Tag: Tax Reform

The IRS’s Tax Rate on Google’s Foreign-Source Income Is 2.4 Percentage Points Too High

There’s been considerable attention to the news that the IRS only managed to grab 2.4 percent of Google’s overseas income. As this Bloomberg article indicates, many statists act as if this is a scandal (including a morally bankrupt quote from a Baruch College professor who thinks a company’s lawful efforts to lower its tax liability is “evil” and akin to robbing citizens).

Google Inc. cut its taxes by $3.1 billion in the last three years using a technique that moves most of its foreign profits through Ireland and the Netherlands to Bermuda. Google’s income shifting – involving strategies known to lawyers as the “Double Irish” and the “Dutch Sandwich” – helped reduce its overseas tax rate to 2.4 percent, the lowest of the top five U.S. technology companies by market capitalization, according to regulatory filings in six countries. …Google, the owner of the world’s most popular search engine, uses a strategy that…takes advantage of Irish tax law to legally shuttle profits into and out of subsidiaries there, largely escaping the country’s 12.5 percent income tax. The earnings wind up in island havens that levy no corporate income taxes at all. Companies that use the Double Irish arrangement avoid taxes at home and abroad as the U.S. government struggles to close a projected $1.4 trillion budget gap and European Union countries face a collective projected deficit of 868 billion euros. …U.S. Representative Dave Camp of Michigan, the ranking Republican on the House Ways and Means Committee, and other politicians say the 35 percent U.S. statutory rate is too high relative to foreign countries. …Google is “flying a banner of doing no evil, and then they’re perpetrating evil under our noses,” said Abraham J. Briloff, a professor emeritus of accounting at Baruch College in New York who has examined Google’s tax disclosures. “Who is it that paid for the underlying concept on which they built these billions of dollars of revenues?” Briloff said. “It was paid for by the United States citizenry.”

Congressman Dave Camp, the ranking Republican (and presumably soon-to-be Chairman) of the House tax-writing committee sort of understands the problem. The article mentions that he wants to investigate whether America’s corportate tax rate is too high. The answer is yes, of course, as explained in this video, but the bigger issue is that the IRS should not be taxing economic activity that occurs outside U.S. borders. This is a matter of sovereignty and good tax policy. From a sovereignty persepective, if income is earned in Ireland, the Irish government should decide how and when that income is taxed. The same is true for income in Bermuda and the Netherlands.

From a tax policy perspective, the right approach is “territorial” taxation, which is the common-sense notion of only taxing activity inside national borders. It’s no coincidence that all pro-growth tax reform plans, such as the flat tax and national sales tax, use this approach. Unfortunately, America is one of the world’s few nations to utilize the opposite approach of “worldwide” taxation, which means that U.S. companies face the competitive disadvantage of having two nations tax the same income. Fortunately, the damaging impact of worldwide taxation is mitigated by a policy known as deferral, which allows multinationals to postpone the second layer of tax.

Perversely, the Obama Administration wants to undermine deferral, thus putting American multinationals at an even greater disadvantage when competing in global markets. As this video explains, that would be a major step in the wrong direction. Instead, policy makers should junk America’s misguided worldwide system and replace it with territorial taxation.

An Australian Lesson about Capital Gains Tax Rates and Revenues

A decade ago, amid much controversy, I persuaded the Australian government to cut the capital gains tax rate in half.

Stephen Kirchner, an economist from Australia’s leading think tank, the Center for Independent Studies, reviewed the results last November.

This a brief summary:

The introduction of capital gains tax discounts for individuals and funds as part of the 1999 Ralph business tax reforms has received a lot of bad press, but much of this commentary is ill-informed… .

Those who called for reform of Australia’s capital gains tax regime 10 years ago argued that the Ralph reforms would likely raise more revenue because of the increased incentive they provided for taxpayers to realise capital gains that would otherwise go untaxed. Supply-side economist Alan Reynolds predicted that the reforms would raise twice as much revenue in the long run. He was right. The capital gains tax share of Commonwealth tax revenue nearly doubled between the introduction of the Ralph reforms and 2006–07. In absolute terms, CGT revenue rose from $4.6 billion in 1998–99 to $17.3 billion in 2006–07. CGT revenue growth has been strongest among individuals, who received the larger discount of 50%, followed by funds, which received a 33% discount. The slowest CGT revenue growth has been from companies, which received no discount.

The data suggest that the Ralph CGT reforms have resulted in more tax revenue through increased realisations of capital gains. They have thus strengthened rather than weakened the ability of the tax system to serve equity objectives. The Ralph reforms demonstrate the basic supply-side insight that lower effective tax rates lead to faster growth in the tax base and tax revenue.

Russia Scraps Capital Gains Tax

The former communists running Russia apparently understand tax policy better than the crowd in charge of U.S. tax policy. Not only does Russia have a 13 percent flat tax, but the government has just announced it will eliminate the capital gains tax (which shouldn’t exist in a pure flat tax anyhow).

Here’s a passage from the BBC report:

Russia will scrap capital gains tax on long-term direct investment from 2011, President Dmitry Medvedev has said. …Mr Medvedev told the St Petersburg International Economic Forum that long-term direct investment was “necessary for modernisation”. …Its oil revenues fund, which has been financing the deficit, is expected to end next year, and the government wants to attract more foreign investment to boost the economy.

Sounds like President Medvedev has watched my video explaining why there should be no capital gains tax. Now we just need to get American politicians to pay attention.

Dan Mitchell Gets Results

I gave a speech in Hungary about two weeks ago and now the government has announced a big step in the direction of better fiscal policy. My role was about as meaningful as the rooster crowing, followed by the sunrise, but this is still good news. According to Reuters, “Hungary’s new government plans to introduce a flat personal income tax of 16 percent from 2011, as well as a 15 percent cut in public sector wages.” Those are the headline initiatives, but the fiscal reform package includes other good policies. Here’s a blurb from The Economist.

After a three-day emergency cabinet meeting over the weekend, Viktor Orban, the prime minister, announced the government’s new economic programme this afternoon. The battered forint quickly jumped almost 2% in response. …The introduction of a 16% flat personal income tax is a daring move, and could have important repercussions beyond balancing the state’s books. Unemployment, or at least that element of it which is declared, is nudging 12%, and one reason is Hungary’s cumbersome bureacracy and heavy tax burden. Now Mr Orban has announced that corporation tax for companies with annual profits of less than 500m forints will be reduced from 19% to 10%. Ten more small and bothersome taxes are set to be abolished altogether.

A few years ago, when several nations each year were adopting the flat tax, I arbitrarily decided that this rock classic would be the theme song of the tax reform movement. Sadly, it doesn’t look like we’ll get to play it in America anytime soon.

The Joy of Tax Serfdom

Like a good peasant, I have already filed an extension, so I am at least temporarily compliant with the friendly people at the IRS. But since it is tax day, perhaps a slight bit of criticism of the tax code is warranted. I have already posted my video on the flat tax and warned about the risks of adding a value-added tax on top of the income tax in another video. I also posted a very successful video narrated by a former Cato intern about the harsh compliance costs of the internal revenue code. So it is time to reach into the archives and post this classic video produced by Caleb Brown and Austin Bragg of the Cato Institute.

P.S. Not that I would ever want to put my thumb on the scale of any contest, but I am defending the flat tax in an online debate for U.S. News & World Report with someone who favors the current system. You can cast a vote if you have an opinion on the matter.

P.P.S. Caleb has independently produced a video on the meaning of free enterprise. With politicians acting as if the business community is an ATM machine to finance a bigger welfare state, Caleb’s video puts a human face on what it means to be a risk-taking entrepreneur.

New Video Exposes Nightmare of IRS Complexity

My former intern, Hiwa Alaghebandian, has just narrated a new Economics 101 video about the cost of the tax code. I won’t spoil the surprise by giving the details, but you if you’re not angry now, you will be after watching.

In the video, Ms. Alaghebandian notes that a study from 1996 (back when the tax code was not nearly as complex) estimated that a flat tax would reduce the compliance burden of the income tax by 94 percent. In my video on the flat tax, I mostly focused on how a single-rate, consumption-base system would boost growth and competitiveness, but simplicity also would be a remarkable achievement. Not only would real tax reform reduce compliance costs by hundreds of billions of dollars, it would also put a big dent in the corrupt practice of distorting economic choices with deductions, exemptions, credits, preferences, shelters, and other loopholes. That’s a profitable game for politicians and lobbyists, but the rest of us pay the price because the tax code is even more of a nightmare.

There is also an under-appreciated connection between simplicity and fairness. My colleague Will Wilkinson sagely observed that “…the more power the government has to pick winners and losers, the more power rich people will have relative to poor people.” The tax code is a good example. Many leftists want the tax system to penalize success with high tax rates. I’ve explained why this is economically misguided in a video on class-warfare tax policy, but it’s also worth pointing out that a simple and fair tax system like the flat tax makes it much more difficult for the well-connected to take advantage of complexity. Simply stated, the tax system should not punish the rich with high rates (notwithstanding the neurotic views of self-loathing trust-fund heirs), and it shouldn’t reward them with special deals.

The good news is that we know the policies that will fix the current system. The bad news is that politicians keep making the system worse. Putting the IRS in charge of enforcing key parts of Obamacare is just the latest example of why America needs a tax revolt.

The Flat Tax: Good for America, Bad for Washington

America’s biggest fiscal challenge is excessive government spending. The public sector is far too large today and it is projected to get much bigger in coming decades. But the corrupt and punitive internal revenue code is second on the list of fiscal problems. This new video, narrated by yours truly, explains how a flat tax would work and why it would promote growth and fairness. Something to keep in mind with tax day in just a couple of weeks.

There are two big hurdles that must be overcome to achieve tax reform. The first obstacle is that the class-warfare crowd wants the tax code to penalize success with high tax rates. That issue is addressed in the video in a couple of ways. I explain that fairness should be defined as treating all people equally, and I also point out that upper-income taxpayers are far more likely to benefit from all the deductions, credits, exemptions, preferences, and other loopholes in the tax code. The second obstacle, which is more of an inside-the-beltway issue, is that the current tax system is very rewarding for the iron triangle of lobbyists, politicians, and bureaucrats (or maybe iron rectangle if we include the tax preparation industry). There are tens of thousands of people who make very generous salaries precisely because the tax code is a playground for corrupt deal making. A flat tax for these folks would be like kryptonite for Superman. But more than two dozen nations around the world have implemented a flat tax, so hope springs eternal.