Topic: Tax and Budget Policy

Notwithstanding Reprehensible History, Germany Launches Fiscal Attack on Liechtenstein

In a remarkable display of fiscal imperialism, the German government sent spies into Liechtenstein and bribed a bank employee to provide confidential records about German account holders. Unfortunately, this sleazy act of aggression was successful, leading to a series of high-profile raids by German authorities. This has created quite a kerfuffle in Europe, and it should come as no surprise that the bureaucrats at the OECD are using the controversy to push their anti-tax competition agenda. According to a story in the Financial Times:

Pressure grew on Liechtenstein on Tuesday to ease its bank secrecy rules in the wake of a German tax ­scandal centered on the Alpine tax haven. …Angel Gurria, the secretary general of the OECD, said Liechtenstein’s secrecy rules were a “relic of a different time”. …Liechtenstein’s Crown Prince Alois on Tuesday accused Germany of mounting an “attack” on the principality. He condemned as “unacceptable” Berlin’s decision to allow its BND intelligence agency to pay more than €4m ($5.9m, £3.7m) for bank client data allegedly stolen by a former Liechtenstein bank employee. …Jeffrey Owens, the OECD’s chief tax havens expert, said the changes would only make a difference if ­Liechtenstein “were now ready to sign tax information exchange agreements with Germany and other countries.”

This story is troubling on many levels, particularly given Germany’s ugly history of oppression. In the 1930s, Germany had draconian laws to deter citizens from having money outside the country and – like today – it trampled on the sovereignty of its neighbors to get information (see here for more information). Indeed, snooping by the Nazis was the main reason that Switzerland substantially strengthened its privacy laws in the 1930s.

Today’s controversy is motivated by greed for tax revenue rather than anti-Semitism, but the issues are similar. To what extent do nations have the right to compel other jurisdictions to act as deputy enforcers? Most reasonable people understand that there are limits on cooperation between governments. European Union nations, for instance, refuse to cooperate in extradition cases where an American might face the death penalty. Likewise, most nations would never consider helping a totalitarian regime like Saudi Arabia or Iran if it tried to persecute escaped homosexuals.

The tax issue is a bit more challenging because it is easy to demagogue against wealthy people who utilize so-called tax havens (though even OECD officials get a bit squeamish when asked whether financial privacy laws should be totally abolished, since even they recognize that billions of people live in nations that practice some form of religious, political, ethnic, racial, and/or sexual discrimination – not to mention all the people who live in nations that suffer from economic mismanagement, kidnapping, and/or monetary instability).

The head of the OECD considers privacy to be a “relic of a different time.” But why should there be a one-size-fits-all policy? Is there really no room in the world for nations that treat people with dignity and respect their privacy? If politicians from high-tax nations and bureaucracies such as the OECD get to decide, the answer is no. But hopefully Liechtenstein will stand firm against Germany’s vicious bullying. After all, so long as over-burdened taxpayers have safe havens, governments face pressure to improve their tax law. And even the Financial Times was forced to acknowledge, in a schizophrenic editorial that endorsed sending spies into low-tax jurisdictions, that bad tax policy bears part of the blame:

Germany’s problem with evasion is partly the fault of its tax system. Although the abolition of wealth tax has improved matters, marginal income and inheritance tax rates for high earners approach 50 per cent. Tough enforcement will never stop evasion if taxes are punitive.

Air Force vs. Taxpayers

This week’s Air Force Times reports that the Air Force wants an extra $59 million of your tax dollars next year to pay for a campaign to win tens of billions more of your tax dollars.

You see, the Air Force’s research shows that the American public does not appreciate the Air Force as much as the Air Force thinks it should. Air Force generals worry that Americans may conclude that our current wars, which are relatively low-tech, ground power-centric affairs, are a reasonable basis for making procurement decisions. That conclusion may produce budgets that favor the ground forces, thwarting the Air Force’s plan to become the service that runs future wars. And the administration has already refused the Air Force an extra $20 billion for its annual budget.

So the defense budget submitted recently to Congress would more than double the Air Force’s advertising spending to insure that the public doesn’t figure out that platforms like the F-22 are white elephants.

The Air Force defends the funds in this, surprisingly forthright, way (from page 652 of their budget estimate for FY 2009):

Without the funding the ability to educate the American public about Air Force roles and mission will be limited and [sic] ultimately creating a gap between the public and the Air Force that will influence public opinion and the Air Force’s ability to maintain its stature amongst the other Services. Other recruiting programs aided in meeting accession goals but did little to illustrate the Air Force story. This funding purchases capabilities to illustrate the Air Force’s vital role in national defense today and in the future, hi-light the unique capabilities delivered by no other service, depict the most complex and challenging assignments, and show case the USAF.

According to the Air Force Times:

Air Force officials believe Congress and the public are focused on the wars in Iraq and Afghanistan, where the Army and Marine Corps do most of the fighting. Therefore, efforts to expand the Air Force’s high-tech fleet of aircraft and the service’s cyber mission are taking a backseat to the immediate needs of the wars.

If that is what the public thinks, I commend our common sense. Silly op-eds and press releases asserting how essential airpower is to counter-insurgency apparently failed to do the trick.

All the services spend big bucks on recruiting. That’s the point of the $53 million the Air Force spent on advertising last year. And that’s low, relatively speaking. In 2005 (the latest set of complete figures I could find), the Army spent $290 million on recruiting-related advertising, the Marine Corps $67, the Navy $100 million, and the Air Force $57 million. The ground services, which need more manpower and take far more casualties, naturally spend more to woo recruits (not to mention a whole lot more on bonuses).

But the extra money the Air Force wants is not going to recruit new airmen; it is for TV, web, and print advertising meant to win public support and funds. It is, in other words, for propaganda.

True, $60 million isn’t much in a defense budget that will cost nearly three quarters of a trillion dollars. But spending our money to convince us to spend more of our money just grates.

The Air Force already has the Thunderbirds, a traveling air-show, to promote itself. (The similar Blue Angels promote the Navy. The Army employs a Parachute Team, the Golden Knights for PR). It was a $50 million promotional contract for the Thunderbirds that recently landed the top brass of the Air Force in the middle of an FBI investigation – one that, as far as I can determine, is ongoing.

Beyond public funds, the Air Force Association, a non-profit organization, exists to sing airpower’s praises (the Navy and Marines have the Navy League). And of course there are the contractors who lobby on behalf of the Air Force contracts that pay their way.

The Air Force has enough ways to sell itself, and then some, without this new request. Congress should say no.

Inside the Sausage Factory

The cover story of this week’s Washington Post Magazine offers a fantastic look at how lobbyists make a living by helping some people take from others.  Every citizen should read it.  Casual observers of government may be surprised (and nauseated) to see how elaborate, expensive, and disingenuous such efforts have become.  (Students of public choice economics will not be.)  As author Jeffrey H. Birnbaum notes, it’s usually the wealthy who are trying to do the taking.

The article is about the travel industry trying to force taxpayers to fund the industry’s advertising campaigns.  (Birnbaum includes such gems as: “One thing everyone agreed on: The travel industry did not want to pay for the ads itself.”)  But the story could have been written about nearly any of the countless lobbying shops littering the D.C. landscape:

The explosion in the size of K Street, the locus of the lobbying industry, is an extension of the growth and reach of government. The ballooning federal budget has its tentacles in every aspect of American life and commerce. No serious industry or interest can function without monitoring, and at least trying to manipulate, Washington’s decision makers. The penalty for ignoring the federal government can run into the billions of dollars. Just ask Microsoft. The software giant was hit with an antitrust lawsuit by the Justice Department in the late 1990s and, in 2001, agreed to alter the way it packaged its computer operating system. Before then, it had mostly ignored the nation’s capital.

Bad mistake. Chastened by its defeat, Microsoft has built a powerhouse presence in Washington, as have scores of other companies and industries. Lobbyists argue that it’s a relatively cheap investment. The Carmen Group, a mid-size lobbying firm, regularly compares its clients’ costs with the benefits it says they receive from lobbying. In its latest internal assessment, Carmen said it collected $15 million in fees from about 70 clients and delivered $1.5 billion in assistance – measured both in benefits received and in burdens avoided – a return ratio of roughly 1 to 100. Most clients still part with their lobbying dollars grudgingly. But they do part with them, which is why new buildings are going up all the time to accommodate the industry’s growth. Want a former senator to guarantee a meeting with a current senator? No problem. Half the senators who leave Congress for the private sector register to lobby. Need to know the history of a tax law and whom best to ask to change it? Easy. At least half a dozen consulting firms are composed of nothing but former congressional tax aides and Treasury Department officials who know as much as, and probably more than, the current people inside.

And why wouldn’t ex-lawmakers and aides gravitate to K Street? Lobbying jobs pay at least twice and sometimes three times government salaries. Serving in government is now viewed by many on Capitol Hill as a steppingstone to a lucrative career in bending government to the whims of paying clients. In many ways, lobbying now mimics the government it targets. It has become a bureaucracy, with its own language, its own peculiar ways of doing business and, most important, its own instinct to survive.

Indeed, the last thing any lobbyist wants is to win everything his or her client is seeking. That would mean an end to a retainer, the closing of the feedbag. Success for a lobbyist is not outright victory but, rather, just enough progress to justify the creation of an elaborate and well-funded lobbying apparatus. Even outright failure can underscore the need to lobby harder.

Lobbying is Washington’s version of a perpetual motion machine. Once it gets revved up, it rarely stops running. In fact, it tends to grow. 

All of which raises this question: why don’t we see more such stories?  Whatever the reason, Birnbaum deserves kudos for inspecting this small corner of the sausage factory.

Of course, the solution is not to restrict the people’s ability to lobby Congress.  All that sleazy lobbying is nothing more than “petition[ing] the government for a redress of grievances” – a constitutionally protected activity.  The solution, conveniently enough, is to respect the rest of the Constitution too.  Were the People to do that, those sleazy lobbyists wouldn’t get anywhere.

The Free Market Produces Incoherent Headlines

Today’s Washington Post has a story on economic espionage by Chinese interests, most of which have connections to the Chinese government and military. Inexplicably, the headline of the story is “Even Spies Embrace China’s Free Market.”

Government-sponsored economic espionage has little to do with free markets. These are crimes (or at least civil wrongs) sponsored directly or indirectly by over-large governments. Crime and over-large governments are antithetical to free markets, not a part of them.

Evidently, there’s some kind of market failure at the Post. (Note to the economic illiterates at the Post: That’s a joke.)

Organ Shortage Update

The United Network for Organ Sharing on its website provides a running total of the number of people waiting for an organ transplant. Today that number is at 98,059. Next Thursday, Cato is holding a policy forum “Human Organs for Sale?” where solutions for solving the U.S. organ shortage will be discussed by well known advocates both for and against the sale of organs. Also under discussion will be Iran’s organ vending system which some say is so successful that Iran has been without an organ waiting list for almost a decade. To join us, please register at events [at] cato.org.

Iraq War Spending: 2001-present

The CBO has issued a report titled “Analysis of the Growth in Funding for Operations in Iraq, Afghanistan, and Elsewhere in the War on Terrorism.”

I ran the figures through the Net Present Value calculator I use at WashingtonWatch.com. (The amount you’d have to put in the bank for future spending, or the amount you’d have in the bank but for past spending.)

The results? A little over $8,600 per U.S. family, or $2,700 per person.

Don’t Go Scaring the Geese Who Lay the Golden Eggs

Britain’s Labor leaders Tony Blair and Gordon Brown have long boasted how successful and sure-footed they have been in making London one of the World’s preeminent financial centers. Brown, who served as the Chancellor of the Exchequer until he succeeded Blair as Prime Minister, was more responsible than any politician in helping London leapfrog up the league tables in the financial market to challenge New York.

Financial regulation has been lighter in the UK than the US, especially since the post-Enron Sarbanes-Oxley reform, and the tax authorities have been welcoming of rich foreigners, helping to attract many of the world’s wealthiest entrepreneurs and investors to the UK, including Greek shipping magnates, American hedge-fund traders and Russian oligarchs.

But in a bid to outdo the British Conservatives, who have joined the bandwagon of economic populism, Brown has threatened London’s role as a global finance center with talk of a tax crackdown on rich foreigners.

He has provided – also inadvertently – a major object lesson on the importance of tax competition.

Unnerved by the Conservatives, who promised that in government they would impose a levy on rich foreigners, Brown and his Chancellor, Alistair Darling, announced just before Christmas that come spring, tax rules on foreigners resident in the UK would change. Under the previous regime, foreign residents could claim “non-domiciled” status and avoid paying tax on overseas earnings and offshore assets. Only money brought into the UK or generated there was liable to income tax or capital gains tax.

Brown’s new proposal would have all non-domiciled foreigners resident in the UK for more than 7 years paying an annual tax charge of 30,000 pounds ($60,000).

According to the government’s theory, hugely wealthy foreigners wouldn’t up and leave just because of a mere $60,000, although, of course, for families it could be a lot more than $60,000, if spouse and adult children are taken into account.

To make matters much worse, the British government also started to talk about introducing new residency rules and rules on taxing offshore trusts.

Government spokesmen, along with supporters of the tax crackdown, including rather strangely the editorial writers at the Financial Times, pooh-poohed the notion there would be an exodus of the wealthy and entrepreneurial just because of the tax changes. They have been arguing that London is too important, what with its deep pool of financial and international legal expertise. Low-tax cantons in Switzerland or non-tax Monaco or offers of generous tax treatment in, say Greece, would hardly compensate for what London has to offer.

Foreigners apparently have been thinking otherwise. Many of the country’s richest foreigners have already started to relocate to Geneva, Zurich, Barbados or Ireland. This week, Irish paper king Dermot Smurfit announced he was planning to move to Switzerland and there were reports that dozens of Greek shipping magnates were exploring the possibility of moving back to Athens – a transfer that would cost the British economy annually $10 billion alone, and in the long term maybe two or three times more. The $60,000 annual levy per non-domiciled foreigner would bring in annually $1.6 billion.

Belatedly, the alarm bells have started to ring. The British government is poised to announce, possibly tomorrow, an embarrassing back-down. Taxing offshore trusts is now likely not to happen, although the $60,000 levy per non-domiciled foreigner will remain.

The reversal highlights the importance of tax competition. But there still might be long-term consequences from Brown’s botched handling of the affair. Non-doms who have already moved overseas are unlikely to return and the London-based Greek shipping magnates, who control a quarter of the Greek shipping industry, are now being courted energetically by Athens, with offers of generous tax treatment and subsidies.