Tag: tax competition

Senator Rubio, Representative Posey, and other Lawmakers Fighting to Stop Rogue IRS Proposal that Would Drive Investment from U.S. Economy

There hasn’t been much good economic news in recent years, but one bright spot for the economy is that the United States is a haven for foreign investors and this has helped attract more than $10 trillion to American capital markets according to Commerce Department data.

These funds are hugely important for the health of the U.S. financial sector and are a critical source of funds for new job creation and other forms of investment.

This is a credit to the competitiveness of American banks and other financial institutions, but we also should give credit to politicians. For more than 90 years, Congress has approved and maintained laws to attract investment from overseas. As a general rule, foreigners are not taxed on interest they earn in America. Moreover, by not requiring it to be reported to the IRS, lawmakers on Capitol Hill have effectively blocked foreign governments from taxing this U.S.-source income.

This is why it is so disappointing and frustrating that the Internal Revenue Service is creating grave risks for the American economy by pushing a regulation that would drive a significant slice of this foreign capital to other nations. More specifically, the IRS wants banks to report how much interest they pay foreign depositors so that this information can be forwarded to overseas tax authorities.

Yes, you read correctly. The IRS is seeking to abuse its regulatory power to overturn existing law.

Not surprisingly, many members of Congress are rather upset by this rogue behavior.

Senator Rubio, for instance, just sent a letter to President Obama, slamming the IRS and urging the withdrawal of the regulation.

At a time when unemployment remains high and economic growth is lagging, forcing banks to report interest paid to nonresident aliens would encourage the flight of capital overseas to jurisdictions without onerous reporting requirements, place unnecessary burdens on the American economy, put our financial system at a fundamental competitive disadvantage, and would restrict access to capital when our economy can least afford it. …I respectfully ask that Regulation 146097-09 be permanently withdrawn from consideration. This regulation would have a highly detrimental effect on our economy at a time when pro-growth measures are sorely needed.

And here’s what the entire Florida House delegation (including all Democrats) had to say in a separate letter organized by Congressman Posey.

America’s financial institutions benefit greatly from deposits of foreigners in U.S. banks. These deposits help finance jobs and generate economic growth… For more than 90 years, the United States has recognized the importance of foreign deposits and has refrained from taxing the interest earned by them or requiring their reporting. Unfortunately, a rule proposed by the Internal Revenue Service would overturn this practice and likely result in the flight of hundreds of billions of dollars from U.S. financial institutions. …According to the Commerce Department, foreigners have $10.6 trillion passively invested in the U.S. economy, including nearly “$3.6 trillion reported by U.S. banks and securities brokers.” In addition, a 2004 study from the Mercatus Center at George Mason University estimated that “a scaled back version of the rule would drive $88 billion from American financial institutions,” and this version of the regulation will be far more damaging.

Both Texas Senators also have registered their opposition. Senators Hutchison and Cornyn wrote to the Obama Administration earlier this month.

We are very concerned that this proposed regulation will bring serious harm to the Texas economy, should it go into effect. …Forgoing the taxation of deposit interest paid to certain global investors is a long-standing tax policy that helps attract capital investment to the United States. For generations, these investors have placed their funds in institutions in Texas and across the United States because of the safety of our banks. Another reason that many of these investors deposit funds in American institutions is the instability in their home countries. …With less capital, community banks will be able to extend less credit to working families and small businesses. Ultimately, working families and small businesses will bear the brunt of this ill-advised rule. Given the ongoing fragility of our nation’s economy, we must not pursue policies that will send away job-creating capital.We ask you to withdraw the IRS’s proposed REG-14609-09. The United States should continue to encourage deposits from global investors, as our nation and our economy are best served by this policy.

Their dismay shouldn’t be too surprising since their state would be especially disadvantaged. Here are key passages from a story in the Houston Chronicle.

Texas bankers fear Mexican nationals will yank their deposits if the institutions are required to report to the Internal Revenue Service the interest income non-U.S. residents earn. …such a requirement would drive billions of dollars in deposits to other countries from banks in Texas and other parts the country, hindering the economic recovery, bankers argue. About a trillion dollars in deposits from foreign nationals are in U.S. bank accounts, according to some estimates. …The issue is of particular concern to some banks in South Texas, where many Mexican nationals have moved deposits because they don’t feel their money is safe in institutions in Mexico. …”This proposal has caused a wave of panic in Mexico,” said Lindsay Martin, an estate-planning lawyer with Oppenheimer Blend Harrison + Tate in San Antonio. He has received in recent weeks more than a dozen calls from Mexican nationals and U.S.-based financial planners with questions on the rule. …Jabier Rodriguez, chief executive of Pharr-based Lone Star National Bank, said not one Mexican national he has spoken to backs the rule. “Several of them have said if it were to happen, then there’s no reason for us to have our money here anymore,” he said. Many Mexican nationals worry that the data could end up in the wrong hands, jeopardizing their safety. If people in Mexico and some South American nations find out they have a million dollars in an FDIC-insured account in the United States, “their families could be kidnapped,” added Alex Sanchez, president of the Florida Bankers Association.

For those who want more information about this critical issue, here’s a video explaining why the IRS’s unlawful regulation is very bad for the American economy.

New Video Explains that Tax Competition Is a Powerful Mechanism to Restrain the Greed of the Political Class

Here’s a new mini-documentary from the Center for Freedom and Prosperity, narrated by Natasha Montague of Americans for Tax Reform, that explains why the process of tax competition is a critical constraint on the propensity of governments to over-tax and over-spend.

The issue is very simple. When labor and capital have the ability to escape bad policy by moving across borders, politicians are more likely to realize that it is foolish to impose high tax rates. And they oftentimes compete for jobs and investment by lowering tax rates. This virtuous form of rivalry helps explain why so many nations in recent years have lowered tax rates and adopted simple and fair flat tax systems.

Another great feature of the video is the series of quotes from winners of the Nobel Prize. These economists all recognize competition between governments is just as desirable as competition between banks, pet stores, and supermarkets.

The video also discusses how politicians are attacking tax competition. It mentions a privacy-eroding scheme concocted by governors to tax out-of-state purchases (how dare consumers buy online and avoid state sales tax!).

And it also discusses a very destructive tax harmonization effort by a Paris-based bureaucracy (the Organization for Economic Cooperation and Development, subsidized with American tax dollars!), which would undermine fiscal sovereignty by punishing jurisdictions that adopt pro-growth tax systems that attract labor and capital.

The issues discussed in this video generally don’t get a lot of attention, but they are critical for the long-run battle to restrain government. Please share widely.

P.S. This speech by Florida’s new Governor is a good example of how tax competition encourages policy makers to do the right thing.

Actually, Texans Save $600 Million a Year

A Texas tax official estimates in this story that Texas loses an estimated $600 million in Internet sales taxes every year. Its part of a long-running debate about whether state governments should be able to collect taxes from out-of-state retailers who send goods into their jurisdictions.

What happens with the $600 million depends on what you mean by “Texas.” If you mean the government of the state of Texas in Austin, why, yes, the government appears not to collect that amount, which it wants to. If by “Texas” you mean the people who live, work, and raise their families throughout the state–Texans–they actually save $600 million a year. They get to do what they want with it. After all, it’s their money.

The Texas tax collector is complaining because the last thing state taxing agents want to do is collect money in the form of use taxes, which means something like going door to door to collect money from voters based on what they bought from out of state. Revenuers intensely prefer to hide the process, collecting their residents’ money from out-of-state companies.

Amazon.com is Texas’ target–it’s the great white whale for tax-hungry jurisdictions nationwide. With no retail outlets and few offices or fulfillment centers around the country, it’s not subject to tax jurisdiction in lots of places that would like to tap it for revenue. Having a fulfillment center in Texas may make Amazon liable for $600 million of its customers’ money, so it’s doing the sensible thing: getting out.

And thank heavens it can! Amazon is a cog in the extremely virtuous process of tax competition. Its ability to move operations means that it can escape states with burdensome taxes and tax collections oblibations, like Texas. Tax competition among states puts downward pressure on taxes, which in turn puts upward pressure on the wealth and well-being of state residents.

The pro-tax folks have been working for years to eliminate tax competition. The “Streamlined Sales Tax Project” continues work it began in 2000 to pave the way for nationwide sales taxation. “Streamlining” sounds so good, doesn’t it? But the result would be uniform–and uniformly high–sales taxes that every state might impose on every retailer that sends goods across state lines.

The Web site of the pro-tax coalition sounds good, too: the “Alliance for Main Street Fairness,” at the URL standwithmainstreet.com. Who wouldn’t want to “stand with Main Street”? Lovers of limited government, for one.

“Fairness” here means uniform high sales taxes and interstate tax collection obligations. The site doesn’t say who’s behind it, but the campaign to impose taxes on Amazon and other remote sellers is almost certainly a project of big national chain retailers. Rather than fight to lower taxes nationwide, they think they should just saddle their online competitors with tax collection obligations.

As long as the Streamlined Sales Tax Project continues to fail, tax competition in this area survives, and retailers like Amazon can provide lower costs to all of us–including that $600 million in savings enjoyed by Texans each year.

English Anti-Tax Haven Ideologues Are Just as Foolish and Ignorant as their American Cousins

There’s a supposed expose’ in the U.K.-based Daily Mail about how major British companies have subsidiaries in low-tax jurisdictions. It even includes this table with the ostensibly shocking numbers.

This is quite akin to the propaganda issued by American statists. Here’s a table from a report issued by a left-wing group that calls itself “Business and Investors Against Tax Haven Abuse.”

At the risk of being impolite, I’ll ask the appropriate rhetorical question: What do these tables mean?

Are the leftists upset that multinational companies exist? If so, there’s really no point in having a discussion.

Are they angry that these firms are legally trying to minimize tax? If so, they must not understand that management has a fiduciary obligation to maximize after-tax returns for shareholders.

Are they implying that these businesses are cheating on their tax returns? If so, they clearly do not understand the difference between tax avoidance and tax evasion.

Are they agitating for governments to impose worldwide taxation so that companies are double-taxed on any income earned (and already subject to tax) in other jurisdictions? If so, they should forthrightly admit this is their goal, notwithstanding the destructive, anti-competitive impact of such a policy.

Or, perhaps, could it be the case that leftists on both sides of the Atlantic don’t like tax competition? But rather than openly argue for tax harmonization and other policies that would lead to higher taxes and a loss of fiscal sovereignty, they think they will have more luck expanding the power of government by employing demagoguery against the big, bad, multinational companies and small, low-tax jurisdictions.

To give these statists credit, they are being smart. Tax competition almost certainly is the biggest impediment that now exists to restrain big government. Greedy politicians understand that high taxes may simply lead the geese with the golden eggs to fly across the border. Indeed, competition between governments is surely the main reason that tax rates have dropped so dramatically in the past 30 years. This video explains.

Disastrous U.K. Tax Hike Unleashes a Steroid-Pumped Version of the Laffer Curve

The Laffer Curve is one of my favorite issues (see here, here, here, here, here, etc). But it is a very frustrating topic. Half my time is spent trying to convince left-leaning people that the Laffer Curve exists. I use common-sense explanations. I cite historical examples. I even use information from left-of-center institutions in hopes that they will be more likely to listen.

The other half of my time is spent trying to educate right-leaning people that the Laffer Curve does not mean that “all tax cuts pay for themselves.” I relentlessly try to make them understand that there is a big difference between pro-growth tax cuts that increase incentives for productive behavior and therefore lead to more taxable income and other tax cuts such as child credits that have little or no impact on economic performance.

Given my focus on this issue (some would say I’m tenacious, others that I’m bizarrely fixated), I was excited to see a column from the editor of a business paper in the United Kingdom about a tax increase that backfired in a truly spectacular fashion. It deals with the taxation of rich foreigners, called “non-doms,” who often choose to live in London because the U.K. government does not tax them on their foreign income. But then the Labor Party, with the support of spineless Tories, imposed an annual fee of £30,000 (about $45,000-$50,000) on these highly productive people.

The rest, as they say, is history. Here’s a long extract, but you should read the entire article.

Figures out last night confirmed yet again that crippling tax hikes are driving people and economic activity away from Britain. Rather than raising extra tax receipts to plug Britain’s budget deficit, there is growing evidence that the raids are actually reducing the amount of money collected by the taxman, thus inflicting even greater debt on the rest of us. Our predicament is depressing almost beyond words. The number of non-doms living in the UK collapsed by 16,000 in 2008-09, the most recent year for which data is available, according to yesterday’s figures. This is a dramatic decline: an 11.6 per cent drop from 139,000 in 2007-08 to 123,000. When in April 2008 Labour – egged on by the Conservatives – introduced an annual levy of £30,000 for those who had claimed non-dom status for seven years, pundits dismissed the tax as too low to make a difference. …Non-doms are people who originated overseas and pay UK tax on their UK earnings but no tax on their foreign income. The original non-doms were Greek shipping moguls who fled their socialist country to base themselves (and their businesses) in London. Until recently, the UK fought to attract such people; they pay a lot of UK tax and are often employers or high spenders. Yesterday’s figures actually underplay the true extent of the exodus: the departure of non-doms is bound to have accelerated in 2009-10 and will continue in the coming years as a result of the 50p tax rate, the hike in capital gains tax, the extra national insurance contributions and the near-hysterical war on financiers and myriad other attacks on wealth-creators and foreign investors that are now routine in this country. …The Treasury told us 5,400 non-doms opted to pay the fee. This means that the taxman raised an extra £162m. The Treasury wouldn’t or couldn’t give us any more information, so I’ve made a few guesstimates to work out the net cost of the tax raid. Being over-generous to the government, it might be that half the missing non-doms are now full taxpayers. Let’s assume they are paying an extra £15,000 in tax each. That would make another £120m in tax, taking the total to £282m. Let’s then assume that the 8,000 missing non-doms would have paid £50,000 each in UK income tax, capital gains tax, VAT and stamp duty – the gross loss jumps to £400m, which means that the Treasury is £118m worse off. The real loss is almost certainly much higher.

In other words, this is one of those rare cases where a tax increase is so punitive that the government winds up losing money. In a logical world, this should be an opportunity for the left and right to unite for lower taxes. The left would get more money to spend and the right would get the satisfaction of better tax policy. This assumes, however, that the left is more motivated by revenue maximization than it is by a class-warfare impulse to punish the rich. As Obama said during a Democratic debate in 2008, he didn’t care whether higher taxes raised more revenue.

Will the Last Person to Leave Illinois Please Turn Off the Lights?

There is a very bizarre race happening in Illinois. The Governor and the leaders of the State Senate and General Assembly are trying to figure out how to ram through a massive tax increase, but they’re trying to make it happen before new state lawmakers take office tomorrow. The Democrats will still control the state legislature, but their scheme to fleece taxpayers would face much steeper odds because of GOP gains in last November’s elections.

As a result, the Illinois version of a lame-duck session has become a nightmare, sort of a feeding frenzy of tax-crazed politicians. Here’s the Chicago Tribune’s description of the massive tax hike being sought by the Democrats.

The 3 percent rate now paid by individuals and families would rise to 5 percent in one of the largest state tax increases in Illinois history. …Also part of the plan is a 46 percent business tax increase. The 4.8 percent corporate tax rate would climb to 7 percent… In addition, lawmakers are looking at a $1-a-pack increase in the state’s current 98-cent tax on cigarettes. …Democrats will still control the new General Assembly that gets sworn in Wednesday, their numbers were eroded by Republicans in the November election. With virtually no Republican support for higher taxes, Democratic leaders contend it will be easier to gain support for a tax hike in a legislature with some retiring members no longer worried about facing the voters.

If Governor Quinn and Democratic leaders win their race to impose a massive tax hike, that will then trigger another race. Only this time, it will be a contest to see how many productive people “go Galt” and leave the state. John Kass, a columnist for the Tribune, points out that the Democrats’ plan won’t work unless politicians figure out how to enslave taxpayers so they can’t escape the kleptocracy known as Illinois.

The warlords of Madiganistan — that bankrupt Midwestern state once known as Illinois — are hungry to feed on our flesh once again. This time the ruling Democrats are planning a…state income tax increase, with more job-killing taxes on corporations… A few tamed Republicans also want to join in and support a tax deal, demonstrating their eagerness to play the eunuch in the court of the pasha. And though they’ve been quite ingenious, waiting for the end of a lame-duck legislative session to do their dirty work, they forgot something important. They forgot to earmark some extra funds for that great, big wall. You know, that wall they’re going to need, 60 feet high, the one with razor wire on top and guard towers, equipped with police dogs and surrounded by an acid-filled moat. The wall they’re going to have to build around the entire state, to keep desperate taxpayers from fleeing to Indiana, Wisconsin and other places that want jobs and businesses and people who work hard for a living. …With the state billions upon billions in debt, and the political leaders raising taxes, borrowing billions more and not making any substantive spending cuts, we’ve reached a certain point in our history. The tipping point. Taxes grow. Employers run. The jobs leave. High-end wage earners have the mobility to escape. What’s left are the low-end workers who are stuck here. …the Democrats aren’t about to disappoint their true constituents. So they don’t cut, they tax. Because the true constituents of the Democratic warlords are the public service unions and the special interests that benefit from all that spending. Why should politicians make cuts and anger the people that give them power, the power that allows them access to treasure? …we reach another tipping point: The point at which those who are tied to government, either through contracts or employment, actually outnumber those who are not tied to government. Do the math on Election Day.

Illinois is America’s worst state, based on what it costs to insure state debt. The greedy politicians in Springfield think a tax hike will give them enough money to pay bondholders and reward special-interest groups. But that short-sighted approach is based on the assumption that people and businesses will cheerfully bend over and utter the line made famous by Animal House: “Thank you, sir! May I have another?”

Moving across state lines is generally not something that happens overnight. But this giant tax hike is sure to be the tipping point for a few investors, entrepreneurs, rich people, and employers. Each year, more and more of them will decide they can be more successful and more profitable by re-domiciling in low-tax states. When that happens, Illinois politicians will get a lesson about the Laffer Curve, just as happened in Maryland, Oregon, and New York.

America’s Number One! America’s Number One!…Oops, Never Mind

Sometimes it’s not a good idea to be at the top of a list. And now that Japan has announced a five-percentage point reduction in its corporate tax rate, the United States will have the dubious honor of imposing the developed world’s highest corporate tax rate. Here’s an excerpt from the report in the New York Times.

Japan will cut its corporate income tax rate by 5 percentage points in a bid to shore up its sluggish economy, Prime Minister Naoto Kan said here Monday evening. Companies have urged the government to lower the country’s effective corporate tax rate — which now stands at 40 percent, around the same rate as that in the United States — to stimulate investment in Japan and to encourage businesses to create more jobs. Lowering the corporate tax burden by 5 percentage points could increase Japan’s gross domestic product by 2.6 percentage points, or 14.4 trillion yen ($172 billion), over the next three years, according to estimates by Japan’s Trade Ministry. … In a survey of nearly 23,000 companies published this month by the credit research firm Teikoku Data Bank, more than 44 percent of respondents cited lower corporate taxes as a prerequisite to stronger economic growth in Japan. … A 5 percentage-point tax rate cut is unlikely to do much to solve Japan’s woes, however. An effective corporate tax rate of 35 percent would still be higher than South Korea’s 24 percent or Germany’s 29 percent, for example. … Meanwhile, the government is trying to offset lost tax revenue with tax increases elsewhere, which could blunt the effect of reduced corporate tax burdens.

I suspect the Japanese government’s estimate of $172 billion of additional output is overly generous. After all, the corporate tax rate in Japan will still be very high (the government originally was considering a bigger cut). And foolish Japanese politicians will probably raise taxes elsewhere. But there will be some additional growth since the corporate tax rate is an especially damaging way to collect revenue.

But I’m not losing sleep about Japan’s economic future. I hope they do well, of course, but my bigger concern is the American economy. The U.S. corporate tax rate of nearly 40 percent (including state corporate burdens) already is far too high, particularly since America adds to the competitive disadvantage of U.S.-domiciled firms by being one of the few nations to impose an extra layer of tax on foreign-source income. Japan’s proposed rate reduction, however,  means the high tax rate in America will be an even bigger hindrance to job creation.

It’s also worth noting that the average corporate tax rate in Europe has now dropped to less than 24 percent, so even welfare states have figured out that a high tax burden on business doesn’t make sense in a competitive global economy.

Sometimes you can fall farther behind if you stand still and everyone else moves forward. That’s a good description of what’s happening in the battle for a pro-growth corporate tax system. By doing nothing, America’s self-destructive corporate tax system is becoming, well, even more destructive.