Tag: tax competition

A Victory for Fiscal Sovereignty and Human Rights

A Swiss court just threw a wrench in the gears of an IRS effort to impose bad U.S. tax law on an extraterritorial basis, ruling that Switzerland-based UBS does not have to hand over data to the American tax authorities. This ruling nullifies an agreement that the Swiss government was coerced into making with the U.S. government last year.

In typical arrogant fashion, the IRS already has indicated that it still expects acquiescence, notwithstanding Switzerland’s strong human rights policy on personal privacy. The Bloomberg story excerpted below has the details, but it’s worth noting that this entire fight exists solely because the Internal Revenue Code imposes double taxation on income that is saved and invested, and imposes that bad policy on economic activity outside America’s border. But just as other governments should not have the right to impose their laws on things that happen in America, the United States should not have the right to trample the sovereignty of other nations:

The failure by U.S. citizens to complete certain tax forms or declare income doesn’t constitute “tax fraud” that would require Switzerland to disclose account data, the country’s Federal Administrative Court ruled in a judgment released today. …“The prosecutors at the Justice Department are not going to be happy with this opinion,” Namorato said in an interview in Washington. …U.S. Justice Department spokesman Charles Miller declined to comment. …The Internal Revenue Service said in a statement that while the agency hadn’t reviewed the ruling it “had every expectation that the Swiss government will continue to honor the terms of the agreement.” …Switzerland distinguishes between tax fraud, which is a crime, and tax evasion, which is a civil offense.

This battle is part of a broader effort by uncompetitive nations to persecute “tax havens.” Creating a tax cartel for the benefit of greedy politicians in France, Germany, and the United States would be a mistake. An “OPEC for politicians” would pave the way for higher taxes, as explained here, here, and here.

But this also is a human rights issue. Look at what happened recently in the thugocracy known as Venezuela, where Chavez began a new wave of expropriation. The Venezuelans with money in Cayman, Miami, and Switzerland were safe, but the people with assets inside the country have been ripped off by a criminal government. Or what about people subjected to persecution, such as political dissidents in Russia? Or Jews in North Africa? Or ethnic Chinese in Indonesia? Or homosexuals in Iran? And how about people in places such as Mexico where kidnappings are common and successful people are targeted, often on the basis of information leaked from tax departments. This world needs safe havens, jurisdictions such as Switzerland and the Cayman Islands that offer oppressed people the protection of honest courts, financial privacy, and the rule of law. Heck, even the bureaucrat in charge of the OECD’s anti-tax competition campaign admitted to a British paper that “tax havens are essential for individuals who live in unstable regimes.” With politicians making America less stable with each passing day, let’s hope this essential freedom is available in the future.

Greedy Local Politicians Attempt to Grab Revenue Far Outside Their Borders

Regular readers of this blog are familiar with the tax competition battle, which largely revolves around high-tax governments attempting to track – and tax – economic activity that migrates to lower-tax jurisdictions. But this is not just a global fight between decrepit welfare states such as France and fiscal havens such as the Cayman Islands. American states also compete with each other, and there are numerous examples of high-tax states such as California and New York trying to grab money from people who escape to zero-income tax states such as Nevada and Florida. The fight even exists at the local level, and a good example is the attempt by politicians to tax faraway online travel agencies. The Orange County Register opines about these extraterritorial tax grabs:

A recent legal victory for some Texas cities against online travel companies over hotel taxes may have given Anaheim officials hope for their own case, but they shouldn’t start celebrating just yet. Other cities have not fared as well in similar lawsuits. …Here’s what Fairview Heights, Anaheim and other cities wanted to change: In a typical transaction, a traveler picks a hotel and books a room, stays there, and pays the hotel a room charge plus a local occupancy tax based on the room charge. The hotel keeps the room charge and forwards the tax money to the government. Enter online travel companies like Expedia, Hotels.com, Orbitz, Priceline and Travelocity, which allow travelers to sort through hotels and book a room on a central Web site. These companies do not reserve or resell hotel rooms, but act as intermediaries to facilitate the transaction between hotel and traveler. The hotel receives an amount for the room, on which the city’s hotel tax is based. Let’s say I search a Web site and book a $100 hotel room. The online company charges me $10 for their service. Anaheim argues that hotel occupancy tax should be paid not only on the $100 room charge, but also on the $10 service fee. …A federal bill is pending to limit hotel taxes to amounts collected by a hotel for occupancy purposes, excluding service fees and markups by intermediaries. The Constitution permits Congress to pass such laws if there is a danger that state and city laws are interfering with interstate commerce. Hotel taxes are attractive to local politicians because they are a way to shift the tax burden to “outsiders.” But because every U.S. city has a hotel tax, we’re all somebody else’s “outsider.” The net result is that everyone is taxing everyone else in an unaccountable way, and unless the cities and their lawyers are stopped, in an unpredictable way, too.

Pelosi Eyeing Global Tax on Financial Transactions

Imagine if the government got to pick your pocket every time you engaged in a financial transaction? That nightmare scenario is a distinct possibility now that senior Democrats have joined with European politicians and urged that such a tax be applied on a worldwide based. Reuters has the disturbing details:

Any tax imposed on financial transactions would have to take effect internationally to keep Wall Street jobs and related business from moving overseas, U.S. House of Representatives Speaker Nancy Pelosi said on Thursday.

“It would have to be an international rule, not just a U.S. rule,” Pelosi said at a news conference. “We couldn’t do it alone, we’d have to do it as an international initiative.”

Several House Democrats have proposed a Wall Street tax to pay for job-creating legislation they plan to pass in December. The tax, which could raise $150 billion per year, would tap into widespread public outrage at Wall Street in the wake of the financial crisis.

…The No. 4 Democrat in the House, Representative John Larson, said his proposal to impose a 0.25 percent tax on over-the-counter derivatives transactions would apply internationally. “Part of our proposal would include that it would be international,” Larson told Reuters after meeting with other lawmakers about the jobs package. Democratic Representative Peter DeFazio said his separate proposal, which would tax a wider array of trading activity, would cover all U.S. corporations and individuals no matter where their trades took place.

…Britain urged other governments earlier this month to consider a bank tax as a way to fund future bailouts, and France and Germany have also called for a bank tax. The International Monetary Fund is studying the idea.

This issue reveals the value of tax competition – but also its limitations. Pelosi and other collectivists realize that economic activity will migrate to friendlier jurisdictions if if they unilaterally impose this punitive tax. This externally-imposed discipline is why tax competition is a liberalizing force. But competition can be undermined if governments create a cartel, which is exactly what American and European statists would like to see.

Monday Links

Using Gasoline to Douse a Fire? OECD Thinks Higher Tax Rates Will Help Iceland’s Faltering Economy

Republicans made many big mistakes when they controlled Washington earlier this decade, so picking the most egregious error would be a challenge. But continued American involvement with the Organization for Economic Cooperation and Development would be high on the list. Instead of withdrawing from the OECD, Republicans actually increased the subsidy from American taxpayers to the Paris-based bureaucracy. So what do taxpayers get in return for shipping $100 million to the bureaucrats in Paris? Another international organization advocating for big government.

The OECD, for example, is infamous for trying to undermine tax competition. It also has recommended higher taxes in America on countless occasions. And now it is suggesting that Iceland impose high tax increases - even though Iceland’s economy is in big trouble and the burden of government spending already is about 50 percent of GDP:

Both tax increases and spending cuts will be needed, although the former are easier to introduce immediately. The starting point for the tax increases should be to reverse tax cuts implemented over the boom years, which Iceland can no longer afford. This would involve increases in the personal income tax… Just undoing the past tax cuts is unlikely to yield enough revenue. In choosing other measures, priority should be given to those that are less harmful to economic growth, such as broadening tax bases, or that promote sustainable development, such as introducing a carbon tax.

When Governments Are Forced to Compete, the Result Is Better Policy and More Liberty

A story in USA Today is a perfect illustration of the liberalizing power of tax competition. In an effort to attract more jobs and investment, states are competing with each - even taking the aggressive step of advertising in high-tax states. This does not guarantee that states will always use the best approach since states sometimes try to lure companies with special handouts, but tax competition generally encourages states to lower tax rates and control fiscal and regulatory burdens. The same process works internationally, which is precisely why international bureaucracies controlled by high-tax nations are seeking to thwart fiscal competition between nations:

Las Vegas is running ads in California warning businesses they can “kiss their assets goodbye” if they stay in the Golden State. In New Hampshire, economic development officials pick up Massachusetts business owners at the border in a limousine and give them VIP treatment and a pitch about why they should relocate there. Indiana officials, using billboards at the borders and direct appeals to businesses in neighboring states, are inviting them to ‘Come on IN for lower taxes, business and housing costs.’ As states struggle to keep jobs in a continuing recession, they are no longer hoping businesses in other states happen to notice their lower taxes, cheaper office space and less-stringent regulations. They are taking the message directly to them and taking shots at their neighbor’s shortcomings. …No one does it more unapologetically than the Nevada Development Authority. The agency has picked on California before, but its $1 million campaign, launched this month, ratchets up the mockery of California’s budget deficits and IOU paychecks. ‘It’s all done tongue-in-cheek. But the underlying deal is, we want this business,’ Nevada Development Authority President and CEO Somer Hollingsworth said. …’They do mask the nastiness of their message with humor, but this time, their ads are over the top,’ said [California Assemblyman] Solorio, a Democrat from Santa Ana.

Tax Oppression Index Ranks America in Bottom Half of Industrialized Nations

A thorough new study of 30 nations from the Institut Constant de Rebecque in Switzerland reveals serious shortcomings in America’s tax system.

The report, entitled “Tax burden and individual rights in the OECD: An International Comparison,” creates a Tax Oppression Index based on three key variables: the overall tax burden, public governance, and taxpayer rights. The good news is that the United States has a comparatively low aggregate tax burden, though America’s score on this measure would be much better in the absence of a punitively high corporate tax rate. The bad news is that corruption and inefficiency in Washington drag down America’s score for public governance. The ugly news is that America has a very low rating for protecting taxpayer rights — largely because politicians have tilted the playing field to favor the IRS, including the fact that taxpayers lose the presumption of innocence provided in the Constitution.

Here is a brief description of the study:

The OECD’s campaign against “harmful tax competition” and “tax havens” has overshadowed the essential issue, namely the important roles that both tax competition and “tax havens” play for capital preservation and formation, leading to higher prosperity and better protection of individual rights throughout the OECD.

The tax oppression index is based on 18 representative criteria measuring fiscal attractiveness, public governance and financial privacy in the 30 member states of the OECD. Switzerland appears as the country with the lowest tax oppression — due to a relatively low tax burden and a more [classical] liberal institutional order, including its citizens’ right to veto legislation, political decentralization, and protection of financial privacy. Germany and France, on the other hand, whose governments have supported the OECD’s efforts, are among the most questionable states in terms of safeguarding their residents’ individual rights.

…The tax oppression index evaluates the 30 OECD member states on three complementary dimensions quantified by 18 representative criteria, on the basis of OECD and World Bank data. The index enables relevant conclusions about the tax burden and individual rights among those countries.

Switzerland earns the top ranking in the report, followed by Luxembourg, Austria, Canada, and Slovakia. Italy and Turkey have the worst systems, followed by Poland, Mexico, and Germany. The United States is tied for 19th, behind the welfare states of Scandinavia. With Obama promising to raise tax rates and increase the power of the IRS, it may just be a matter of time before the United States is competing for the world’s most oppressive tax regime.