Halfway Around the World, Fighting for Freedom, Low Taxes, and Sovereignty

I'm in Singapore for two days to help fight the Organization for Economic Cooperation and Development, a statist international bureaucracy based in Paris. The OECD has something called a global tax forum, the purpose of which is to harass so-called tax haven in hopes of coercing them into acting as tax collectors for Europe's decrepit welfare states. Here's the executive summary from the memo I wrote, which warns low-tax jurisdictions that the OECD may push even harder to undermine fiscal sovereignty because of fears that a GOP takeover of Congress will make it more difficult to push for tax harmonization policies in the future.

The Paris-based Organization for Economic Cooperation and Development has an ongoing project to prop up Europe’s inefficient welfare states by attacking tax competition in hopes of enabling governments to impose heavier tax burdens. This project received a boost when the Obama Administration joined forces with countries such as France and Germany, but the tide is now turning against high-tax nations – particularly as more people understand that such an approach inevitably leads to Greek-style fiscal collapse. Looming political changes in the United States will further complicate the OECD's ability to impose bad policy. Because of these developments, low-tax jurisdictions should be especially wary of schemes to rush through new anti-tax competition initiatives at the Singapore Global Forum.

The good news is that nothing dramatic took place on the first day of the two-day conference. the OECD continued to bully low-tax jurisdictions to sign information-sharing agreements and the low-tax jurisdictions kept asking for double-taxation agreements so they could get some benefit in exchange for weakening their human rights/financial privacy laws. The OECD and high-tax nations have been ignoring these requests for a two-way street, thus continuing their bad-faith behavior.

For more information on this issue, here's a link to my video on tax competition, and here are a handful of TV appearances where I discuss the issue. This is a challenging issue to debate, so I'd welcome feedback on which arguments you think are most effective.

Greetings From Panama

I'm on my may to El Salvador to give a speech about the principles of good fiscal policy and I stopped off in Panama for a luncheon speech sponsored by the Fundacion Libertad about the dangers of excessive government spending. I have two observations based on my day of discussions.

First, Panama has a very large banking sector, in part because it is a tax haven and in part because it is a "dollarized" economy. But Panama, like Canada, did not have any sectoral problems during the financial crisis. Why? Because unlike the United States, there are no policies to subsidize housing. There is no Fannie Mae, no Freddie Mac, and no Community Reinvestment Act. So even though there has been a housing boom in Panama City that has since cooled off, this did not lead to significant problems since banks had no government-created incentive to make zero-downpayment loans or offer loans to people with inadequate income and assets.

Second, Panama is a safe haven for oppressed people in Latin America. Many people from unstable regimes such as Venezuela have fled to Panama - or at least moved their money to Panama - to protect their families. Other people from places such as Ecuador and Argentina have moved their money to Panama to guard against expropriation and theft by corrupt governments. And others from nations like Mexico have placed their money in Panama because of rampant crime and kidnapping in their home nations - often triggered when corrupt bureaucrats in national tax offices sell information to criminal gangs. Putting money in Panama minimizes these terrible risks because so-called tax havens have strong human rights policies that protect financial privacy. But for many Latin Americans, the goal is not to protect against punitive taxation, but rather to guard against thuggish and incompetent governments. These are some of the issues highlighted in this video about "The Moral Case for Tax Havens."



For taxpayers from North America and Western Europe, tax havens are an important safety valve to guard against bloated and wasteful government. For taxpayers in most other parts of the world, though, tax havens can mean the difference between life and death. So every time you hear greedy politicians like Barack Obama and Nicolas Sarkozy attack tax havens, remember that they are willing to put people's lives at risk to promote their big government agenda.

Tax Haven Policies Attract $Trillions of Job-Creating Investment to the U.S. Economy

I think it is very nice when left-wing groups help make the case for pro-market policies A recent example is a report from the Center for International Policy, which wants to demonize so-called tax havens, but their report shows that the United States is actually the biggest beneficiary of tax haven policies, with more than $2 trillion of non-resident deposits in American financial institutions(the Cayman Islands is in second place, with $1.55 trillion of deposits compared to $2.18 trillion in the U.S.). This augments a report from another left-wing group, which found that Delaware is the world's best tax haven. In other words, America's tax haven policies (sadly, only available to non-resident aliens) are enormously beneficial to U.S. financial markets, which means capital that boosts investment and job creation. It's also worth noting that even non-U.S. tax havens benefit the American economy. As this Treasury Department chart illustrates, Caribbean banking centers have about $2 trillion invested in America's economy. The left-wing groups would like to destroy tax competition and set up a global tax cartel, sort of an "OPEC for politicians," but the numbers they report underscore how important it is for American policymakers to preserve the open flow of capital and why tax havens are great news for the U.S. economy. Which is exactly what we argued in our video on the Economic Case for Tax Havens.

Should Banks Be Forced by the Government to Spy on Consumers?

There's a principled Fourth Amendment argument against anti-money laundering laws. In this video, however, I mostly focus on the cost-benefit issue, explaining that the fight against crime will be more effective if law enforcement is not forced to look for a needle in a haystack.

Switzerland's Strong Human Rights Laws Should be Emulated, not Persecuted

In a rational world, Switzerland would be a role model for other nations. It is quite prosperous thanks largely to a modest burden of government. There is remarkable ethnic and religoius diversity, but virtually no tension because power is decentralized (sort of what America's Founders envisioned for the United States). Yet despite these - and many other - attractive features, Switzerland is being persecuted because of strong human rights laws that protect financial privacy. Money-hungry politicians from other nations resent Swtizerland's attractive policies, and they would rather trample Swiss sovereignty rather than fix their own oppressive tax laws. An official from the Swiss Bankers Association provides some background in a New York Times column:

In Switzerland, this tradition of treating a client’s financial affairs in confidence became law in 1934 when it was codified in Article 47 of the country’s first-ever federal banking act as a contemporary reaction to the economic crisis, various domestic political considerations and well-publicized cases of espionage involving France and Germany. ...Banking secrecy, therefore, is not some gimmick the Swiss devised to attract foreign clients to their banks. It reflects the very high degree of trust that exists between the Swiss state and its citizens and it has strong democratic foundations. ...The Swiss are proud of their system and they reward it with a high level of taxpayer honesty. It works because the Swiss vote their own taxes, they have a high degree of control over the way tax revenues are spent and over all they believe their tax system to be reasonable, comprehensible, transparent and fair. The principle of self-declaration backed up with withholding taxes and, if necessary, stiff fines supports this “honesty box” system. ...Doesn’t Switzerland hear the snapping jaws and cracking whips of foreign finance ministers, tax collectors, O.E.C.D. bureaucrats, cash-dispensing government agents and other denizens of the encroaching real world as they circle round Mother Helvetia intent on biting huge chunks out of her banking secrecy, if not swallowing it whole? ...In March last year the Swiss announced they would give up the evasion-fraud distinction for foreign bank clients and adopt the O.E.C.D. standards on information exchange in tax matters. ...However, requests for assistance must be made with regard to a specific individual, and “fishing expeditions” — any indiscriminate trawling through bank accounts in the hope of finding something interesting — remain ruled out. ...Switzerland demonstrates to the world that it is possible for a state to collect taxes with a high degree of taxpayer honesty and without the authorities being corroded with suspicion about the financial activities of their citizens. Citizens in a democracy would never allow their police force to have an automatic right of forced entry into their homes just on the off-chance of finding some stolen goods, so why on earth should the state have an automatic right of forced entry into citizens’ banks accounts just on the off-chance of discovering some tax evasion? There must be a limit to the extent to which respect for an individual’s privacy is sacrificed on the altar of international cooperation in tax matters.

Sadly, the United States is part of the effort to create a global tax cartel. An "OPEC for politicians" would be terrible news for taxpayers, though, much as a cartel of gas stations would be bad for driviers. So-called tax havens play a valuable role in curtailing the greed of the political class. Ask yourself a simple question: Would politicians be more likely or less likely to raise tax rates if they knew taxpayers had no escape options?

A Victory for the Rule of Law over IRS Bullying

A Swiss court just threw a wrench in the gears of an IRS effort to impose bad US tax law on an extraterritorial basis, ruling that UBS does not have to hand over data to the American tax authorities. This ruling nullifies an agreement that the Swiss government was coerced into making with the US government last year. In typical arrogant fashion, the IRS already has indicated that it still expects acquiescence, notwithstanding Switzerland's strong human rights policy on personal privacy. The Bloomberg story excerpted below has the details, but it's worth noting that this entire fight exists solely because the internal revenue code imposes double taxation on income that is saved and invested and imposes that bad policy on economic activity outside America's border. But just as other governments should not have the right to impose their laws on things that happen in America, the United States should not have the right to trample the sovereignty of other nations:

A UBS AG account holder won a Swiss court case preventing data from being disclosed in a ruling that may impede a U.S. crackdown on overseas tax evasion. The failure by U.S. citizens to complete certain tax forms or declare income doesn’t constitute “tax fraud” that would require Switzerland to disclose account data, the country’s Federal Administrative Court ruled in a judgment released today. ...“The prosecutors at the Justice Department are not going to be happy with this opinion,” Namorato said in an interview in Washington. “It guts the settlement that they negotiated with the Swiss authorities.” ...The Swiss government said in a statement that it will decide Jan. 27 how the Swiss-U.S. agreement can be implemented in light of the ruling. U.S. Justice Department spokesman Charles Miller declined to comment. ...The Internal Revenue Service said in a statement that while the agency hadn’t reviewed the ruling it “had every expectation that the Swiss government will continue to honor the terms of the agreement.” ...Today’s ruling involved a single test case, and the court said there were 25 more involving similar claims that it will ask the Swiss tax authority to review. “It’s a landmark decision,” said Bernhard Loetscher a partner at Zurich-based law firm CMS von Erlach Henrici AG. “The court considers the case so crystal clear that it invited the SFTA to withdraw the 25 other claims.” ...Under the 1996 double taxation treaty, “tax fraud and the like” means fraudulent behavior that causes or attempts an illegal and important reduction in tax owed. Examples included keeping separate accounts of incorrect profit, losses and orders, as well as a scheme of lies. Switzerland distinguishes between tax fraud, which is a crime, and tax evasion, which is a civil offense. “The U.S. will soon start to renegotiate the double taxation treaty, to give up the distinction between tax evasion and tax fraud,” said Zurich lawyer Wolfram Kuoni. “The key battle will be if it will apply retrospectively.”

This battle is part of a broader effort by uncompetitive nations to persecute "tax havens." Creating a tax cartel for the benefit of greedy politicians in France, Germany, and the United States would be a mistake. An "OPEC for politicians" would pave the way for higher taxes, as explained here, here, and here. But this also is a human rights issue. Look at what happened recently in the thugocracy known as Venezuela, where Chavez began a new wave of expropriation. The Venezuelans with money in Cayman, Miami, and Switzerland were safe, but the people with assets inside the country have been ripped off by a criminal government. Or what about people subjected to persecution, such as political dissidents in Russia? Or Jews in North Africa? Or ethnic Chinese in Indonesia? Or homosexuals in Iran? And how about people in places such as Mexico where kidnappings are common and successful people are targeted, often on the basis of information leaked from tax departments. This world needs safe havens, jurisdictions such as Switzerland and the Cayman Islands that offer oppressed people the protection of honest courts, financial privacy, and the rule of law. Heck, even the bureaucrat in charge of the OECD's anti-tax competition campaign admitted to a British paper that "tax havens are essential for individuals who live in unstable regimes." With politicians making America less stable with each passing day, let's hope this essential freedom is available in the future.

Prince Michael of Liechtenstein Discusses the Human Right of Financial Privacy

Here's a Cato Institute podcast with H.S.H. Prince Michael v. Liechtenstein. It would be nice if America has business and political leaders with a commitment to individual liberty and personal freedom.

Wall Street Journal Highlights Importance of Privacy Havens to Protect People from Government Extortion and Incompetence

Wall Street Journal Highlights Importance of Privacy Havens to Protect People from Government Extortion and Incompetence. In an important shift, the Wall Street Journal takes a more sympathetic view of bank secrecy. The WSJ's editorial page has always been an excellent source for pro-market opinion, but the editors were not overly sympathetic to some aspects of tax competition. But Holman Jenkins' column highlights key moral and economic reasons for financial privacy:

That's the paradoxical virtue of Swiss banking secrecy, which has protected both greedy tax scofflaws and those merely trying to save something for the next generation when politicians are burning down the economy back home. ...A decade ago, this column took a more sanguine view of this gradual erosion than we might today. Then, we noted that the world was moving toward democracy and rule of law. Governments were dismantling senseless regulations and tax rates so high they inhibited growth and collected less revenue than government would have collected with lower rates. The world was becoming more like the Swiss, we said at the time—i.e., sane. A similar judgment does not leap from our lip today, not after two years so reminiscent of the omen-filled early 1930s. ...today's IRS war on Swiss banking secrecy does not occur in a vacuum. In 1934, Swiss politicians were legislating in response to specific events abroad: a Nazi law that made it a death-penalty crime to hold assets outside the country; a scandal stoked by French socialist politicians over Swiss bank accounts held by prominent citizens. The Swiss looked out and saw a world gone mad: bank failures, depression, militarism, fascism, communism. The new law was meant to buttress the world's confidence in the privacy and security of a Swiss bank account. Today, the world is at least slightly deranged, with the possibility of getting very much worse. Democrats in Congress, in the face of every economic lesson, want to push marginal tax rates back up to confiscatory levels.