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Posts Tagged ‘fiscal sovereignty’

Regular readers know that I’m a big fan of tax competition because politicians are less likely to misbehave if the potential victims of plunder have the ability to escape across borders.

Here is an excerpt from a superb article by Allister Heath, one of the U.K.’s best writers on economic and business issues.

In a modern, global and open world, states have to compete for people. Weirdly, that is something that a large number of commentators have failed to recognise… They assume implicitly that governments remain quasi-monopolies, as was the case throughout most of human history, with citizens mere subjects forced to put up with poor public services, high taxes, crime, misgovernment and a poor quality of life. Yet the reality is that there is now more competition than ever between governments for human capital, with people – especially the highly skilled and the successful – more footloose and mobile than ever before. This is true both within the EU, where freedom of movement reins, and globally.

…[C]ompetition between governments is as good for individuals as competition between firms is for consumers. It keeps down tax rates, especially on labour and capital, which is good for growth and job creation; states need to produce better services at the cheapest possible cost. And if governments become too irritating or incompetent, it allows an exit strategy. It is strange how pundits who claim to want greater competition in the domestic economy – for example, in banking – are so afraid of competition for people between states, decrying it as a race to the bottom. Yet monopolies are always bad, in every sphere of human endeavour, breeding complacency, curtailing innovation and throttling progress.

…Globalisation is not just about buying cheap Chinese goods: it also limits the state’s powers to over-tax or over-control its citizens.

For those who haven’t seen them before, here are a couple of my videos that elaborate on these critical issues.

First, here’s a video on tax competition, which includes some well-deserved criticism of international bureaucracies and high-tax nations that are seeking to create global tax cartels.

Here’s a video that makes a powerful economic case for tax havens.

But this is not just an economic issue. Here’s a video that addresses the moral issues and explains why tax havens play a critical role in protecting people subject to persecution by venal governments – as well as people living in nations plagued by crime and instability.

And last but not least, this video punctures some of the myths promoted by the anti-tax haven advocates of global tax cartels.

By the way, since the main purpose of this post is to draw your attention to the superb analysis of a British writer, I may as well close by drawing your attention to a couple of speeches by Dan Hannan, a British member of the European Parliament. In a remarkably limited time, he explains what this battle is all about.

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Here’s a new mini-documentary from the Center for Freedom and Prosperity, narrated by Natasha Montague of Americans for Tax Reform, that explains why the process of tax competition is a critical constraint on the propensity of governments to over-tax and over-spend.

The issue is very simple. When labor and capital have the ability to escape bad policy by moving across borders, politicians are more likely to realize that it is foolish to impose high tax rates. And they oftentimes compete for jobs and investment by lowering tax rates. This virtuous form of rivalry helps explain why so many nations in recent years have lowered tax rates and adopted simple and fair flat tax systems.

Another great feature of the video is the series of quotes from winners of the Nobel Prize. These economists all recognize competition between governments is just as desirable as competition between banks, pet stores, and supermarkets.

The video also discusses how politicians are attacking tax competition. It mentions a privacy-eroding scheme concocted by governors to tax out-of-state purchases (how dare consumers buy online and avoid state sales tax!).

And it also discusses a very destructive tax harmonization effort by a Paris-based bureaucracy (the Organization for Economic Cooperation and Development, subsidized with American tax dollars!), which would undermine fiscal sovereignty by punishing jurisdictions that adopt pro-growth tax systems that attract labor and capital.

The issues discussed in this video generally don’t get a lot of attention, but they are critical for the long-run battle to restrain government. Please share widely.

P.S. This speech by Florida’s new Governor is a good example of how tax competition encourages governments to do the right thing.

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There’s a supposed expose in the U.K.-based Daily Mail about how major British companies have subsidiaries in low-tax jurisdictions. It even includes this table with the ostensibly shocking numbers.

This is quite akin to the propaganda issued by American statists. Here’s a table from a report issued by a left-wing group that calls itself “Business and Investors Against Tax Haven Abuse.”

At the risk of being impolite, I’ll ask the appropriate rhetorical question: What do these tables mean?

Are the leftists upset that multinational companies exist? If so, there’s really no point in having a discussion.

Are they angry that these firms are legally trying to minimize tax? If so, they must not understand that management has a fiduciary obligation to maximize after-tax returns for shareholders.

Are they implying that these businesses are cheating on their tax returns? If so, they clearly do not understand the difference between tax avoidance and tax evasion.

Are they agitating for governments to impose worldwide taxation so that companies are double-taxed on any income earned (and already subject to tax) in other jurisdictions? If so, they should forthrightly admit this is their goal, notwithstanding the destructive, anti-competitive impact of such a policy.

Or, perhaps, could it be the case that leftists on both sides of the Atlantic don’t like tax competition? But rather than openly argue for tax harmonization and other policies that would lead to higher taxes and a loss of fiscal sovereignty, they think they will have more luck expanding the power of government by employing demagoguery against the big, bad, multinational companies and small, low-tax jurisdictions.

To give these statists credit, they are being smart. Tax competition almost certainly is the biggest impediment that now exists to restrain big government. Greedy politicians understand that high taxes may simply lead the geese with the golden eggs to fly across the border. Indeed, competition between governments is surely the main reason that tax rates have dropped so dramatically in the past 30 years. This video explains.

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Regular readers know that I am a tireless advocate for tax competition, which exists when governments are encouraged to adopt better tax policy in order to attract/retain jobs and investment. In other words, I want governments to compete with each other because that leads to better policy, just as we get better results as consumers when banks, pet stores, hairdressers, and grocery stores compete with each other.

There is powerful evidence that tax competition has generated very good results in the past 30 years. Top personal income tax rates averaged more than 67 percent back in 1980, but thanks in large part to tax competition, the average top tax rate on individuals has fallen to about 41 percent. Corporate tax rates also have dropped dramatically, from an average of around 48 percent (this data is not as easy to pin down) in 1980 to 25 percent today. And we now have more than 30 flat tax nations today, compared to just 3 in 1980.

That’s the good news. The bad news is that greedy politicians don’t like being constrained by tax competition. Politicians didn’t lower tax rates because they wanted to. They only made their tax systems better because they were afraid that jobs and investment would escape to lower-tax jurisdictions. They resent the fact that tax competition makes it hard to engage in class-warfare tax policy.

That’s why many of these politicians are seeking to replace tax competition with some sort of tax cartel. They want to impose rules on the entire world that will make it hard for taxpayers to benefit from better tax policy in another jurisdiction. In effect, they want some form of tax harmonization, which would create an “OPEC for politicians.” And just as the real OPEC extracts more money from energy consumers, a tax cartel would grab more money from taxpayers.

One aspect of this battle is the way proponents of higher taxes try to demonize so-called tax havens. Many of these jurisdictions are very small, but the smart ones nonetheless defend themselves against the attacks coming from the world’s major welfare states. Here’s a good example. Tony Travers of Cayman Finance, the association representing the financial services industry in the Cayman Islands, recently spoke about the left’s campaign against low-tax jurisdictions.

Travers said he believed the widespread negativity was part of well organised and powerful public relations campaigns driven by onshore Treasury, and supranational and domestic regulatory bodies. British politicians such as Emma Reynolds and former Prime Minister Gordon Brown and even US President Barack Obama were, he said, examples of politicians that were “blame deflecting … and anxious to obfuscate the failures of their domestic regulatory systems … by suggesting that in some way it is the tax or regulatory system of the offshore financial centre that is at fault.” He claimed the problems they were trying to conceal by their demonisation of offshore centres had their source onshore. He described various socialist activist movements, such as the trade unions, major charities such as Oxfam, and Travers arch nemesis, Richard Murphy of the Tax Justice Network as the “Tax Taliban” .

This fight is occurring at all levels. A new scholarly study from the Instituto Bruno Leoni in Italy digs into the academic debate about tax competition. Written by Dalibor Rohác of London’s Legatum Institute, the report debunks the argument that tax competition somehow is economically inefficient.

The first common argument is that tax competition distorts the allocation of mobile factors of production across countries. The second argument recurrent in the literature says that tax competition can reduce tax revenue and endanger the stability of public finances. The troublesome feature of both of these arguments is that they start from the assumption of government benevolence and omniscience. For instance, the first argument presupposes that the initial allocation of capital between the two countries was optimal and that tax competition is driving it away from the optimum. Likewise, the second argument implicitly assumes that the initial amount raised in taxes corresponded to some well-defined social optimum and therefore that tax competition drives revenue below that optimal level. Hence neither of these arguments holds in the light of basic public choice theory which convincingly demonstrates that governments do have a tendency to overspend and overtax.

Rohác cleverly exposes the other side’s statist agenda. He explains that their main argument is based on the idea that different tax rates in different nations will lead to an inefficient allocation of investment. He then points out that there is a pro-growth way and an anti-growth way of dealing with this supposed problem.

…if the problem of capital misallocation is caused by differences in tax rates among countries, than introducing a maximal rate is a solution that would be equally appropriate. …tax competition might well offer a solution to the alleged problem of misallocation of capital caused by tax differentials. If tax competition was a “race to the bottom,” then the final outcome would actually be a tax rate harmonized across countries and harmonized at a rate of zero per cent, thus eliminating capital tax distortions altogether.

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Recently, I chastised Senator Levin for his assault on so-called “tax havens,” pointing out that Levin’s agenda would fail to benefit small businesses, but instead “place U.S. corporations at a competitive disadvantage in the international marketplace.”  Since then, Cayman Finance has taken issue with the Senator, reinforcing many of the points consistently made by CF&P in response to fallacious attacks on low-tax jurisdictions:

[A]s a sovereign tax jurisdiction, we have the right to set our own rate of tax—just as Ireland and other jurisdictions do—that is all in accordance with the rule of law, and neither we nor these other jurisdictions can properly be accused of thereby undertaking anything “abusive.” The only question is whether those U.S. multinationals are making use of our jurisdiction in accordance with U.S. law which under current U.S. law is categorically the case.

Consider these points: …

  • The anti-money laundering legislation of the Cayman Islands has been evaluated by the International Monetary Fund and by the Financial Action Task Force and is found to be superior to that of the United States and most EU jurisdictions.
  • The report also ignores the very substantial benefits that our financial industry confers on the United States economy. The financial services sector in the Cayman Islands is enormously important to the economic growth of the United States…
  • The favoured location for inward investment by Cayman funds is the United States; the preponderant flow of capital is from  the Cayman Islandsinto, not out of, the United States.

…[P]laces like the Cayman Islands have in a fully transparent and accountable manner provided a massive source of inward capital flow and taxable income for the U.S.

Thursday, July 22, 2010, CF&P President Opposes Senator Levin’s Latest Attack on So-Called Tax Havens
http://www.freedomandprosperity.org/press/p07-22-10/p07-22-10.shtml

Tuesday,  July 27, 2010, An Open Letter to Sen. Carl Levin, by Anthony Travers, O.B.E., Chairman, Cayman Finance
http://www.caymanfinances.com/Cayman-Finance-News/an-open-letter-to-sen-carl-levin.html

CF&P Fact Sheet, Tax Havens: Myth vs. Fact
http://www.freedomandprosperity.org/taxhavens-facts/taxhavens-facts.shtml

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Congress wants to reduce tax evasion, but politicians are unwilling to address the underlying problem of low tax rates, so they continuously give the IRS more power and make it more difficult for law-abiding people to engage in commerce. A good example is the FATCA legislation, which is directly harming honest expatriates and also Americans with foreign investment. I recently returned from a trip overseas where I heard how difficult it has become, thanks to U.S. regulations, to engage even in the simplest of financial tasks. Now, this Wall Street Journal blog post recounts a similar story:

It took Richard M. Shoemaker, a physics teacher at a community college in Montreal, to tell the Internal Revenue Service just how nutty tax returns are going to get for Americans who live or save overseas because of a new anti-tax haven law called Foreign Account Tax Compliance Act (FATCA).

…FATCA will compel many expats or Americans with offshore accounts or foreign real estate like a family villa in Tuscany to file duplicate reports — in some cases three different forms on the same items. And, it means some people will have to report on assets that went unreported before. There’s a $50,000 threshold involved.

This is bad, wrote Shoemaker. But, in the long run, he and his wife ”can live with this complex and duplicative reporting.” What really has him exorcised is that FATCA is going to make it very, very hard for expats to bank locally. “What we could not live with would be the total denial of banking services in Canada, resulting from the draconian reporting requirements imposed on foreign financial institutions,” he wrote.

The Center for Freedom and Prosperity’s Coalition for Tax Competition has made this a priority issue.  American expatriates and investors are being unfairly caught in the cross-fire as U.S. politicians and regulators continue their relentless campaign against good tax policy and fiscal sovereignty.

For more on the Foreign Account Tax Compliance Act, see our issue page.

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