacks occur, I’m extremely confident that the stories will fail to mention that prominent Democrats routinely utilize tax havens for business and investment purposes, including as Bill Clinton, John Kerry, John Edwards, Robert Rubin, Peter Orszag, and Richard Blumenthal.

It’s almost enough to make you think this cartoon is correct and that the establishment press is biased.

Grading Perry’s Flat Tax: Some Missing Homework, but a Solid B+

Governor Rick Perry of Texas has announced a plan, which he outlines in the Wall Street Journal, to replace the corrupt and inefficient internal revenue code with a flat tax. Let’s review his proposal, using the principles of good tax policy as a benchmark.

1. Does the plan have a low, flat rate to minimize penalties on productive behavior?

Governor Perry is proposing an optional 20 percent tax rate. Combined with a very generous allowance (it appears that a family of four would not pay tax on the first $50,000 of income), this means the income tax will be only a modest burden for households. Most important, at least from an economic perspective, the 20-percent marginal tax rate will be much more conducive to entrepreneurship and hard work, giving people more incentive to create jobs and wealth.

2. Does the plan eliminate double taxation so there is no longer a tax bias against saving and investment?

The Perry flat tax gets rid of the death tax, the capital gains tax, and the double tax on dividends. This would significantly reduce the discriminatory and punitive treatment of income that is saved and invested (see this chart to understand why this is a serious problem in the current tax code). Since all economic theories - even socialism and Marxism - agree that capital formation is key for long-run growth and higher living standards, addressing the tax bias against saving and investment is one of the best features of Perry’s plan.

3. Does the plan get rid of deductions, preferences, exemptions, preferences, deductions, loopholes, credits, shelters, and other provisions that distort economic behavior?

A pure flat tax does not include any preferences or penalties. The goal is to leave people alone so they make decisions based on what makes economic sense rather than what reduces their tax liability. Unfortunately, this is one area where the Perry flat tax falls a bit short. His plan gets rid of lots of special favors in the tax code, but it would retain deductions (for those earning less than $500,000 yearly) for charitable contributions, home mortgage interest, and state and local taxes.

As a long-time advocate of a pure flat tax, I’m not happy that Perry has deviated from the ideal approach. But the perfect should not be the enemy of the very good. If implemented, his plan would dramatically boost economic performance and improve competitiveness.

That being said, there are some questions that need to be answered before giving a final grade to the plan. Based on Perry’s Wall Street Journal column and material from the campaign, here are some unknowns.

1. Is the double tax on interest eliminated?

A flat tax should get rid of all forms of double taxation. For all intents and purposes, a pure flat tax includes an unlimited and unrestricted IRA. You pay tax when you first earn your income, but the IRS shouldn’t get another bite of the apple simply because you save and invest your after-tax income. It’s not clear, though, whether the Perry plan eliminates the double tax on interest. Also, the Perry plan eliminates the double taxation of “qualified dividends,” but it’s not clear what that means.

2. Is the special tax preference for fringe benefits eliminated?

One of the best features of the flat tax is that it gets rid of the business deduction for fringe benefits such as health insurance. This special tax break has helped create a very inefficient healthcare system and a third-party payer crisis. It is unclear, though, whether this pernicious tax distortion is eliminated with the Perry flat tax.

3. How will the optional flat tax operate?

The Perry plan copies the Hong Kong system in that it allows people to choose whether to participate in the flat tax. This is attractive since it ensures that nobody can be disadvantaged, but how will it work? Can people switch back and forth every year? Is the optional system also available to all the small businesses that use the 1040 individual tax system to file their returns?

4. Will businesses be allowed to “expense” investment expenditures?

The current tax code penalizes new business investment by forcing companies to pretend that a substantial share of current-year investment outlays take place in the future. The government imposes this perverse policy in order to get more short-run revenue since companies are forced to artificially overstate current-year profits. A pure flat tax allows a business to “expense” the cost of business investments (just as they “expense” workers wages) for the simple reason that taxable income should be defined as total revenue minus total costs.

Depending on the answers to these questions, the grade for Perry’s flat tax could be as high as A- or as low as B. Regardless, it will be a radical improvement compared to the current tax system, which gets a D- (and that’s a very kind grade).

Here’s a brief video for those who want more information about the flat tax.

Last but not least, I’ve already received several requests to comment on how Perry’s flat tax compares to Cain’s 9-9-9 plan.

At a conceptual level, the plans are quite similar. They both replace the discriminatory rate structure of the current system with a low rate. They both get rid of double taxation. And they both dramatically reduce corrupt loopholes and distortions when compared to the current tax code.

All things considered, though, I prefer the flat tax. The 9-9-9 plan combines a 9 percent flat tax with a 9 percent VAT and a 9 percent national sales tax, and I don’t trust that politicians will keep the rates at 9 percent.

The worst thing that can happen with a flat tax is that we degenerate back to the current system. The worst thing that happens with the 9-9-9 plan, as I explain in this video, is that politicians pull a bait-and-switch and America becomes Greece or France.

New Video Has Important Message: Freedom and Prosperity vs. Big Government and Stagnation

The folks from the Koch Institute put together a great video a couple of months ago looking at why some nations are rich and others are poor.

That video looked at the relationship between economic freedom and various indices that measure quality of life. Not surprisingly, free markets and small government lead to better results.

Now they have a new video that looks at recent developments in the United States. Unfortunately, you will learn that the U.S. is slipping in the wrong direction.

The entire video is superb, but there are two things that merit special praise, one because of intellectual honesty and the other because of intellectual effectiveness.

1. The refreshingly honest aspect of the video is its non-partisan tone. It explains, in a neutral fashion, that Bush undermined prosperity by making government bigger and that Obama is undermining prosperity by increasing the burden of government.

2. The most important and effective argument in the video, at least from my perspective, is that it shows clearly that a larger government necessarily comes at the expense of the productive sector of the economy. Pay extra-close attention around the 2:00 mark.

It’s also worth pointing out that there are several policies that impact on economic performance. The Koch Institute video focuses primarily on the key issues of fiscal policy and regulation, but trade, monetary policy, property rights, and rule of law are examples of other policies that also are very important.

This video, narrated by yours truly, looks at economic growth from this more comprehensive perspective.

The moral of the story from both videos is very straightforward. If the answer is bigger government, you’ve asked a very strange question.

Reckless IRS Regulation Would Put Foreign Tax Law over American Tax Law and Drive Investment out of the United States

I’m not a big fan of the IRS, but usually I blame politicians for America’s corrupt, unfair, and punitive tax system. Sometimes, though, the tax bureaucrats run amok and earn their reputation as America’s most despised bureaucracy.

Here’s an example. Earlier this year, the Internal Revenue Service proposed a regulation that would force American banks to become deputy tax collectors for foreign governments. Specifically, they would be required to report any interest they pay to accounts held by nonresident aliens (a term used for foreigners who live abroad).

The IRS issued this proposal, even though Congress repeatedly has voted not to tax this income because of an understandable desire to attract job-creating capital to the U.S. economy. In other words, the IRS is acting like a rogue bureaucracy, seeking to overturn laws enacted through the democratic process.

But that’s just the tip of the iceberg. The IRS’s interest-reporting regulation also threatens the stability of the American banking system, makes America less attractive for foreign investors, and weakens the human rights of people who live under corrupt and tyrannical governments.

This video outlines five specific reasons why the IRS regulation is bad news and should be withdrawn.

I’m not sure what upsets me most. As a believer in honest and lawful government, it is outrageous that the IRS is abusing the regulatory process to pursue an ideological agenda that is contrary to 90 years of congressional law. But I guess we shouldn’t be surprised to see this kind of policy from the IRS with Obama in the White House. After all, this Administration already is using the EPA in a dubious scheme to impose costly global warming rules even though Congress decided not to approve Obama’s misguided legislation.

As an economist, however, I worry about the impact on the U.S. banking sector and the risks for the overall economy. Foreigners invest lots of money in the American economy, more than $10 trillion according to Commerce Department data. This money boosts our financial markets and creates untold numbers of jobs. We don’t know how much of the capital will leave if the regulation is implemented, but even the loss of a couple of hundred billion dollars would be bad news considering the weak recovery and shaky financial sector.

As a decent human being, I’m also angry that Obama’s IRS is undermining the human rights of foreigners who use the American financial system as a safe haven. Countless people protect their assets in America because of corruption, expropriation, instability, persecution, discrimination, and crime in their home countries. The only silver lining is that these people will simply move their money to safer jurisdictions, such as Panama, the Cayman Islands, Hong Kong, or Switzerland, if the regulation is implemented. That’s great news for them, but bad news for the U.S. economy.

In pushing this regulation, the IRS even disregarded rule-making procedures adopted during the Clinton Administration. But all this is explained in the video, so let’s close this post with a link to a somewhat naughty - but very appropriate - joke about the IRS.

Time to Get Rid of the Corporate Income Tax?

Here’s a video arguing for the abolition of the corporate income tax. The visuals are good and it touches on key issues such as competitiveness.

 

I do have one complaint about the video, though it is merely a sin of omission. There is not enough attention paid to the issue of double taxation. Yes, America’s corporate tax rate is very high, but that is just one of the layers of taxation imposed by the internal revenue code. Both the capital gains tax and the tax on dividends result in corporate income being taxed at least two times.

These are points I made in my very first video, which is a good companion to the other video.

There is a good argument, by the way, for keeping the corporate tax and instead getting rid of the extra layers of tax on dividends and capital gains. Either approach would get rid of double taxation, so the economic benefits would be identical. But the compliance costs of taxing income at the corporate level (requiring a relatively small number of tax returns) are much lower than the compliance costs of taxing income at the individual level (requiring the IRS to track down tens of millions of shareholders).

Indeed, this desire for administrative simplicity is why the flat tax adopts the latter approach (this choice does not exist with a national sales tax since the government collects money when income is spent rather than when it is earned).

But that’s a secondary issue. If there’s a chance to get rid of the corporate income tax, lawmakers should jump at the opportunity.