Topic: Tax and Budget Policy

Tax and Regulatory Competition Make the Caymans an Ideal Home for Hedge Funds

The New York Times has a detailed story showing how good tax policy and a sensible approach to regulation have made the Cayman Islands the world’s premier domicile for hedge funds. The irritates politicians in Washington and other national capitals, but the article correctly notes that Cayman funds and American investors and managers are obeying all U.S. laws. This leaves two options for politicians. They can engage in fiscal protectionism and try to criminalize free trade in financial services, or they can improve the tax and regulatory environment in America. Sadly, it does not take a political expert to know which route is more likely:

…lucrative tax breaks and fabled financial secrecy have made this British territory a magnet for hedge fund managers. “All of the offshore jurisdictions are competing against each other to provide the most hospitable regulatory landscape, and the Caymans are really coming on strong,” Mr. Grayson says. …In as little as two weeks, and for about $35,000 in fees, hedge funds can set up shop in the Caymans — just a fraction of the time and up to one-tenth the price of incorporating a fund in drearier climes like Delaware. While speed and bargain prices are big attractions, the real draw, say analysts and Congressional investigators, are perfectly legal Caymans-based corporations and partnerships that allow major investors to avoid taxes of up to 35 percent that the Internal Revenue Service levies on unearned business income. Cayman tax laws also help American fund managers legally defer domestic taxes on their personal profits by channeling them offshore through their funds. …it is the corporate home for what the Cayman Islands Monetary Authority estimates to be three out of every four of the world’s hedge funds — more than anywhere else — thanks to its friendly tax and regulatory regimes, as well as an army of foreign bankers, tax lawyers, accountants and fund administrators who make it all work. …foreign individual investors and tax-exempt American investors — like pension plans, hospitals and university endowments — are allowed to put their money into another section of the fund that is registered offshore, in the Caymans. The American institutions have that option because, while they are tax-exempt under American tax law, a United States tax on unearned business income would apply if they invested in a domestic fund. …Some 8,500 investment funds are registered in the Cayman Islands, according to the agency — a near-tripling since 2001.

New Attack Planned Against Low-Tax Jurisdictions

The UK-based Observer reports that Norway’s socialist government is leading a new campaign against low-tax jurisdiction.

The premises are absurd, including the assumption that developing nations will prosper if they get more tax revenue. Moreover, the entire scheme is based on some very dubious “facts,” none of which are substantiated. Most importantly, the article fails to note the many benefits of tax competition, including better tax policy and the protection of human rights:

Plans have been drawn up for an international taskforce to crack down on tax haven abuses orchestrated in large part by bankers, accountants and lawyers in London. As authoritative evidence suggests that $1 trillion of illicit funds flow to secretive havens managed by financiers based in London, New York and Dubai, the Norwegian government is forming a global coalition to ‘facilitate the recovery of assets illicitly stacked away in tax havens’. Several countries are set to join, but Britain, recently classed as an offshore financial centre by the International Monetary Fund, is not among them.

…The imminent formation of an international tax haven taskforce comes as the World Bank, headed by Robert Zoellick, is coming under pressure to establish its first forensic study into the illicit cash flowing out of developing nations. …Exactly 10 times the $100bn spent on aid and debt write-offs by rich countries is siphoned out of developing countries, with corporations responsible for 60 per cent of that figure through a web of trusts, nominee accounts and the flagrant mispricing of goods to escape tax.

…Cracking down on tax havens and the evasion of taxes by some of the world’s biggest companies is seen as the ‘missing link’ in the poverty alleviation agenda. Investigators and lawyers at a conference on the Movement of Illicit Funds in Washington last Thursday confirmed it was corporations and not corrupt politicians in the developing world that accounted for most tax evasion.

Raise Your Own Darn Taxes

In a Politico story about what appears to be push-polling (“a political campaign technique in which an individual or organization attempts to influence or alter the view of respondents under the guise of conducting a poll”) by Hillary Clinton is this gem:

Freeman Ng, a software designer in Oakland, Calif., reported getting a call late in the morning of May 5.

He wrote on DailyKos that day that he was asked how the fact that “Barack Obama failed to vote in favor of abortion rights nine times as a state senator” might affect his vote.

He said he was also asked a question that associated Edwards with tax hikes.

“A lot of the statements struck me as being very conservative and moderate in orientation, like the tax thing,” said Ng, who stands well to the left of center. “To me, that was a plus that he’s going to raise my taxes.”

Hey, you wanna pay more taxes? Fine, pay more taxes. Nobody’s stopping you. But leave me out of it.

Warren Buffett’s Faulty Tax Math

Class-warfare activists were delighted when Warren Buffett recently complained that his tax rate was too low and that his secretary was subject to a higher effective tax rate. The various news reports, including the excerpt below from, do not provide any detail on Buffett’s taxes, but he almost certainly was being either dishonest or ignorant.

It is probably safe to assume that Buffett receives lots of dividend income and that he also declares a considerable amount of capital gains, both of which are subject to a 15 percent tax rate on an individual tax return. What he did not mention, however, is that corporations pay a 35 percent tax before distributing dividends to shareholders, so the actual effective tax rate on that portion of Buffett’s income is closer to 50 percent.

The capital gains tax is another example of double taxation. An increase in the value of a stock is a reflection of an anticipated increase in the future income stream from that stock. Yet that income stream will be taxed (usually two times!) when it occurs. The real effective rate on that portion of Buffett’s income is harder to calculate, but it certainly will be far higher than 15 percent.

Shifting gears, Buffett’s calculations almost surely include Social Security payroll taxes, which only apply to the first $90,000 of income in exchange for not providing huge benefit payments to rich retirees. Indeed, the overall program is highly progressive once benefit payments are added to the equation, so Buffett’s secretary gets a better deal than he does from Social Security (though both would be better off with a system of personal retirement accounts).

Last but not least, if Buffett really thinks he is not paying enough to government, he can write a check to George Bush, Ted Kennedy, and Nancy Pelosi. But he should not try to assuage his feelings of guilt by seeking higher taxes on other people:

Warren Buffett, perhaps the most successful investors of modern times and one of the world’s wealthiest men, has spoken out against the U.S. tax system which allows him to pay proportionately less of his multi-million dollar annual income in taxes than his cleaning lady. Addressing attendees at the $4,600-a-place fund-raising dinner for the Hilary Clinton presidential campaign, Buffett, who runs investment group Berkshire Hathaway and is reputedly worth $52 billion, told the 600 Wall Street bankers and money managers that: “(We) pay a lower part of our income in taxes than our receptionists do, or our cleaning ladies, for that matter. If you’re in the luckiest 1 per cent of humanity, you owe it to the rest of humanity to think about the other 99 per cent.” According to Buffett, he makes no use of tax shelters to mitigate his tax liability, but still managed to pay an average tax rate of 17.7% on his $46 million income last year. By comparison, his secretary, who earned $60,000, paid tax at 30%.

Zimbabwean Economics Spreads to Capitol Hill

In Zimbabwe, the government is ordering businesses to cut prices and threatening to jail executives who don’t comply, in an attempt to deal with inflation that is now variously estimated at somewhere between 4,000 and 20,000 percent a year.

Meanwhile, on Capitol Hill both houses of Congress have passed legislation establishing stiff penalties for those found guilty of gasoline price gouging. The bill directs the Federal Trade Commission and Justice Department to go after oil companies, traders, or retail operators if they take “unfair advantage” or charge “unconscionably excessive” prices for gasoline and other fuels in an “energy emergency.” (The complex energy legislation is still working its way through both houses, though both have endorsed the price-gouging provisions.)

How’d’ja like to be the bureaucrat charged with enforcing such vague and emotional language, or the businessperson trying not to incur a 10-year jail sentence for doing something “unfair” or “unconscionably excessive”? It’d be sort of like living in, you know, Zimbabwe.

Did Congress offer bureaucrats and businesses any more specific guidance? You bet they did. H.R. 6 and S. 1263 define an ”unconscionably excessive price” as a price that

(A)(i) represents a gross disparity between the price at which it was offered for sale in the usual course of the supplier’s business immediately prior to the President’s declaration of an energy emergency;

(ii) grossly exceeds the price at which the same or similar crude oil, gasoline, or petroleum distillate was readily obtainable by other purchasers in the affected area; or

(iii) represents an exercise of unfair leverage or unconscionable means on the part of the supplier, during a period of declared energy emergency; and

(B) is not attributable to increased wholesale or operational costs outside the control of the supplier, incurred in connection with the sale of crude oil, gasoline, or petroleum distillates.

So that seems reasonable clear: it’s a price that is “gross” or “unfair” or (redundantly enough) “unconscionable.” And it can only happen during a “Federal energy emergency”:

(a) IN GENERAL- If the President finds that the health, safety, welfare, or economic well-being of the citizens of the United States is at risk because of a shortage or imminent shortage of adequate supplies of crude oil, gasoline, or petroleum distillates due to a disruption in the national distribution system for crude oil, gasoline, or petroleum distillates (including such a shortage related to a major disaster (as defined in section 102(2) of the Robert T. Stafford Disaster Relief and Emergency Assistance Act 42 U.S.C. 5122(2))), or significant pricing anomalies in national energy markets for crude oil, gasoline, or petroleum distillates, the President may declare that a Federal energy emergency exists.

In the United States, unlike Zimbabwe, we have the rule of law. That means vague, emotional, and nonsensical laws can only be passed upon a vote of both houses of Congress and the approval of the president.

It Dawns Upon Gore

This Fast Company profile of Al Gore (via Jim Henley) contains this delicious nugget:

One problem he had in politics, he says, was identifying an issue too early–“ ‘predawn’ is the term I use”–to be able to act on it. But “in the business world, particularly at a time when things are moving so swiftly, if you can see it early, you can make a business opportunity out of it.” He pauses. “For whatever reason, the business world rewards a long-term perspective more than the political world does.”

“For whatever reason”!

It may be that “predawn” Al Gore has killer entrepreneurial instincts, but, being the scion of a political family, just got caught in the wrong game. However, I suspect he landed on the board of Apple, for example, for reasons other than his proven track record as a market ace. And the $175,000 speakers fee may have something to do with his having won the popular vote in a contest against one of history’s most unpopular presidents. But we can only hope that Gore’s many new business ventures help create new wealth and earn him and a bunch of other people a ton of money. For whatever reason, the incentives provided by markets to look further in the future than the next election tend to do us all a lot of good.     

Announcing the Anti-Universal Coverage Club

Inspired by National Review’s recent editorial and Andrew Sullivan’s embrace of same (as well as by Greg Mankiw), I have decided it would be fun and educational to keep tally of those who reject the idea that federal or state governments should strive to provide every American with health insurance.  Call it the Anti-Universal Coverage Club.

Here are the guiding principles of the Anti-Universal Coverage Club:

  1. Health policy should focus on making health care of ever-increasing quality available to an ever-increasing number of people.
  2. To achieve “universal coverage” would require either having the government provide health insurance to everyone or forcing everyone to buy it.  Government provision is undesirable, because government does a poor job of improving quality or efficiency.  Forcing people to get insurance would lead to a worse health-care system for everyone, because it would necessitate so much more government intervention.
  3. In a free country, people should have the right to refuse health insurance.
  4. If governments must subsidize those who cannot afford medical care, they should be free to experiment with different types of subsidies (cash, vouchers, insurance, public clinics & hospitals, uncompensated care payments, etc.) and tax exemptions, rather than be forced by a policy of “universal coverage” to subsidize people via “insurance.”

If you’d like to join the Anti-Universal Coverage Club, let me know by posting something to your own blog, or by emailing me mcannon [at] cato [dot] org (here).  Feel free to forward items from other like-minded individuals.

I predict that neither the American Medical Association, nor the Federation of American Hospitals, nor America’s Health Insurance Plans will join the Anti-Universal Coverage Club.