Topic: International Economics and Development

Gordon Brown’s Finance Minister Defends UK’s Status as Tax-Haven

The United Kingdom has extremely favorable rules for “non-domiciled” residents, a policy that enables highly productive people to live in London while avoiding most taxes on capital income and foreign-source income. The left in Europe hates this policy, especially since entrepreneurs and investors are escaping high-tax nations to live in London, but the new Chancellor of the Exchequer seems content to leave well enough alone. The Observer reports:

London, the great global financial centre, has another claim to fame: it has become the fastest growing destination for international tax avoiders. The world’s super-rich and an elite cadre of financiers working in the Square Mile are increasingly using non-domicile tax status to sidestep paying tax on their fortunes. …Those benefiting from non-dom status have rocketed over the last five years. The Treasury…confirmed that 112,000 individuals indicated non-dom status in their self-assessment returns in the tax year to April 2005. This is a 74 per cent increase over 2002’s figures. …Unlike UK citizens, non-doms escape tax on income from property or capital gains. It is not only the international jet set who claim non-dom status; it is also available to some of the most powerful figures in the City. …Non-domicile status is self-assessed. Forms are easy to download from the web and there are just 19 questions. One tax expert says it is easy to convince the Revenue that a claimant is based overseas, whether it is through a relative or a series of overseas investments. In addition, the Revenue makes very few checks on status. Many senior City figures qualify for non-dom tax exemptions, including Dominic Murphy, the UK boss of private equity giant KKR. And it is widely thought that the Chancellor’s City adviser Sir Ronald Cohen and a large collection of Labour Party donors do too.  …Earlier this week, new Chancellor Alistair Darling made it clear that nothing must harm the international pre-eminence of the City and he warned against ‘knee jerk’ reactions to calls to amend the regulation.

Mr. Frank Gets Mixed Up

In an article today in the Boston Globe, Rep. Barney Frank (D, MA) commented on the closure of a fabric maker located in or near (the article is unclear) his district:

These working-class people are bearing the brunt of a policy of globalization that benefits the few and damages the many,” Frank said. (my emphasis)

Mr. Frank has the problem precisely backwards. Open trade benefits the many — through more competition and lower prices — even though it takes away the protection of a chosen few. It is tariffs that impose (relatively small) costs on many dispersed consumers, but benefits concentrated interests (and harms the economy overall). In this case, the closure of a 900-employee textile plant is a highly visible manifestation of a phenomenon that has been largely postive on net. It is sad for those losing their jobs, to be sure, but millions of American consumers benefit every day from opening the U.S. market to cheaper imports.

As a Wall Street Journal article yesterday pointed out (and my colleague Dan Ikenson blogged about here last week), the power of organized labor in the Democratic Party has probably spoiled any further trade liberalization in the near future, despite the month-old and much-hyped “bipartisan deal” on trade. This backtracking comes after the administration agreed to Democrats’ demands for stronger labor and environmental provisions in trade agreements.

The recently-inked deal with Korea — the biggest trade deal for the United States since NAFTA, and one that promises large market opportunities for American farmers and service providers, not to mention deals for U.S. consumers — is probably off, all because of American automobile makers who fear competition from Korean imports and assert that the Korean market was not going to open enough for their liking. (Of course, if the deal fails, then the market probably won’t open further at all, but that logic is apparently unconvincing.) Talk about benefiting the few and damaging the many.

The ‘Pseudo-Dictatorship of the Market’

Some people hoped that new French president Nicolas Sarkozy would liberalize France’s economy and reduce the burden of government. But all the evidence points in the other direction.

The International Herald Tribune reports on Sarkozy’s statist choices:

[C]riticism of Sarkozy’s interventionist language…is mounting. The question that Eurocrats, central bankers and fellow politicians are asking is the same they asked three years ago: Is the man who wants to shake up France’s labor market and ignite economic growth with a flurry of tax cuts the liberal European he claims? Or is he an old-style Gaullist in modern disguise?

“Institutions, procedures, directives and rules are not ends in themselves,” Sarkozy declared in Strasbourg, calling for a Europe “that does not submit itself to the pseudo-dictatorship of the market….

Sarkozy has shown little willingness to abandon certain nationalist instincts of past French leaders. He has defended EU agricultural subsidies against demands for greater trade liberalization. He has shown little inclination to withdraw from France’s aim of creating national champions, particularly in the energy sector. On Thursday, he debated the future of the state-controlled gas company Gaz de France with his prime minister and finance minister. And rather than encouraging globalization, he has appeared to reinforce French fears of unfettered capitalism — for example, by fighting to remove a largely symbolic affirmation of EU competition policy from the revamped treaty agreed last month in Brussels.

“Sarkozy talks right but rules left. Portrayals of him as a French Thatcher who will shake things up are vastly exaggerated,” said one EU official in reference to the former British prime minister Margaret Thatcher. “He is, after all, French.”

An EU Minimum Wage Law?

The European Union commissioner for economic and monetary affairs, Joaquin Almunia, thinks there should be a minimum wage for all EU member nations. This is a destructive notion, considering many European nations suffer from substantional unemployment and under-employment. To the extent that minimum wage policy is harmonized (as opposed to 27 different minimum wage policies in 27 EU nations), poorer countries will be hardest hit.

The EU Observer reports on the latest proposal from the statists in Brussels:

EU economic and monetary affairs commissioner Joaquin Almunia has mooted the idea of minimum wages being introduced in each of the 27 member states across the European Union. “Every country in the EU should have a minimum wage,” Mr Almunia told the German weekly Die Zeit in an interview.

…[O]nly 20 EU member states currently have a set level of minimum wages…. Germany … is one of the few major world economies without a minimum wage.

Here’s One Embargo SiCKO Won’t Violate

USA Today initially reported that Michael Moore will be screening his new film SiCKO at a Tehran film festival in October.  Alas, one of Moore’s producers responded with an even-tempered denial (which was dutifully reported by USA Today).

That’s a shame. 

With the help of a beautiful and intelligent attorney, I uncovered a Treasury Department guide to U.S. sanctions against Iran.  Officially speaking:

The receipt or transmission of postal, telegraphic, telephonic or other personal communications, which does not involve the transfer of anything of value, between the United States and Iran is authorized.

I’d say that gives SiCKO the green light.

The Germans Attack Tax Competition…Again

Germany’s finance minister Peer Steinbrueck wants to curtail tax competition by prohibiting countries from having corporate tax rates of less than 30 percent. Since German politicians have been whining about competition from low-tax nations in Eastern Europe for quite some time, this is hardly news.

But this new round of sour grapes is particularly amusing because Herr Steinbrueck is trying to close the barn door when the horses are galloping in the fields. The average corporate tax rate in the European Union already has fallen to about 24 percent and more corporate tax cuts are about to take effect — including a tax rate reduction in Germany.

Bloomberg reports:

The European Union needs a “level playing field” in areas including tax competition…if there is to be greater integration among member states, German Finance Minister Peer Steinbrueck said. A “race to the bottom” regarding…taxes, social and environmental standards risks discrediting the idea of a more united Europe among the continent’s citizens, Steinbrueck said in a speech prepared for delivery today in Frankfurt an der Oder, on the eastern German border with Poland.

…The average corporate tax rate in Europe shouldn’t fall below the threshold of just under 30 percent, which will go into effect in Germany next year, Steinbrueck said. Eastern European governments…can’t finance the infrastructure demanded by their citizens if taxes are lowered too much, he said.

Another Flat Tax Nation?

Moldova, a former Soviet Republic, is a poor and backwards nation with too much government. Seeking a brighter future, a part of Moldova has declared independence and is calling itself Pridnestrovie. Though this new country has not yet been recognized by the world, Pridnestrovie has wisely decided to implement free market reforms — including a flat tax that has been reduced from 15 percent to 10 percent according to a story from last year in the Tiraspol Times:

Parliament in Pridnestrovskaia Moldavskaia Respublica approved new lower tax rates for the emerging but unrecognized country. Previously, the nation taxed incomes for physical persons at 15%, but starting next month the rate will be just 10% flat.

…Since its declaration of independence on 2 September 1990, Pridnestrovie has gradually transformed itself from a post-Soviet system to a free, Western-style market based economy. In the process, it has found that a flat tax provides the best incentives for citizens and investors alike.

Hoover Institution political scientist Alvin Rabushka points to a number of different countries in the former Soviet bloc that have adopted some form of flat tax in recent years. In addition to Russia, Pridnestrovie and Slovakia, they are Romania, Georgia, Estonia, Latvia, Serbia and Ukraine.

Not surprisingly, the flat tax is having a positive impact. The Tiraspol Times now reports that tax revenues have more than tripled and lawmakers understand that lower tax rates can lead to more revenue — just as the Laffer Curve illustrates:

Thanks to reform in the tax code, and a lowering of rates, income from taxes has gone up three and a half times in Pridnestrovie, says the parliamentary press service. …Tax revenues went from 63.4 million dollars in 2001 to a whopping 221.6 million dollars in 2006, the last full year for which the numbers are available.

…Key to the reform package were measures which makes filing simpler, as well as a comprehensive program of tax relief. Five taxes which existed before 2001 have now been abolished and instead replaced with a single, simple tax.

…With both personal and corporate tax rates well below those of Ireland, the growth in Pridnestrovie’s tax income is even more impressive. As taxes have been simplified and rates have been lowered, revenues have gone up three and a half times.

Addendum: The good news about Pridnestrovie may not be so good after all. My Cato colleague Justin Logan rained on my flat tax parade by telling me that Pridnestrovie, AKA Tansnistria (I guess even the name of the place is in dispute), is not exactly the Hong Kong of Eastern Europe. The breakaway province has a very poor reputation for corruption. It also is not exactly a role model of democracy, since the boss of the country recently won 103 percent of the vote in one region (eat your heart out, Castro). Alas.