Topic: Tax and Budget Policy

Is Defending Tax Competition Akin to “Trading with the Enemy”?

When I was younger, my left-wing friends said conservatives unfairly attacked them for being unpatriotic and anti-American simply because they disagreed on how to deal with the Soviet Union.

Now the shoe is on the other foot.

Last decade, a Treasury Department official accused me of being disloyal to America because I defended the fiscal sovereignty of low-tax jurisdictions.

And just today, in a story in the Washington Post about the Center for Freedom and Prosperity (I’m Chairman of the Center’s Board of Directors), former Senator Carl Levin has accused me and others of “trading with the enemy” because of our work to protect and promote tax competition.

Here’s the relevant passage.

Former senator Carl Levin (D-Mich.)…said in a recent interview that the center’s activities run counter to America’s values and undermine the nation’s ability to raise revenue. “It’s like trading with the enemy,” said Levin, whose staff on a powerful panel investigating tax havens regularly faced public challenges from the center. “I consider tax havens the enemy. They’re the enemy of American taxpayers and the things we try to do with our revenues — infrastructure, roads, bridges, education, defense. They help to starve us of resources that we need for all the things we do. And this center is out there helping them to accomplish that.”

Before even getting into the issue of tax competition and tax havens and whether it’s disloyal to want limits on the power of governments, I can’t resist addressing the “starve us of resources” comment by Levin.

Our Corrupt Navy

The Glenn Defense Marine scandal has exposed “a staggering degree of corruption within the Navy,” concludes a Washington Post investigation.

A more accurate title for this blog might have been “Our Corrupt 7th Fleet,” but the ease with which one foreign contractor infiltrated and ripped off the Navy in the Pacific makes one wonder about the integrity and strength of the broader institution. It is surprising that Navy officers with so much training and experience fell prey to the simple flattery, bribes, and other low-tech tools of a Singapore-based huckster.

For more than a decade, the head of Glenn Defense, Leonard Glenn Francis, cozied up to Navy leaders to win lucrative contracts to refuel and resupply ships. At the same time, he was gathering internal Navy procurement information and other intelligence. To do so, he wined and dined Navy officers, and provided them with gifts, prostitutes, and other favors to get them to do his bidding.

If this nobody, who had no military background, could wrap so many Navy leaders around his finger with little more than charisma, there is a huge institutional problem here. What about our other military and intelligence services and agencies—are they just as easy for hucksters, let alone expert foreign spy services, to penetrate?

You should read the full Post story. The revelations are disgusting and pathetic. I assume the Navy puts a huge effort into training, protocols, security, and technology to ensure that we have the most effective fighting force possible. Yet all of that was so easily undermined in such old-fashioned ways. I don’t get it.

To the Navy’s credit, it was their internal investigation that eventually exposed the corruption. And the Post story indicates that there were some officers who wouldn’t go along with the sleaze.

Francis was captured and pled guilty to various crimes. Four Navy officers, an enlisted sailor, and a Navy investigator have pled guilty to crimes. Last Friday three more officers were charged with corruption-related offenses. Investigations are ongoing, and dozens of other Navy officials are under scrutiny.

Here are some of the highlights from the Post story about one of the worst national security breaches in years:

Leonard Glenn Francis was legendary on the high seas for his charm and his appetite for excess. For years, the Singapore-based businessman had showered Navy officers with gifts, epicurean dinners, prostitutes and, if necessary, cash bribes so they would look the other way while he swindled the Navy to refuel and resupply its ships.

Much more than a contracting scandal, the investigation has revealed how Francis seduced the Navy’s storied 7th Fleet, long a proving ground for admirals given its strategic role in patrolling the Pacific and Indian oceans.

In perhaps the worst national-security breach of its kind to hit the Navy since the end of the Cold War, Francis doled out sex and money to a shocking number of people in uniform who fed him classified material about U.S. warship and submarine movements. Some also leaked him confidential contracting information and even files about active law enforcement investigations into his company.

He exploited the intelligence for illicit profit, brazenly ordering his moles to redirect aircraft carriers to ports he controlled in Southeast Asia so he could more easily bilk the Navy for fuel, tugboats, barges, food, water and sewage removal.

Over at least a decade, according to documents filed by prosecutors, Glenn Defense ripped off the Navy with little fear of getting caught because Francis had so thoroughly infiltrated the ranks.

The company forged invoices, falsified quotes and ran kickback schemes. It created ghost subcontractors and fake port authorities to fool the Navy into paying for services it never received.

The investigation has mushroomed partly because Glenn Defense was a pillar of U.S. maritime operations for a quarter-century. The 7th Fleet depended on the firm more than any other to refuel and resupply its vessels.

Over time, Francis became so skilled at cultivating Navy informants that it was a challenge to juggle them all. On a near-daily basis, they pelted him with demands for money, prostitutes, hotel rooms and plane tickets.

“The Soviets couldn’t have penetrated us better than Leonard Francis,” said a retired Navy officer who worked closely with Francis and spoke on the condition of anonymity to avoid reprisal. “He’s got people skills that are off the scale. He can hook you so fast that you don’t see it coming. . . . At one time he had infiltrated the entire leadership line. The KGB could not have done what he did.”

Lesson from Cyprus: Spending Restraint Is the Pro-Growth Way to Solve a Fiscal Crisis

Much of my work on fiscal policy is focused on educating audiences about the long-run benefits of small government and modest taxation.

But what about the short-run issue of how to deal with a fiscal crisis? I have periodically weighed in on this topic, citing research from places like the European Central Bank and International Monetary Fund to show that spending restraint is the right approach.

And I’ve also highlighted the success of the Baltic nations, all of which responded to the recent crisis with genuine spending cuts (and I very much enjoyed exposing Paul Krugman’s erroneous attack on Estonia).

Today, let’s look at Cyprus. That Mediterranean nation got in trouble because of an unsustainable long-run increase in the burden of government spending. Combined with the fallout caused by an insolvent banking system, Cyprus suffered a deep crisis earlier this decade.

Unlike many other European nations, however, Cyprus decided to deal with its over-spending problem by tightening belts in the public sector rather than the private sector.

This approach has been very successful according to a report from the Associated Press.

…emerging from a three-year, multi-billion euro rescue program, Cyprus boasts one of the highest economic growth rates among the 19 Eurozone countries — an annual rate of 2.7 percent in the first quarter. Finance Minister Harris Georgiades says Cyprus turned its economy around by aggressively slashing costs but also by avoiding piling on new taxes that would weigh ordinary folks down and put a serious damper on growth. “We didn’t raise taxes that would burden an already strained economy,” he told The Associated Press in an interview. “We found spending cuts that weren’t detrimental to economic activity.”

Issa on the TSA: Privatize It

Rep. Darrell Issa proposes Cato-style aviation reforms in a CNN op-ed today. The congressman does an excellent job laying out problems with the Transportation Security Administration (TSA) and arguing that privatized screening would increase both efficiency and security.

Here are some excerpts:

These firestorms online and in the media [regarding security lines] have brought new attention to our broken airport security system, a problem that has been slowly growing for years. But if we really “hate the wait” and want to fix it, the solution couldn’t be any simpler: let’s get the TSA out of the airport screening business altogether.

The idea of privatizing airport security isn’t a new one. Look no further than Canada and almost every single European country, which all use private airport screeners.

Last year, an internal investigation revealed that undercover agents were able to sneak mock explosives or banned weapons through the agency’s security checkpoints a whopping 95% of the time.

A number of case studies show that private screeners are not only more efficient at their jobs, allowing them to screen more passengers in less time, but are also better at detecting threats.

Under the TSA’s “Screening Partnership Program,” 22 airports have been allowed to contract with private companies to administer airport screening operations. Numerous studies of those programs … offer ample evidence that private security screeners are much better able to detect dangerous objects, including explosives and weapons, than their government-employed counterparts.

Private screeners are also shown to process passengers more efficiently, too, meaning faster-moving lines and more taxpayer savings.

For more on privatizing the TSA, see here and here.

Cato Fiscal Grades: Gary Johnson and William Weld

For November, voters turned off by Trump and Clinton may be interested in the likely Libertarian Party ticket of Gary Johnson and William Weld. Johnson is a former governor of New Mexico (1995-2003), and Weld is a former governor of Massachusetts (1991-1997).

David Boaz gives an overview of their records, noting that both governors scored well on Cato’s fiscal report cards. Since 1992, the report cards have examined the tax and spending records of the nation’s governors every two years.  

Cato report cards are here. The best governors get an “A” and the worst get an “F.” The reports covering Johnson and Weld were written by Steve Moore and various coauthors.

The Necessary and Valuable Economic Role of Tax Havens

Economists certainly don’t speak with one voice, but there’s a general consensus on two principles of public finance that will lead to a more competitive and prosperous economy.

To be sure, some economists will say that high tax rates and more double taxation are nonetheless okay because they believe there is an “equity vs. efficiency” tradeoff and they are willing to sacrifice some prosperity in hopes of achieving more equality.

I disagree, mostly because there’s compelling evidence that this approach ultimately leads to less income for the poor, but this is a fair and honest debate. Both sides agree that lower rates and less double taxation will produce more growth (though they’ll disagree on how much growth) and both sides agree that a low-tax/faster-growth economy will produce more inequality (though they’ll disagree on whether the goal is to reduce inequality or reduce poverty).

Since I’m on the low-tax/faster-growth side of the debate, this is one of the reasons why I’m a big fan of tax competition and tax havens.

The Smoot-Hawley Tariff and the Great Depression

[Reprinted with permission from Alan Reynolds, “What Do We Know about the Great Crash?National Review, November 9, 1979]

 Many scholars have long agreed that the Smoot-Hawley tariff had disastrous economic effects, but most of them have  felt  that  it could  not have caused the stock market collapse of  October  1929, since the tariff was not signed into law  until the following June. Today we know that market participants do not wait for a major law to pass, but instead try to anticipate whether or not it will pass and what its effects will be.

 Consider the following sequence of events:

 The Smoot-Hawley tariff passes the House on May   28, 1929.  Stock prices in New   York   (1926=100) drop   from 196 in March to 191   in June.   On June   19, Republicans   on the Senate Finance Committee   meet   to   rewrite   the   bill. Hoping for improvement, the market rallies,  but  industrial production  ( 1967 = 100)  peaks  in  July,  and  dips  very  slightly through  September.  Stocks  rise  to  216  by  September,  hit­ting their peak on  the  third  of  the  month.  The  full  Senate Finance Committee goes to   work  on  the  tariff  the  following day,  moving  it  to  the  Senate  floor  later  in  the   month.

 On October 21, the Senate rejects, 64 to 10, a move to limit tariff increases to agriculture. “A weakening of the Democratic-Progressive Coalition was evidenced on October 23,” notes the Commercial and Financial Chronicle. In this first test vote, 16 members of the anti-tariff coalition switch sides and vote to double the tariff on calcium carbide from Canada. Stocks collapse in the last hour of trading; the following morning is christened Black Thursday.   On  October 28,  a  delegation   of   senators   appeals   to   President   Hoover to help push a tariff  bill  through  quickly  (which  he  does  on the 31st). The Chronicle  headlines  news  about  broker  loans on  the  same  day:  “Recall  of  Foreign  Money  Grows  Heavier-All Europe  Withdrawing  Capital.” The following day is stalemate. Stocks begin to rally after November 14, rising steadily from 145 in November to 171 in April. Industrial production stops falling and hovers around the December level through March.