Topic: International Economics and Development

A Tax Haven Primer for the New York Times

By
Daniel J. Mitchell

I could only use 428 words, but I highlighted the main arguments for tax havens and tax competition in a “Room for Debate” piece for the New York Times.

I hope that my contribution is a good addition to the powerful analysis of experts such as Allister Heath and Pierre Bessard.

I started with the economic argument.

[T]ax havens are very valuable because they discourage anti-growth tax policy. Simply stated, it is very difficult for governments to impose and enforce confiscatory tax rates when investors and entrepreneurs can shift their economic activity to jurisdictions with better tax policy. Particularly if those nations have strong policies on financial privacy, thus making it difficult for uncompetitive high-tax nations to track and tax flight capital. Thanks to this process of tax competition, with havens playing a key role, top personal income tax rates have dropped from an average of more than 67 percent in 1980 to about 42 percent today. Corporate tax rates also have plummeted, falling from an average of 48 percent to 24 percent.

…Lawmakers also were pressured to lower or eliminate death taxes and wealth taxes, as well as to reduce the double taxation of interest, dividends and capital gains. Once again, tax havens deserve much of the credit because politicians presumably would not have implemented these pro-growth reforms if they didn’t have to worry that the geese with the golden eggs might fly away to a confidential account in a well-run nation like Luxembourg or Singapore.

Since I didn’t have much space, I couldn’t go into much greater detail. Below the jump is a video that elaborates on the economic benefits of tax havens, including an explanation of why fiscal sovereignty is a big part of the debate.

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Topics: 
Finance, Banking & Monetary Policy, Government and Politics, International Economics and Development, Tax and Budget Policy

International Trade in Online Medical Services

By
Simon Lester

The hard-working Cato interns pointed me to this article discussing a constitutional challenge to restrictions on the online provision of veterinary services:

A retired Texas veterinarian has filed a federal lawsuit challenging state regulations that bar him from evaluating animals and giving veterinary advice over the Internet.

Since 2002, Ronald Hines, 69, of Brownsville, Tex., has used his website to provide veterinary advice—sometimes for free and sometimes for a flat $58 fee. Sometimes his clients are overseas with limited access to veterinary services. He gets lots of questions from people who find wounded birds and want to nurse them to health. Over the course of his career, he developed an expertise with monkeys, and said he still gets a lot of monkey questions.

…

Last month, the Texas veterinary board suspended Hines’ license for a year after finding that his Internet practice violates state laws. Texas regulations require a vet to establish a “veterinarian-client-patient relationship,” and they explicitly state that such a relationship cannot be established solely through the telephone or Internet.

Hines’ lawyers at the Arlington, Va.-based Institute for Justice say the rule infringes on their client’s free-speech rights and is an unreasonable restriction on the profession.

Jeff Rowes, an attorney with the institute, said the case could set a precedent in fields that extend well beyond veterinary medicine. He noted that telemedicine continues to be an emerging field and that regulations restricting Internet speech could affect a number of professions, including law, psychology and investment advice.

More details here, here and here.

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Topics: 
International Economics and Development, Law and Civil Liberties, Regulatory Studies

Margaret Thatcher and the Battle of the 364 Keynesians

By
Steve H. Hanke

With the death of Margaret Thatcher, and the ensuing profusion of commentary on her legacy, it is worth looking back at an overlooked chapter in the Thatcher story. I am referring to her 1981 showdown with the Keynesian establishment—a showdown that the Iron Lady won handily. Before getting caught up with the phony “austerity vs. fiscal stimulus” debate, the chattering classes should take note of how Mrs. Thatcher debunked the Keynesian “fiscal factoid.”

According to the Oxford English Dictionary, a factoid is “an item of unreliable information that is reported and repeated so often that it becomes accepted as fact.” The standard Keynesian fiscal policy prescription for the maintenance of non-inflationary full employment is a fiscal factoid. The chattering classes can repeat this factoid on cue: to stimulate the economy, expand the government’s deficit (or shrink its surplus); and to rein in an overheated economy, shrink the government’s deficit (or expand its surplus).

Even the economic oracles embrace the fiscal factoid. That, of course, is one reason that the Keynesians’ fiscal mantra has become a factoid. No less than Nobelist Paul Krugman repeats it ad nauseam. Now, the new secretary of the treasury, Jack Lew (who claims no economic expertise), is in Europe peddling the fiscal factoid.

Unfortunately, the grim reaper finally caught up with Margaret Thatcher—but not before she laid waste to 364 wrong-headed British Keynesians.

In 1981, Prime Minister Thatcher made a dash for confidence and growth via a fiscal squeeze. To restart the economy, Mrs. Thatcher instituted a fierce attack on the British fiscal deficit, coupled with an expansionary monetary policy. Her moves were immediately condemned by 364 distinguished economists. In a letter to The Times, they wrote a knee-jerk Keynesian response: “Present policies will deepen the depression, erode the industrial base of our economy and threaten its social and political stability.”

Mrs. Thatcher was quickly vindicated. No sooner had the 364 affixed their signatures to that letter than the economy boomed. Confidence in the British economy was restored, and Mrs. Thatcher was able to introduce a long series of deep, free-market reforms.

As for the 364 economists (who included seventy-six present or past professors, a majority of the Chief Economic Advisors to the Government in the post-WWII period, and the president, as well as nine present or past vice-presidents, and the secretary general of the Royal Economic Society), they were not only wrong, but also came to look ridiculous.

In the United States, the peddlers of the fiscal factoid have never suffered the intellectual humiliation of their British counterparts. In consequence, American Keynesians can continue to peddle snake oil with reckless abandon and continue to influence policy in Washington, D.C., and elsewhere.

Topics: 
Cato Publications, Finance, Banking & Monetary Policy, General, Government and Politics, International Economics and Development, Tax and Budget Policy

New Cato Policy Analysis on Regulatory Protectionism

By
Sallie James

Just in time for today’s release of my and Bill Watson’s new PA, “Regulatory Protectionism: A Hidden Threat to Free Trade” comes a feature article [$] in the specialist trade (in both senses of the word) publication, Inside U.S. Trade on the likely obstacles to a U.S-EU preferential trade agreement (a recent Cato event also hosted a discussion on this topic). And, in an inadvertent PR coup for us, it focusses almost entirely on how regulations and other non-tariff barriers (NTBs) in each economy might inhibit a successful result to negotiations:  

The shifting nature of domestic policies and agricultural trade between the United States and the European Union over the last several decades means that while some traditional trade irritants are no longer present, others have been introduced that will likely prove difficult to unravel in the context of trans-Atlantic bilateral negotiations. Whereas bilateral trade irritants previously centered on export subsidies and competition in third markets for commodities like wheat, now the disagreements primarily relate to non-tariff barriers (NTBs), including divergent scientific standards, food safety regulations and other issues that are hindrances to bilateral trade… But the difficulty in negotiating these issues is that, because they ostensibly relate to consumer health and safety, governments cannot easily make “trade-offs,” as they can with tariffs. Observers believe that this is the chief reason that the talks over agriculture promise to be so difficult.

Indeed. As we discuss in our paper, tariffs and other conventional trade barriers have fallen over the years, so the barriers that remain are more regulatory in nature, and more sensitive to negotiate. What we’re essentially left with is the difficult issues. They get to the heart of national sovereignty and, on a practical level, require the participation of regulatory administrators who may have very little or no trade negotiation knowledge or experience. They also have little incentive to concede their power. Whereas trade negotiators are paid to, well, negotiate, regulators are paid to inhibit commerce. They face asymmetric rewards: a huge fuss if something goes wrong, not many kudos if they remove the reins and let commerce thrive. Under those conditions, it should be no surprise that they are risk-averse. So this trade agreement will not be easy to complete. In the meantime, though, there is much the United States can do to limit the ability of regulators to shackle the economy with burdensome—and potentially illegal—requirements that limit choice and expose American businesses to retaliatory sanctions. For example, ensure WTO obligations are taken seriously and adhered to. From our paper:  

Prior to implementing a new regulation, federal agencies should be required to evaluate the possibility that less trade-restrictive alternatives could meet regulatory goals as effectively as their preferred proposal. Also, the U.S. government should not dilute or bypass the multilateral rules of the WTO through bilateral or regional negotiations that accept managed protectionism. This paper uses a number of recent examples of protectionist regulations to show that the enemies of regulatory protectionism are transparency and vigilance. Policymakers should be skeptical of regulatory proposals backed by the target domestic industry and of proposals that lack a plausible theory of market failure.

Read the whole thing here. And if you are in D.C. or near a computer next Thursday, watch our event to launch the paper.

Topics: 
International Economics and Development, Regulatory Studies, Trade and Immigration

According to Washington Post Exposé, People Who Utilize Tax Havens Are Far More Honest than Politicians

By
Daniel J. Mitchell

Using data stolen from service providers in the Cook Islands and the British Virgin Islands, the Washington Post published a supposed exposé of Americans who do business in so-called tax havens.

Since I’m the self-appointed defender of low-tax jurisdictions in Washington, this caught my attention. Thomas Jefferson wasn’t joking when he warned that “eternal vigilance is the price of liberty.” I’m constantly fighting against anti-tax haven schemes that would undermine tax competition, financial privacy, and fiscal sovereignty.

Even if it means a bunch of international bureaucrats threaten to toss me in a Mexican jail or a Treasury Department official says I’m being disloyal to America. Or, in this case, if it simply means I’m debunking demagoguery.

The supposedly earth-shattering highlight of the article is that some Americans linked to offshore companies and trusts have run afoul of the legal system.

Among the 4,000 U.S. individuals listed in the records, at least 30 are American citizens accused in lawsuits or criminal cases of fraud, money laundering or other serious financial misconduct.

But the real revelation is that people in the offshore world must be unusually honest. Fewer than 1 percent of them have been named in a lawsuit, much less been involved with a criminal case.

This is just a wild guess, but I’m quite confident that you would find far more evidence of misbehavior if you took a random sample of 4,000 Americans from just about any cross-section of the population.

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Topics: 
Government and Politics, International Economics and Development, Tax and Budget Policy

Iran’s Inflation Statistics: Lies, Lies and Mehr Lies

By
Steve H. Hanke

The Mehr News Agency is now reporting that Iran’s annual inflation rate has reached 31.5%. According to the Central Bank’s official line, Iran’s annual inflation rate has bumped up only 1.3 percentage points from February to March.

Never mind that this official inflation statistic is well below all serious estimates of Iran’s inflation. And yes, Iran’s official inflation statistics are also contradicted by the overwhelming body of anecdotal reports in the financial press.

Since September 2012, I have been estimating Iran’s inflation rate – which briefly reached hyperinflation levels in October 2012 – using a standard, widely-accepted methodology. By measuring changes in the rial’s black-market (read: free-market) U.S. dollar exchange rate, it is possible to calculate an implied inflation rate for Iran.

When we do so, a much different picture of Iran’s inflation emerges. Indeed, Iran’s annual inflation rate is actually 82.5% – a rate more than double the official rate of 31.5% (see the accompanying chart).

As I have documented, regimes in countries undergoing severe inflation have a long history of hiding the true extent of their inflationary woes. In many cases, the regimes resort to underreporting or simply fabricating statistics to hide their economic problems. And, in some cases, such as Zimbabwe and North Korea, the government simply stops reporting economic data altogether.

Iran has followed a familiar path, failing to report inflation data in a timely and replicable manner. Those data that are reported by Iran’s Central Bank tend to possess what I’ve described as an “Alice in Wonderland” quality and should be taken with a grain of salt.

Topics: 
Finance, Banking & Monetary Policy, International Economics and Development

Can We Have An Evidence-Based Debate about the Future of the IMF?

By
Dalibor Rohac

On Saturday, March 30, the New York Times ran a curious editorial about the International Monetary Fund (IMF). The piece makes the case for a quick ratification of IMF’s quota reform by the United States, which it pictures as being in America’s interest. Unfortunately, the article is somewhat casual when it comes to the evidence it presents in support of its argument.

Firstly, the authors claim that the IMF

“has helped stabilize the global economy, most recently by providing loans to troubled European countries like Greece and Ireland.”

It is far from obvious that the repeated bailouts to Greece, in which the IMF has participated, have done much to calm the financial markets or to help the country’s economy. Recall that Greece is still going through a recession deeper than the Great Depression, with youth unemployment at around 60 percent, and no signs of recovery.

Secondly, there is the following assertion:

“[T]he fund’s capital […] has fallen sharply as a percentage of the global economy in the last decade.”

That is misleading as it does not take into consideration the increased use of the ‘new arrangements to borrow,’ (NAB) through which the Fund’s lending capacity was tripled in 2009, from $250 billion to $750 billion. That represented a historically unprecedented hike in the amount of resources available to any international organization.

Thirdly, the statement that the increase in quotas will happen “without increasing America’s financial commitment to the organization” is disingenuous. While the increase in quotas is to be accompanied by a reduction in the use of NAB’s – making it appear fiscally neutral on surface – the deployment of the NAB’s is accompanied by a stringent approval procedure, whereas the quotas can be deployed towards various lending purposes at the Fund’s discretion. Greater reliance on quota funding would thus enable the Fund to make bigger claims on the public purse, with less accountability.

A debate about the future of the IMF is long overdue in this country. But it should be a debate based on a careful examination of the Fund’s track record in mitigating financial crises around the world. To flatly assert, like the editorial does, that “[i]ncreasing the fund’s resources will ensure that it can respond quickly to another wave of turmoil in Europe or elsewhere” does not do the job. If anything, that claim - like much of the editorial - only strains credulity.

Topics: 
International Economics and Development

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