Tag: tax competition

OECD Study Admits Income Taxes Penalize Growth, Acknowledges that Tax Competition Restrains Excessive Government

By
Daniel J. Mitchell

I have to start this post with a big caveat.

I’m not a fan of the Paris-based Organization for Economic Cooperation and Development. The international bureaucracy is infamous for using American tax dollars to promote a statist economic agenda. Most recently, it launched a new scheme to raise the tax burden on multinational companies, which is really just a backdoor way of saying that the OECD (and the high-tax nations that it represents) wants higher taxes on workers, consumers, and shareholders. But the OECD’s anti-market agenda goes much deeper.

Now that there’s no ambiguity about my overall position, I can admit that the OECD isn’t always on the wrong side. Much of the bad policy comes from its committee system, which brings together bureaucrats from member nations.

The OECD also has an economics department, and they sometimes produce good work. Most recently, they produced a report on the Swiss tax system that contains some very sound analysis, including a rejection of Obama-style class warfare and a call to lower income tax burdens.

Shifting the taxation of income to the taxation of consumption may be beneficial for boosting economic activity (Johansson et al., 2008 provide evidence across OECD economies). These benefits may be bigger if personal income taxes are lowered rather than social security contributions, because personal income tax also discourages entrepreneurial activity and investment more broadly.

I somewhat disagree with the assertion that payroll taxes do more damage than VAT taxes. They both drive a wedge between pre-tax income and post-tax consumption. But the point about income taxes is right on the mark.

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Topics: 
Government and Politics, International Economics and Development, Tax and Budget Policy

New European Data: When Tax Competition Is Weakened, Politicians Respond by Increasing Tax Rates

By
Daniel J. Mitchell

I often argue that we need to preserve tax competition and tax havens in order to limit the greed of the political class.

Without some sort of external constraint, they will over-tax and over-spend, creating the kind of downward economic spiral already happening in some European nations.

Speaking of which, new evidence from Europe bolsters my case.

Back in 2009, facing pressure from the big G-20 nations, all of the world’s major low-tax jurisdictions - even Switzerland - acquiesced to the notion that human rights laws protecting financial privacy no longer would apply to foreign investors.

In other words, high-tax governments now have much greater ability to track - and tax - flight capital.

So how have they responded since that time? Well, look at this chart from the European Union’s new report on taxation trends. Tax rates have begun to increase, reversing a very positive trend (which began with the Reagan and Thatcher tax cuts, though this chart only shows data since 1995).

Top EU Tax Rates

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Topics: 
Government and Politics, International Economics and Development, Tax and Budget Policy

A Tax Haven Primer for the New York Times

By
Daniel J. Mitchell

I could only use 428 words, but I highlighted the main arguments for tax havens and tax competition in a “Room for Debate” piece for the New York Times.

I hope that my contribution is a good addition to the powerful analysis of experts such as Allister Heath and Pierre Bessard.

I started with the economic argument.

[T]ax havens are very valuable because they discourage anti-growth tax policy. Simply stated, it is very difficult for governments to impose and enforce confiscatory tax rates when investors and entrepreneurs can shift their economic activity to jurisdictions with better tax policy. Particularly if those nations have strong policies on financial privacy, thus making it difficult for uncompetitive high-tax nations to track and tax flight capital. Thanks to this process of tax competition, with havens playing a key role, top personal income tax rates have dropped from an average of more than 67 percent in 1980 to about 42 percent today. Corporate tax rates also have plummeted, falling from an average of 48 percent to 24 percent.

…Lawmakers also were pressured to lower or eliminate death taxes and wealth taxes, as well as to reduce the double taxation of interest, dividends and capital gains. Once again, tax havens deserve much of the credit because politicians presumably would not have implemented these pro-growth reforms if they didn’t have to worry that the geese with the golden eggs might fly away to a confidential account in a well-run nation like Luxembourg or Singapore.

Since I didn’t have much space, I couldn’t go into much greater detail. Below the jump is a video that elaborates on the economic benefits of tax havens, including an explanation of why fiscal sovereignty is a big part of the debate.

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Topics: 
Finance, Banking & Monetary Policy, Government and Politics, International Economics and Development, Tax and Budget Policy

According to Washington Post Exposé, People Who Utilize Tax Havens Are Far More Honest than Politicians

By
Daniel J. Mitchell

Using data stolen from service providers in the Cook Islands and the British Virgin Islands, the Washington Post published a supposed exposé of Americans who do business in so-called tax havens.

Since I’m the self-appointed defender of low-tax jurisdictions in Washington, this caught my attention. Thomas Jefferson wasn’t joking when he warned that “eternal vigilance is the price of liberty.” I’m constantly fighting against anti-tax haven schemes that would undermine tax competition, financial privacy, and fiscal sovereignty.

Even if it means a bunch of international bureaucrats threaten to toss me in a Mexican jail or a Treasury Department official says I’m being disloyal to America. Or, in this case, if it simply means I’m debunking demagoguery.

The supposedly earth-shattering highlight of the article is that some Americans linked to offshore companies and trusts have run afoul of the legal system.

Among the 4,000 U.S. individuals listed in the records, at least 30 are American citizens accused in lawsuits or criminal cases of fraud, money laundering or other serious financial misconduct.

But the real revelation is that people in the offshore world must be unusually honest. Fewer than 1 percent of them have been named in a lawsuit, much less been involved with a criminal case.

This is just a wild guess, but I’m quite confident that you would find far more evidence of misbehavior if you took a random sample of 4,000 Americans from just about any cross-section of the population.

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Topics: 
Government and Politics, International Economics and Development, Tax and Budget Policy

Targeting Multinationals, the OECD Launches New Scheme to Boost the Tax Burden on Business

By
Daniel J. Mitchell

I’ve been very critical of the Organization for Economic Cooperation and Development. Most recently, I criticized the Paris-based bureaucracy for making the rather remarkable assertion that a value-added tax would boost growth and employment.

But that’s just the tip of the iceberg.

Now the bureaucrats have concocted another scheme to increase the size and scape of government. The OECD just published a study on “Addressing Base Erosion and Profit Shifting” that seemingly is designed to lay the groundwork for a radical rewrite of business taxation.

In a new Tax & Budget Bulletin for Cato, I outline some of my concerns with this new “BEPS” initiative.

…the BEPS report…calls for dramatic changes in corporate tax policy based on the presumption that governments are not seizing enough revenue from multinational companies. The OECD essentially argues that it is illegitimate for businesses to shift economic activity to jurisdictions that have more favorable tax laws. …The core accusation in the OECD report is that firms systematically—but legally—reduce their tax burdens by taking advantage of differences in national tax policies.

Ironically, the OECD admits in the report that revenues have been trending upwards.

…the report acknowledges that “… revenues from corporate income taxes as a share of gross domestic product have increased over time. …Other than offering anecdotes, the OECD provides no evidence that a revenue problem exists. In this sense, the BEPS report is very similar to the OECD’s 1998 “Harmful Tax Competition” report, which asserted that so-called tax havens were causing damage but did not offer any hard evidence of any actual damage.

To elaborate, the BEPS scheme should be considered Part II of the OECD’s anti-tax competition project. Part I was the attack on so-called tax havens, which began back in the mid- to late-1990s.

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Topics: 
Finance, Banking & Monetary Policy, Government and Politics, International Economics and Development, Tax and Budget Policy

Jack Lew’s Cayman Adventure

By
Daniel J. Mitchell

Every so often you get a “teaching moment” in Washington. We now have one excellent example, as President Obama’s nominee for treasury secretary has been caught with his hand in the “tax haven” cookie jar. Mr. Lew not only invested some of his own money in a Cayman-based fund, he also was in charge of a Citi Bank division that had over 100 Cayman-domiciled funds. This provides an opportunity to educate lawmakers about the “offshore” world.

As you can imagine, Republicans are having some fun with this issue. Mitt Romney was subjected to a lot of class warfare demagoguery during the 2012 campaign because he had invested some of his wealth in a Cayman fund. GOPers are now hoisting Lew on a petard and grilling him about the obvious hypocrisy of a “progressive” utilizing—both personally and professionally—a jurisdiction that commits the unforgivable crime of not imposing income tax.

In a sensible world, Lew would be able to say what everyone in the financial world already understands: the Cayman Islands are an excellent, fully legal, tax-neutral platform for investment funds because 1) there’s no added layer of tax, 2) there’s good rule of law, and, 3) foreigners can invest in the American economy without creating any nexus with the IRS. But we don’t live in a sensible world, so Lew instead wants us to believe he didn’t realize that the funds were domiciled in Cayman.

I guess all the other wealthy progressives with offshore-based investments were probably also unaware, right?

Anyhow, I’m taking a glass-half-full perspective on this kerfuffle since it gives me an opportunity to educate more people on why tax havens are a liberalizing and positive force in the global economy.

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Topics: 
Government and Politics, International Economics and Development, Tax and Budget Policy

French Thief Complains that Victims Are Running Away

By
Daniel J. Mitchell

Atlas is shrugging and Dan Mitchell is laughing.

I predicted back in May that well-to-do French taxpayers weren’t fools who would meekly sit still while the hyenas in the political class confiscated ever-larger shares of their income.

But the new President of France, Francois Hollande, doesn’t seem overly concerned by economic rationality and decided (Obama must be quite envious) that a top tax rate of 75 percent is fair. And patriotic as well!

French Prime Minister: “I’m upset that the wildebeest aren’t remaining still for their disembowelment.”

So I was pleased - but not surprised - when the news leaked out that France’s richest man was saying au revoir and moving to Belgium.

But he’s not the only one. The nation’s top actor also decided that he doesn’t want to be a fatted calf. Indeed, it appears that there are entire communities of French tax exiles living just across the border in Belgium.

Best of all, the greedy politicians are throwing temper tantrums that the geese have found a better place for their golden eggs.

France’s Prime Minister seems particularly agitated about this real-world evidence for the Laffer Curve. Here are some excerpts from a story in the UK-based Telegraph.

France’s prime minister has slammed wealthy citizens fleeing the country’s punitive tax on high incomes as greedy profiteers seeking to “become even richer”. Jean-Marc Ayrault’s outburst came after France’s best-known actor, Gerard Dépardieu, took up legal residence in a small village just over the border in Belgium, alongside hundreds of other wealthy French nationals seeking lower taxes. “Those who are seeking exile abroad are not those who are scared of becoming poor,” the prime minister declared after unveiling sweeping anti-poverty measures to help those hit by the economic crisis. These individuals are leaving “because they want to get even richer,” he said. “We cannot fight poverty if those with the most, and sometimes with a lot, do not show solidarity and a bit of generosity,” he added.

In the interests of accuracy, let’s re-write Monsieur Ayrault’s final quote from the excerpt. What he’s really saying is: “We cannot buy votes and create dependency if those that produce, and sometimes produce a lot, do not act like morons and let us rape and pillage without consequence.”

So what’s going to happen? Well, I wrote in September that France was going to suffer a fiscal crisis, and I followed up in October with a post explaining how a bloated welfare state was a form of economic suicide.

Yet French politicians don’t seem to care. They don’t seem to realize that a high burden of government spending causes economic weakness by misallocating labor and capital. They seem oblivious  to basic tax policy matters, even though there is plenty of evidence that the Laffer Curve works even in France.

So as France gets ever-closer to fiscal collapse, part of me gets a bit of perverse pleasure from the news. Not because of dislike for the French. The people actually are very nice, in my experience, and France is a very pleasant place to visit. And it was even listed as the best place in the world to live, according to one ranking.

But it helps to have bad examples. And just as I’ve used Greece to help educate American lawmakers about the dangers of statism, I’ll also use France as an example of what not to do.

P.S. France actually is much better than the United States in that rich people actually are free to move across the border without getting shaken down with exit taxes that are reminiscent of totalitarian regimes.

P.P.S. This Chuck Asay cartoon seems to capture the mentality of the French government.

Topics: 
Government and Politics, International Economics and Development, Tax and Budget Policy

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