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Posts Tagged ‘Tax Harmonization’

Jeffrey Sachs of Columbia University is a big booster of the discredited notion that foreign aid is a cure-all for poverty in the developing world, but he is now branching out and saying silly things about policy in other areas.

In a column for the Financial Times, he complains that tax competition is forcing governments to “race to the bottom” with regards to tax rates. The answer, he wants us to believe, is some sort of global tax cartel. Sort of an “OPEC for politicians” that will facilitate the imposition of higher tax rates.

Only international co-operation can now solve what is becoming a runaway social crisis in many high-income countries. …With capital globally mobile, moreover, governments are now in a race to the bottom with regard to corporate taxation and loopholes for personal taxation of high incomes. Each government aims to attract mobile capital by cutting taxes relative to others. …countries cannot act by themselves. Even the social democracies of northern Europe, with their balanced budgets and high tax rates, are increasingly being pulled into the vortex of tax cutting and the race to the bottom. …recent trends…require increased, not decreased, taxation of higher incomes, including corporate profits; and that tax and regulatory co-ordination across countries are vital to prevent a ruinous fiscal race to the bottom.

If this overwrought rhetoric is true, it would mean that governments have been starved of revenue because of race-to-the-bottom tax cuts for evil corporations and sinister rich people. Well, it is true that tax competition over the past 30-plus years has resulted in lower tax rates. But do lower tax rates mean less tax revenue, as implied by Sachs’ analysis?

At the risk of being impolite and shattering anyone’s illusions, let’s actually see what happened to the overall tax burden on both personal and corporate income.

This chart, showing the average for industrialized nations, shows that Sachs and his ilk are wrong. Way wrong. Tax rates have come down, but the overall tax burden actually has increased. So while there may be a race to less-destructive tax rates, there certainly isn’t a race to bottom for tax revenue.

Hmmm….lower tax rates and higher tax revenue. That seems vaguely familiar. Maybe it has something to do with “supply-side economics.” One can only wonder if Sachs has heard about that strange idea known as the Laffer Curve.

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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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Hello from the Most Serene Republic of San Marino, a 24-square mile enclave centered around Monte Titano in eastern Italy. I’m here for a conference on “Competition and Alliances among States.”

Like many other so-called tax havens, San Marino has been bludgeoned in recent years by politicians from high-tax nations, who resent the flow of jobs and capital to low-tax jurisdictions. This is creating problems for the economy, which is one of the most prosperous in the world.

I will speak later today about the ongoing battle between those who favor tax competition and those who want tax harmonization. Not surprisingly, my presentation will include some jabs at France, Germany, and other high-tax nations, as well as statist international bureaucracies such as the Organization for Economic Cooperation and Development.

But my main goal will be to put this battle in context, pointing out that the attacks against low-tax jurisdictions will get more intense in the future as welfare states begin to fall apart and politicians desperately search for more revenue to delay the day of reckoning.

This is not to imply that San Marino is a laissez-faire paradise. Yes, comparatively low tax rates have generated prosperity, but prosperity generates a lot of tax revenue (the Laffer Curve strikes again!), and the nation’s politicians have succumbed to temptation and spent all the money. Indeed, there is not much difference between the welfare state in San Marino and the one in Italy.

The moral of the story, of course, is that all nations should strive to shrink the overall burden of government. San Marino should try to be more like Hong Kong and less like France. The same is true for the United States.

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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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The fight for financial freedom and limited government is global. The Center for Freedom and Prosperity recognizes Eduardo Morgan Jr., an individual whose work for his native Panama echoes much of our own efforts to defend fiscal sovereignty from the onslaught of anti-growth taxation and regulation.

As Panama’s Ambassador to Washington from 1996 to 1998, Eduardo Morgan Jr. saw his country attacked by US political and economic leaders. Ever since, he has dedicated himself to exposing the hypocrisy of the OECD and its members for attacking other countries that want to compete for investment and capital.

Since the beginning of the year, Eduardo has also contributed factual analysis to the online discussion with his blog, which I highly recommend to our readers. His work on behalf of Panama should serve as an inspiration to all individuals and nations that seek freedom and prosperity.
http://www.eduardomorgan.com/blog/

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The Freeman has an article by an expert from Bermuda about the importance of giving taxpayers an escape option to curtail the greed of the political elite:

The Declaration of Independence had it exactly right: “He [King George III] has erected a multitude of New Offices, and sent hither swarms of Officers to harass our people, and eat out their substance.”

Today, the United States makes George III look like a piker.

…The U.S. governments—federal, state, and local—find that extracting 35–40 percent of incomes is not sufficient. They need more to continue their march toward the perfect welfare state…

The EU countries are even worse, with governments raking in around 50 percent of national output. Even Louis IV of France would now be viewed as a benevolent uncle compared to that. The U.S. and EU governments intrude on the financial lives of citizens in every conceivable way, from taxes to regulations to absurd laws that shape and control their citizens.

…Thomas Paine, who wrote of “the greedy hand of government, thrusting itself into every corner and crevice of industry,” would be astounded at today’s situation.

…There are a number of countries, disparagingly called tax havens (or offshore financial centers), most of them small and insignificant, such as Bermuda, Monaco, Liechtenstein, and Cayman, that are allegedly sabotaging the grandiose plans of the United States and the European Union to create their utopian welfare states…

The greatest enemy of the modern State is not the terrorist, criminal, hoodlum, or even the foreign aggressor; it is the citizen who simply wants to keep his own income or to protect his own wealth. “Need” is defined as getting your hands on other people’s money, and greed has come to mean the natural desire to protect your own property and assets from sequestration by governments.

…Tax competition compels governments to think more carefully before spending the public’s money and frees entrepreneurs for greater access to investment funds. Contrary to common belief, low-tax jurisdictions do not siphon off capital from high-tax areas, but allow a better and more effective means of making investment decisions.

The Bible established a tax rate of 10 percent, known as the tithe. That should be enough for governments. There is little hope for optimism on that score.

Low-tax countries are an affront to high-tax countries that believe they have a right to tell the rest of the world how to live. So high-tax countries try to force their tax regimes on everyone else. That is financial imperialism.

http://www.thefreemanonline.org/featured/the-new-financial-imperialism/#

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The United States has a very anti-competitive corporate tax regime. The federal tax rates is 35 percent and the average of state corporate tax systems brings the rate to nearly 40 percent. In Europe, by contrast, the average corporate tax rate is about 25 percent. Depending on which measure is used, the United States and Japan have been rivals for the dubious prize of having the highest corporate tax rate in the developed world. But that’s about to change. According to a story that I saw linked on the Tax Foundation blog, the new Japanese government intends to lower its corporate tax rate by 10 to 15 percentage points. This means America will have no rivals in the contest for having the most anti-growth business tax system in the world. This is something to keep in mind the next time you hear a politician complaining about jobs going to China and India:

Japan’s new government plans to cut corporate tax closer to international norms as it tries to haul Asia’s biggest economy out of a long slump, the economy minister said in a report Friday.

The government is aiming to cut tax on company earnings by five percentage points next fiscal year, from an effective 40 percent now, the Nikkei business daily quoted Economy, Trade and Industry Minister Masayuki Naoshima as saying.

“It’s a fact that international corporate tax rates are 10 to 15 points lower than Japan’s,” said Naoshima, who is part of Prime Minister Naoto Kan’s new cabinet sworn in this week.

“Over the medium term, the government will aim to bring the rate down to around the global standard,” he said.

…”It is now the time to decide (on cutting corporate tax) for the sake of future economic vitality, employment and securing increased tax revenues,” the minister said.

“Japan’s economy has basically been in a slump for the past 20 years and people have been overwhelmed by a sense of stagnation.”

http://www.google.com/hostednews/afp/article/ALeqM5iEJsU0LVfqm6Ir6mybC5_wx5AyoQ

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