Tag: tax competition

Based on His Leaked 2005 Tax Data, Donald Trump Should Move to Italy (or the Isle of Man)

The multi-faceted controversy over Donald Trump’s taxes has been rejuvenated by a partial leak of his 2005 tax return.

Interestingly, it appears that Trump pays a lot of tax. At least for that one year. Which is contrary to what a lot of people have suspected—including me in the column I wrote on this topic last year for Time.

Some Trump supporters are even highlighting the fact that Trump’s effective tax rate that year was higher than what’s been paid by other political figures in more recent years.

But I’m not impressed. First, we have no idea what Trump’s tax rate was in other years. So the people defending Trump on that basis may wind up with egg on their face if tax returns from other years ever get published.

Second, why is it a good thing that Trump paid so much tax? I realize I’m a curmudgeonly libertarian, but I was one of the people who applauded Trump for saying that he does everything possible to minimize the amount of money he turns over to the IRS. As far as I’m concerned, he failed in 2005.

But let’s set politics aside and focus on the fact that Trump coughed up $38 million to the IRS in 2005. If that’s representative of what he pays every year (and I realize that’s a big “if”), my main thought is that he should move to Italy.

Yes, I realize that sounds crazy given Italy’s awful fiscal system and grim outlook. But there’s actually a new special tax regime to lure wealthy foreigners. Regardless of their income, rich people who move to Italy from other nations can pay a flat amount of €100,000 every year. Note that we’re talking about a flat amount, not a flat rate.

Here’s how the reform was characterized by an Asian news outlet.

Italy on Wednesday (Mar 8) introduced a flat tax for wealthy foreigners in a bid to compete with similar incentives offered in Britain and Spain, which have successfully attracted a slew of rich footballers and entertainers. The new flat rate tax of €100,000 (US$105,000) a year will apply to all worldwide income for foreigners who declare Italy to be their residency for tax purposes.

Here’s how Bloomberg/BNA described the new initiative.

Italy unveiled a plan to allow the ultra-wealthy willing to take up residency in the country to pay an annual “flat tax” of 100,000 euros ($105,000) regardless of their level of income. A former Italian tax official told Bloomberg BNA the initiative is an attempt to entice high-net-worth individuals based in the U.K. to set up residency in Italy… Individuals paying the flat tax can add family members for an additional 25,000 euros ($26,250) each. The local media speculated that the measure would attract at least 1,000 high-income individuals.

Think about this from Donald Trump’s perspective. Would he rather pay $38 million to the charming people at the IRS, or would he rather make an annual payment of €100,000 (plus another €50,000 for his wife and youngest son) to the Agenzia Entrate?

Seems like a no-brainer to me, especially since Italy is one of the most beautiful nations in the world. Like France, it’s not a place where it’s easy to become rich, but it’s a great place to live if you already have money.

But if Trump prefers cold rain over Mediterranean sunshine, he could also pick the Isle of Man for his new home.

There are no capital gains, inheritance tax or stamp duty, and personal income tax has a 10% standard rate and 20% higher rate.  In addition there is a tax cap on total income payable of £125,000 per person, which has encouraged a steady flow of wealthy individuals and families to settle on the Island.

Though there are other options, as David Schrieberg explained for Forbes.

Italy is not exactly breaking new ground here. Various countries including Portugal, Malta, Cyprus and Ireland have been chasing high net worth individuals with various incentives. In 2014, some 60% of Swiss voters rejected a Socialist Party bid to end a 152-year-old tax break through which an estimated 5,600 wealthy foreigners pay a single lump sum similar to the new Italian regime.

Though all of these options are inferior to Monaco, where rich people (and everyone else) don’t pay any income tax. Same with the Cayman Islands and Bermuda. And don’t forget Vanuatu.

If you think all of this sounds too good to be true, you’re right. At least for Donald Trump and other Americans. The United States has a very onerous worldwide tax system based on citizenship.

In other words, unlike folks in the rest of the world, Americans have to give up their passports in order to benefit from these attractive options. And the IRS insists that such people pay a Soviet-style exit tax on their way out the door.

Concerns about the”Border Adjustable” Tax Plan from the House GOP, Part II

I wrote yesterday to praise the Better Way tax plan put forth by House Republicans, but I added a very important caveat: The “destination-based” nature of the revised corporate income tax could be a poison pill for reform.

I listed five concerns about a so-called destination-based cash flow tax (DBCFT), most notably my concerns that it would undermine tax competition (folks on the left think it creates a “race to the bottom” when governments have to compete with each other) and also that it could (because of international trade treaties) be an inadvertent stepping stone for a government-expanding value-added tax.

Brian Garst of the Center for Freedom and Prosperity has just authored a new study on the DBCFT. Here’s his summary description of the tax.

The DBCFT would be a new type of corporate income tax that disallows any deductions for imports while also exempting export-related revenue from taxation. This mercantilist system is based on the same “destination” principle as European value-added taxes, which means that it is explicitly designed to preclude tax competition.

Since CF&P was created to protect and promote tax competition, you won’t be surprised to learn that the DBCFT’s anti-tax competition structure is a primary objection to this new tax.

First, the DBCFT is likely to grow government in the long-run due to its weakening of international tax competition and the loss of its disciplinary impact on political behavior. … Tax competition works because assets are mobile. This provides pressure on politicians to keep rates from climbing too high. When the tax base shifts heavily toward immobile economic activity, such competition is dramatically weakened. This is cited as a benefit of the tax by those seeking higher and more progressive rates. …Alan Auerbach, touts that the DBCFT “alleviates the pressure to reduce the corporate tax rate,” and that it would “alter fundamentally the terms of international tax competition.” This raises the obvious question—would those businesses and economists that favor the DBCFT at a 20% rate be so supportive at a higher rate?

Brian also shares my concern that the plan may morph into a VAT if the WTO ultimately decides that is violates trade rules.

Second, the DBCFT almost certainly violates World Trade Organization commitments. …Unfortunately, it is quite possible that lawmakers will try to “fix” the tax by making it into an actual value-added tax rather than something that is merely based on the same anti-tax competition principles as European-style VATs. …the close similarity of the VAT and the DBCFT is worrisome… Before VATs were widely adopted, European nations featured similar levels of government spending as the United States… Feeding at least in part off the easy revenue generate by their VATs, European nations grew much more drastically over the last half century than the United States and now feature higher burdens of government spending. The lack of a VAT-like revenue engine in the U.S. constrained efforts to put the United States on a similar trajectory as European nations.

And if you’re wondering why a VAT would be a bad idea, here’s a chart from Brian’s paper showing how the burden of government spending in Europe increased once that tax was imposed.

European Commission Launches Shakedown of Apple, Asserts Low Taxes Are “State Aid”

Working the world of public policy, I’m used to surreal moments.

Such as the assertion that there are trillions of dollars of spending cuts in plans that actually increase spending. How do you have a debate with people who don’t understand math?

Or the oft-repeated myth that the Reagan tax cuts for the rich starved the government of revenue. How can you have a rational discussion with people who don’t believe IRS data?

And let’s not overlook my personal favorite, which is blaming so-called tax havens for the financial crisis, even though places such as the Cayman Islands had nothing to do with the Fed’s easy-money policy or with Fannie Mae and Freddie Mac subsidies.

These are all example of why my hair is turning gray.

But I’ll soon have white hair based on having to deal with the new claim from European bureaucrats that countries are guilty of providing subsidies if they have low taxes for companies.

I’m not joking. This is basically what’s behind the big tax fight between Apple, Ireland, and the European Commission.

The European Commission’s War against Pro-Growth Corporate Tax Policy

I have a love-hate relationship with corporations.

On the plus side, I admire corporations that efficiently and effectively compete by producing valuable goods and services for consumers, and I aggressively defend those firms from politicians who want to impose harmful and destructive forms of taxes, regulation, and intervention.

On the minus side, I am disgusted by corporations that get in bed with politicians to push policies that undermine competition and free markets, and I strongly oppose all forms of cronyism and coercion that give big firms unearned and undeserved wealth.

With this in mind, let’s look at two controversies from the field of corporate taxation, both involving the European Commission (the EC is the Brussels-based bureaucracy that is akin to an executive branch for the European Union).

First, there’s a big fight going on between the U.S. Treasury Department and the EC. As reported by Bloomberg, it’s a battle over whether European governments should be able to impose higher tax burdens on American-domiciled multinationals.

The U.S. is stepping up its effort to convince the European Commission to refrain from hitting Apple Inc. and other companies with demands for possibly billions of euros… In a white paper released Wednesday, the Treasury Department in Washington said the Brussels-based commission is taking on the role of a “supra-national tax authority” that has the scope to threaten global tax reform deals. …The commission has initiated investigations into tax rulings that Apple, Starbucks Corp., Amazon.com Inc. and Fiat Chrysler Automobiles NV. received in separate EU nations. U.S. Treasury Secretary Jacob J. Lew has written previously that the investigations appear “to be targeting U.S. companies disproportionately.” The commission’s spokesman said Wednesday that EU law “applies to all companies operating in Europe – there is no bias against U.S. companies.”

A Cartoon that Tells You Everything You Need to Know about International Bureaucracies

Okay, I’ll admit the title of this post is an exaggeration. There are lots of things you should know - most bad, though some good - about international bureaucracies.

That being said, regular readers know that I get very frustrated with the statist policy agendas of both the International Monetary Fund and the Organization for Economic Cooperation and Development.

I especially object to the way these international bureaucracies are cheerleaders for bigger government and higher tax burdens. Even though they ostensibly exist to promote greater levels of prosperity!

I’ve written on these issues, ad nauseam, but perhaps dry analysis is only part of what’s needed to get the message across. Maybe some clever image can explain the issue to a broader audience (something I’ve done before with cartoons and images about the rise and fall of the welfare state, the misguided fixation on income distribution, etc).

It took awhile, but I eventually came up with (what I hope is) a clever idea. And when a former Cato intern with artistic skill, Jonathan Babington-Heina, agreed to do me a favor and take the concept in my head and translate it to paper, here are the results.

I think this hits the nail on the head.

Excessive government is the main problem plaguing the global economy. But the international bureaucracies, for all intents and purposes, represent governments. The bureaucrats at the IMF and OECD need to please politicians in order to continue enjoying their lavish budgets and exceedingly generous tax-free salaries.

So when there is some sort of problem in the global economy, they are reluctant to advocate for smaller government and lower tax burdens (even if the economists working for these organizations sometimes produce very good research on fiscal issues).

Instead, when it’s time to make recommendations, they push an agenda that is good for the political elite but bad for the private sector. Which is exactly what I’m trying to demonstrate in the cartoon,

But let’s not merely rely on a cartoon to make this point.

In an article for the American Enterprise Institute, Glenn Hubbard and Kevin Hassett discuss the intersection of economic policy and international bureaucracies. They start by explaining that these organizations would promote jurisdictional competition if they were motivated by a desire to boost growth.

…economic theory has a lot to say about how they should function. …they haven’t achieved all of their promise, primarily because those bodies have yet to fully understand the role they need to play in the interconnected world. The key insight harkens back to a dusty economics seminar room in the early 1950s, when University of Michigan graduate student Charles Tiebout…said that governments could be driven to efficient behavior if people can move. …This observation, which Tiebout developed fully in a landmark paper published in 1956, led to an explosion of work by economists, much of it focusing on…many bits of evidence that confirm the important beneficial effects that can emerge when governments compete. …A flatter world should make the competition between national governments increasingly like the competition between smaller communities. Such competition can provide the world’s citizens with an insurance policy against the out-of-control growth of massive and inefficient bureaucracies.

Using the European Union as an example, Hubbard and Hassett point out the grim results when bureaucracies focus on policies designed to boost the power of governments rather than the vitality of the market.

…as Brexit indicates, the EU has not successfully focused solely on the potentially positive role it could play. Indeed, as often as not, one can view the actions of the EU government as being an attempt to form a cartel to harmonize policies across member states, and standing in the way of, rather than advancing, competition. …an EU that acts as a competition-stifling cartel will grow increasingly unpopular, and more countries will leave it.

They close with a very useful suggestion.

If the EU instead focuses on maximizing mobility and enhancing the competition between states, allowing the countries to compete on regulation, taxation, and in other policy areas, then the union will become a populist’s dream and the best economic friend of its citizens.

Unfortunately, I fully expect this sage advice to fall upon deaf ears. The crowd in Brussels knows that their comfortable existence is dependent on pleasing politicians from national governments.

And the same is true for the bureaucrats at the IMF and OECD.

The only practical solution is to have national governments cut off funding so the bureaucracies disappear.

But, to cite just one example, why would Obama allow that when these bureaucracies go through a lot of effort to promote his statist agenda?

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.

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.

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