Tag: tax competition

Subsidizing the OECD Is a Bad Investment for American Taxpayers

The federal government is capable of enormous waste, which obviously is bad news, but the worst forms of government spending are those that actually leverage bad things. Paying exorbitant salaries to federal bureaucrats is bad, for instance, but it’s even worse if they take their jobs seriously and promulgate new regulations and otherwise harass people in the productive sector of the economy. In a previous video on the economics of government spending, I called this the “negative multiplier” effect.

One of the worst examples of a negative multiplier effect is the $100 million that taxpayers spend each year to subsidize the Paris-based Organization for Economic Cooperation and Development, which is an international bureaucracy that publishes lots of innocuous statistics but also advocates bigger government and higher taxes in America. This video has the unsavory details, including evidence of the OECD’s efforts to push a value-added tax, Al Gore-style carbon taxes, and Obamacare-type policies.

The OECD’s relentless advocacy of higher taxes (as well as its anti-tax competition agenda) is especially galling since the bureaucrats receive tax-free salaries. Maybe they would be more reasonable if they were not so insulated from the real-world consequences of big government.

Taxes Are for the Little People, not John Kerry

In the future, dictionary publishers should get rid of their existing definitions for “hypocrisy” and replace them with a photo of Massachusetts Sen.ator John Kerry. He’s just been caught committing the horrible sin of saving his family more than $500,000 by domiciling his new yacht in Rhode Island (which is a tax haven for such luxuries) rather than his home state. Or at least Senator Kerry says that tax planning is a horrible sin when conducted by “Benedict Arnold” companies and facilitated by those wicked tax havens. But I guess that it’s not such a bad thing when Senator Kerry is protecting his wealth. For the rest of us peasants, it’s our job to meekly get in line and submit to whatever taxes Senator Kerry graciously decides to impose.

The Boston Herald reports:

Sen. John Kerry, who has repeatedly voted to raise taxes while in Congress, dodged a whopping six-figure state tax bill on his new multimillion-dollar yacht by mooring her in Newport, R.I. Isabel — Kerry’s luxe, 76-foot New Zealand-built Friendship sloop with an Edwardian-style, glossy varnished teak interior, two VIP main cabins and a pilothouse fitted with a wet bar and cold wine storage — was designed by Rhode Island boat designer Ted Fontaine. But instead of berthing the vessel in Nantucket, where the senator summers with the missus, Teresa Heinz, Isabel’s hailing port is listed as “Newport” on her stern. Could the reason be that the Ocean State repealed its Boat Sales and Use Tax back in 1993, making the tiny state to the south a haven — like the Cayman Islands, Bermuda and Nassau — for tax-skirting luxury yacht owners? Cash-strapped Massachusetts still collects a 6.25 percent sales tax and an annual excise tax on yachts. Sources say Isabel sold for something in the neighborhood of $7 million, meaning Kerry saved approximately $437,500 in sales tax and an annual excise tax of about $70,000. …[S]tate Department of Revenue spokesguy Bob Bliss confirmed the senator “is under no obligation to pay the commonwealth sales tax.”

Jilted Cavs Fans Should Blame Ohio’s Income Tax

Supporters of the Cleveland Cavaliers, especially the owner of the team, are upset that basketball superstar LeBron James has decided to sign with the Miami Heat. The anger is especially intense because the Cavaliers offered James $4 million more over the next five years. But their anger is misplaced because more money in Cleveland actually translates into about $1 million less disposable income when the burden of state and local income taxes is added to the equation. Rather than condemn James for making a rational choice, local basketball fans should tar and feather Ohio politicians.

This story from CNBC walks through the calculations.

[I]f you match up what James’ salary would be for the first five years in Cleveland and the five years in Miami, you find that the Cavaliers are only offering him $4 million more. That advantage gets erased — and actually gives the Heat the monetary edge over — when you consider the income tax difference. …Playing in Cleveland, LeBron would face a state income tax of 5.925 percent, plus a Cleveland city tax of two percent. Over the first five years of a new contract with Cleveland, James would give back $3,953,060 combined to the state and city for the 41 games each season he’d play at home. But James would have to pay none of that for home games in Miami since Florida doesn’t have an income tax. Athletes have to pay income taxes to states that they play in on the road, so the games he’ll play away from home — whether he played for Cleveland or Miami — are essentially a wash. But there are, on average, 11 away games per season where James would have to pay Ohio and Cleveland taxes. Why? Because he has to pay when he plays in the six areas –– Florida, Texas, Washington D.C., Illinois, Toronto and Tennessee –– that have no jock taxes. That’s another $1,061,128 he’ll have to pay in taxes that he wouldn’t have to pay in Miami.

New York basketball fans also should be angry. With some of the highest taxes in the nation, many of which target highly productive people as part of a class-warfare policy, New York is bad news for professional athletes. The New York Post, commenting on the probability that James would sign with the Miami Heat, identified the real villains.

[B]lame our dysfunctional lawmakers in Albany, who have saddled top-earning New Yorkers with the highest state and city income taxes in the nation, soon to be 12.85 percent on top of the IRS bite. There is no state income tax in Florida. On a five-year contract worth $96 million – what he’d get from the Knicks or the Heat — LeBron would pay $12.34 million in New York taxes. Quite a penalty for the privilege of working in Midtown.

Now let’s look at the big picture. The calculations that LeBron James made when deciding to sign with the Miami Heat are the same calculations that companies make when deciding whether to build factories and create jobs. So when people wonder why high-tax states such as Ohio, California, and New York are losing jobs to zero–income tax states such as Florida and Texas, part of the answer should be obvious. And if we move to the global level, folks should not be too surprised that companies and investors, all other things equal, are likely to avoid the United States, with its punitive 35 percent corporate tax, and instead create jobs and build wealth in places like Hong Kong, Ireland, and Switzerland.

Thanks to Tax Competition, Corporate Tax Rates Continue to Fall in Europe

Many people assume that Europe is the land of high-tax welfare states and America is an outpost of laissez-faire capitalism. We should be so lucky. The burden of government in America is still lower than it is in the average European nation, but the United States is a lot closer to France than it is to Hong Kong – and the trend is not comforting.

We recently endured the embarrassing spectacle of President Obama arguing with Europeans that they should increase the burden of government spending. Now we have a new report from the European Commission indicating that the average corporate tax rate in member nations of the European Union has plummeted to just 23.5 percent while the corporate tax rate in the U.S. has stagnated at 35 percent. In the past dozen years alone, as the chart illustrates, the average corporate tax rate in the European Union has dropped by nearly 12 percentage points. To make matters worse, the corporate tax rate in America actually is closer to 40 percent if state tax burdens are added to the mix.

This is not to say that European politicians are reading Hayek and Friedman (or watching Dan Mitchell videos on corporate taxation). Almost all of the positive reforms are because of tax competition. Thanks to globalization, it is increasingly easy for labor and (especially) capital to cross national borders to escape bad policy. As such, nations now have to compete for jobs and investment, and this liberalizing process is particularly powerful among nations that are neighbors.

Not surprisingly, European politicians despise tax competition and instead would prefer to impose a one-size-fits-all policy of tax harmonization. These efforts to create a tax cartel have a long history, beginning even before Reagan and Thatcher lowered tax rates and triggered the modern era of tax competition. The European Commission originally wanted to require a minimum corporate tax rate of 45 percent. And as recently as 1992, there were an effort to require a minimum corporate tax rate of 30 percent.

Fortunately, the politicians did not succeed in any of these efforts. As such, tax competition remains alive and corporate tax rates continue to fall. What remains to be seen, however, is whether America will join the race to lower corporate tax rates – and more jobs and investment.

The IMF Is Urging Governments to Impose Regulatory and Tax Cartels to Benefit Politicians

Price fixing is illegal in the private sector, but unfortunately there are no rules against schemes by politicians to create oligopolies in order to prop up bad government policy. The latest example comes from the bureaucrats at the International Monetary Fund, who are conspiring with national governments to impose higher taxes and regulations on the banking sector. The pampered bureaucrats at the IMF (who get tax-free salaries while advocating higher taxes on the rest of us) say these policies are needed because of bailouts, yet such an approach would institutionalize moral hazard by exacerbating the government-created problem of “too big to fail.”

But what is particularly disturbing about the latest IMF scheme is that the international bureaucracy wants to coerce all nations into imposing high taxes and excessive regulation. The bureaucrats realize that if some nations are allowed to have free markets, jobs and investment would flow to those countries and expose the foolishness of the bad policy being advocated elsewhere by the IMF. Here’s a brief excerpt from a report in the Wall Street Journal:

Mr. Strauss-Kahn said there was broad agreement on the need for consensus and coordination in the reform of the global financial sector. “Even if they don’t follow exactly the same rule, they have to follow rules which will not be in conflict,” he said. He said there were still major differences of opinion on how to proceed, saying that countries whose banking systems didn’t need taxpayer bailouts weren’t willing to impose extra taxation on their banks now, to create a cushion against further financial shocks. …Mr. Strauss-Kahn said the overriding goal was to prevent “regulatory arbitrage”—the migration of banks to places where the burden of tax and regulation is lightest. He said countries with tighter regulation of banks might be able to justify not imposing new taxes.

I’ve been annoyingly repetitious on the importance of making governments compete with each other, largely because the evidence showing that jurisdictional rivalry is a very effective force for good policy around the world. I’ve done videos showing the benefits of tax competition, videos making the economic and moral case for tax havens, and videos exposing the myths and demagoguery of those who want to undermine tax competition. I’ve traveled around the world to fight the international bureaucracies, and even been threatened with arrest for helping low-tax nations resist being bullied by high-tax nations. Simply stated, we need jurisdictional competition so that politicians know that taxpayers can escape fiscal oppression. In the absence of external competition, politicians are like fiscal alcoholics who are unable to resist the temptation to over-tax and over-spend.

This is why the IMF’s new scheme should be rejected. It is not the job of international bureaucracies to interfere with the sovereign right of nations to determine their own tax and regulatory policies. If France and Germany want to adopt statist policies, they should have that right. Heck, Obama wants America to make similar mistakes. But Hong Kong, Switzerland, the Cayman Islands, and other market-oriented jurisdictions should not be coerced into adopting the same misguided policies.

Tax Havens Are Not Money Laundering Centers

Demagogues such as Sen. Carl Levin (D-MI), as well as many other politicians and journalists, often assert that low-tax jurisdictions are havens for dirty money and terrorist financing. From a theoretical perspective, this does not make sense. So-called tax havens have a big incentive to avoid scandal since they are much more vulnerable to reputational risk. Just imagine what would have happened, after all, if the 9-11 terrorists had used a bank in the Bahamas instead of a bank in Florida. Critics of low-tax jurisdictions automatically would have assumed that the bank was complicit and the entire financial services industry in the Bahamas would have been crippled – or even destroyed. But because the terrorists used American banks (as well as banks in high-tax European nations and the Middle East), there was no knee-jerk reaction. People understood that the bank tellers and managers had no way of knowing that the flight school students were actually lunatics.

But this does not stop the anti-tax haven smear campaign. Low-tax jurisdictions are viewed as a threat by politicians since it is much harder to impose bad tax policy in a world where tax competition is allowed to flourish. This is why tax havens are attacked whenever something bad happens. If there is a terrorist attack, blame tax havens. If there is a financial crisis, blame tax havens.

With this in mind, a new report from the University of Basel’s Institute of Governance did some real research and came up with a list of nations where there actually is a high risk of money laundering and terrorist financing. As the map below indicates, only one so-called tax haven is among the 28 countries listed, and that nation was in the lowest-risk category.

Switzerland’s Strong Human Rights Laws Should Be Emulated, not Persecuted

In a rational world, Switzerland would be a role model for other nations. It is quite prosperous thanks largely to a modest burden of government. There is remarkable ethnic and religoius diversity, but virtually no tension because power is decentralized (sort of what America’s Founders envisioned for the United States). Yet despite these – and many other – attractive features, Switzerland is being persecuted because of strong human rights laws that protect financial privacy. Money-hungry politicians from other nations resent Swtizerland’s attractive policies, and they would rather trample Swiss sovereignty rather than fix their own oppressive tax laws. An official from the Swiss Bankers Association provides some background in a New York Times column:

In Switzerland, this tradition of treating a client’s financial affairs in confidence became law in 1934 when it was codified in Article 47 of the country’s first-ever federal banking act as a contemporary reaction to the economic crisis, various domestic political considerations and well-publicized cases of espionage involving France and Germany. …Banking secrecy…reflects the very high degree of trust that exists between the Swiss state and its citizens and it has strong democratic foundations. …The Swiss are proud of their system and they reward it with a high level of taxpayer honesty. It works because the Swiss vote their own taxes, they have a high degree of control over the way tax revenues are spent and over all they believe their tax system to be reasonable, comprehensible, transparent and fair. …Doesn’t Switzerland hear the snapping jaws and cracking whips of foreign finance ministers, tax collectors, O.E.C.D. bureaucrats, cash-dispensing government agents and other denizens of the encroaching real world as they circle round Mother Helvetia intent on biting huge chunks out of her banking secrecy, if not swallowing it whole? …In March last year the Swiss announced they would give up the evasion-fraud distinction for foreign bank clients and adopt the O.E.C.D. standards on information exchange in tax matters. …However, requests for assistance must be made with regard to a specific individual, and “fishing expeditions” — any indiscriminate trawling through bank accounts in the hope of finding something interesting — remain ruled out. …Switzerland demonstrates to the world that it is possible for a state to collect taxes with a high degree of taxpayer honesty and without the authorities being corroded with suspicion about the financial activities of their citizens. Citizens in a democracy would never allow their police force to have an automatic right of forced entry into their homes just on the off-chance of finding some stolen goods, so why on earth should the state have an automatic right of forced entry into citizens’ banks accounts just on the off-chance of discovering some tax evasion? There must be a limit to the extent to which respect for an individual’s privacy is sacrificed on the altar of international cooperation in tax matters.

Sadly, the United States is part of the effort to create a global tax cartel. An “OPEC for politicians” would be terrible news for taxpayers, though, much as a cartel of gas stations would be bad for driviers. So-called tax havens play a valuable role in curtailing the greed of the political class. Ask yourself a simple question: Would politicians be more likely or less likely to raise tax rates if they knew taxpayers had no escape options?