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.
The federal government is capable of enormous waste, which obviously is bad news, but the worst forms of government spending are those that actually leverage bad things. The old welfare system, for instance, paid people not to work and have babies out of wedlock (this still happens, but it's not as bad as it used to be). Paying exorbitant salaries to federal bureaucrats is bad, but it's even worse if they take their jobs seriously and promulgate new regulations and otherwise harass people in the productive sector of the economy. In a previous video on the economics of government spending, I called this the "negative multiplier" effect.
One of the worst examples of a negative multiplier effect is the $100 million that taxpayers spend each year to subsidize the Paris-based Organization for Economic Cooperation and Development. This video has the gory details.
Sleazy politicians from France, Germany, England, and the United States want a bank taxes that would finance national piggy banks to bail out politically favored companies and industries. But they are not stupid, so they realize that nations that impose bank taxes will lose deposits to nations with more sensible policy. This is why the statists want to convince all nations to adopt the same policy. Fortunately, some nations are resisting harmonized bank taxes, and Canada is taking the lead. Canadian leaders rightfully explain that their banks never got in trouble, largely because Canada does not have foolish housing subsidies. Let us hope that Canada, as well as other nations such as Brazil and Australia, block the corrupt policies being pushed by statists such as Obama and Merkel.
Canada will "resist" a bank tax, Industry Minister Tony Clement said Tuesday as ministers fanned out across the world to raise opposition to the proposal for avoiding another financial crisis. "Canada is, and will remain, opposed to a tax that would penalize financial institutions that remained strong and prosperous while many of the world's banks failed," Clement told a press conference with Foreign Minister Lawrence Cannon. ...Attempts to reach international agreement on coordinated bank taxes at last month's G20 and IMF meetings ran aground. Nations including Canada and Brazil, whose banking sectors emerged largely unscathed from the financial crisis, objected to the plan, favoring higher capital reserve requirements instead. But it is expected to be revived at the next meeting of G20 leaders in Toronto next month, with Germany's Angela Merkel vowing to press for the proposal supported by many in Europe. Clement said the bank tax would "encourage risky behavior" if it is used to create a bank bailout fund and "reward bad behavior" of those institutions responsible for the recent financial crisis in the first place. ..."This tax would reach into consumers' pockets and punish our financial institutions which have taken precautions to avoid the very turmoil that is afflicting other parts of the globe," Clement lamented.
As you can tell from my last couple of posts, I'm getting increasingly upset with politicians who do the wrong thing and make our lives worse off. I'm especially bitter about how so much of what government does is for the benefit of powerful insiders and has a negative impact on the less fortunate in society.
So the time has come for me to take a deep breath and appreciate the fact that I'm on a beautiful Caribbean island. I'm in Curacao for a speech to a Wealth Preservation conference, where I'll be talking about the importance of fighting international bureaucracies (such as the OECD) that are trying to hinder the flow of jobs and capital from high-tax nations to low-tax jurisdictions. To put it bluntly, I want to make it easier for people to "Go Galt" and protect themselves from rapacious politicians. Given what has happened in Europe, this battle is getting more important every day.
The New York Times has an article describing widespread tax evasion in Greece, along with an implication that the country's fiscal crisis is largely the result of unpaid taxes and could be mostly solved if taxpayers were more obedient to the state. This is grossly inaccurate. A quick look at the budget numbers reveals that tax revenues have remained relatively constant in recent years, consuming nearly 40 percent of GDP. The burden of government spending, by contrast, has jumped significantly and now exceeds 50 percent of Greek economic output.
The article also is flawed in assuming that harsher enforcement is the key to compliance. As this video shows, even the economists at the Paris-based Organization for Economic Cooperation and Development admit that tax evasion is driven by high tax rates (which is remarkable since the OECD is the international bureaucracy pushing for global tax rules to undermine tax competition and reduce fiscal sovereignty).
Ironically, the New York Times article quotes Friedrich Schneider of Johannes Kepler University in Austria, but only to provide an estimate of Greece's shadow economy. The reporter should have looked at an article that Schneider wrote for the International Monetary Fund, which found that:
Macroeconomic and microeconomic modeling studies based on data for several countries suggest that the major driving forces behind the size and growth of the shadow economy are an increasing burden of tax and social security payments... The bigger the difference between the total cost of labor in the official economy and the after-tax earnings from work, the greater the incentive for employers and employees to avoid this difference and participate in the shadow economy. ...Several studies have found strong evidence that the tax regime influences the shadow economy. ...In Austria, the burden of direct taxes (including social security payments) has been the biggest influence on the growth of the shadow economy... Other studies show similar results for the Scandinavian countries, Germany, and the United States. In the United States, analysis shows that as the marginal federal personal income tax rate increases by one percentage point, other things being equal, the shadow economy grows by 1.4 percentage points. ...A study of Quebec City in Canada shows that people are highly mobile between the official and the shadow economy, and that as net wages in the official economy go up, they work less in the shadow economy. This study also emphasizes that where people perceive the tax rate as too high, an increase in the (marginal) tax rate will lead to a decrease in tax revenue.
It is worth noting the Schneider's research also shows why Obama's tax policy is very misguided. The President wants to boost the top tax rate by nearly five percentage points, and that's on top of the big increase in the tax rate on saving and investment included in Obamacare. Based on Schneider's research, we can expect America's underground economy to expand.
Shifting back to Greece, Schneider does not claim that tax rates are the only factor determining compliance. But his research indicates that more onerous enforcement regimes are unlikely to put much of a dent in tax evasion unless accompanied by better tax policy (i.e., lower tax rates). Moreover, compliance also is undermined by the rampant corruption and incompetence of the Greek government, but that problem won't be solved unless politicians reduce the size and scope of the public sector. Needless to say, that's not very likely. So when I read some of the details in this excerpt from the New York Times, much of my sympathy is for taxpayers rather than the greedy politicians that turned Greece into a fiscal mess:
In the wealthy, northern suburbs of this city, where summer temperatures often hit the high 90s, just 324 residents checked the box on their tax returns admitting that they owned pools. So tax investigators studied satellite photos of the area — a sprawling collection of expensive villas tucked behind tall gates — and came back with a decidedly different number: 16,974 pools. That kind of wholesale lying about assets, and other eye-popping cases that are surfacing in the news media here, points to the staggering breadth of tax dodging that has long been a way of life here. ...Such evasion has played a significant role in Greece's debt crisis, and as the country struggles to get its financial house in order, it is going after tax cheats as never before. ...To get more attentive care in the country’s national health system, Greeks routinely pay doctors cash on the side, a practice known as “fakelaki,” Greek for little envelope. And bribing government officials to grease the wheels of bureaucracy is so standard that people know the rates. They say, for instance, that 300 euros, about $400, will get you an emission inspection sticker. ...Various studies have concluded that Greece’s shadow economy represented 20 to 30 percent of its gross domestic product. Friedrich Schneider, the chairman of the economics department at Johannes Kepler University of Linz, studies Europe's shadow economies; he said that Greece’s was at 25 percent last year and estimated that it would rise to 25.2 percent in 2010.
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.
We need effective, articulate, and principled lawmakers in Washington. I don't think many Republicans in DC understand the tax competition issue. And if they do, I doubt they could give either of these speeches.
I especially appreciate his defense of tax havens.
German politicians are notoriously bad on European issues, almost always pushing for more centralization, harmonization, and bureaucracy. So it is surprising to see that the German government is rejecting a Luxembourg proposal to give the EU a direct source of tax revenue. This may just be a case of a stopped clock being right twice a day, but it is refreshing to see Germany on the right side for once. The Wall Street Journal reports on the good news:
Germany opposes a proposal to introduce a European Union-wide tax because the bloc already has sufficient funds, the finance ministry said Monday. The comments come ahead of a meeting of euro-zone and EU finance ministers in Brussels later Monday and Tuesday. Ministers are expected to discuss economic policy coordination. Luxembourg's Finance Minister Luc Frieden has proposed the introduction of a European tax, with proceeds going directly into the EU budget. ...The German finance ministry said "such a tax is not necessary because existing funding rules already ensure sufficient own funds for the EU." The ministry said such a tax would complicate the existing financial funding system of the EU, which is based on revenues from custom duties and the EU's shares in the member states' value-added tax and gross national income.
I'm now relaxing in the warm sunshine of the Cayman Islands, having given a speech to an International Funds Conference.
My speech was a standard critique of high-tax governments and international bureaucracies for trying stifle tax competition and create a global tax cartel - sort of an OPEC for politicians.
The most interesting part of the conference was when an expert from Hong Kong equated the tax system of the United States with North Korea and Libya. A bit of hyperbole, to be sure, but our tax system has totalitarian aspects that are far worse than anything found even in places such as France. And now Obama wants to further increase the power of the IRS and strip away even more of our freedoms.
For those who want more information on the topic, here's my video on tax competition, followed by a video castigating Obama's anti-tax haven demagoguery.
Since I said something semi-nice about the French a couple of days ago, let me now revert to form and bash French politicians for their reflexive desire to tax and tax and tax again. The first example is from Tax-news.com, which reports that the French government wants to tax Google and other online companies in order to subsidize politically-approved news outlets:
A report presented recently to the French Culture Ministry has proposed a series of measures designed to improve the legitimate supply of cultural services provided over the Internet and their financing, including most notably the introduction of a new tax to be levied on the online advertising revenue derived by Internet giants such as Google. ...In order to finance the proposals, estimated at around EUR50m in 2010, and between EUR35m and EUR40m a year in 2011 and 2012, the report advocates the introduction of a levy imposed on online advertising revenue. Dubbed the “Google tax” by one of the main authors of the report, Jacques Toubon, himself a former French Culture Minister, the levy is designed to support creative industries and online press sites. A threshold level for the tax would ensure that the levy only affects large companies such as Google, Microsoft, AOL, Yahoo, and Facebook.
If the French politicians limited to themselves to raping French citizens, that would be reprehensible, but not exactly a reason for the rest of the world to be upset. Unfortunately, the French government has a misery-loves-company attitude and is always trying to export bad policy to other nations. France, for instance, is a leading supporter of the OECD's anti-tax competition crusade (not surprisingly, the OECD is based in Paris even though the US pays one-fourth of the bureaucracy's bloated budget). Another example is France's campaign to impose an EU-wide carbon tax, which combines the worst aspects of big government, protectionism, and enviro-radicalism. The EU Observer reports:
France intends to push for a tax on carbon emissions across the European Union, President Nicolas Sarkozy said on Wednesday (6 December), a week after his country's top court struck down an attempt to introduce just such a tax domestically. Mr Sarkozy also wants to see carbon "tariffs" slapped on products entering the EU from countries with weaker environmental legislation. ...Any carbon tariff move is likely to meet with stiff resistance from other EU member states, particularly the more free-trade oriented nations, who would view such a levy as a form of protectionism. When an EU carbon tax imposed at the borders of the bloc was first mooted at a meeting of European environment ministers last July, the idea was given a frosty reception, particularly by Germany. ...In response, the French government is to present a re-edited version of the bill on 20 January, taking into consideration the court's objections. On Tuesday, French finance minister Christine Lagarde said that the new law would would involve a progressive tax, with different brackets similar to income taxation.
Politicians from high-tax nations hate tax competition. It's hard to turn people into tax slaves, after all, if they can shift economic activity to a less oppressive nation. But this is old news. What is worth noting, though, is the lengths to which the statists will go to push their agenda. Euractiv.com notes that a new report from the European Parliament says politicians should take advantage of the economic crisis to push for tax harmonization. Needless to say, there is no reason to think that tax harmonization is ever a good idea, regardless of the economy's performance (though there are good reasons to fear that long-run growth would be even more anemic in Europe if taxes were harmonized - which means, not surprisingly, that nations with more reasonable tax rates would be forced to adopt the bad policies of their collectivist neighbors). It's also predictable that the political elite in Brussels was utterly insincere in their promises to Ireland that tax harmonization would not be on the agenda if the Lisbon Treaty was enacted:
The economic crisis could present an opportunity to harmonise taxation policy across EU member states, according to officials at the European Parliament who contributed to a major report on the future development of the EU. ...The comprehensive document, released with minimal fanfare at the end of 2009, was prepared by researchers in the EU assembly's five policy departments. ...The report sets out three possible scenarios likely to emerge over the next five-to-ten years, saying further harmonisation of direct taxation would be "desirable but has not been realistic until now". Unified corporate tax rates, a long-standing target of European federalists, is set out as an objective. This will cause controversy in some corners, not least in Ireland, which last year was given assurances by European leaders that the Lisbon Treaty would not affect its relatively low corporate tax regime. The officials suggest the window of opportunity may not last long. ..."The problem with common fiscal and tax policies is that decisions in the EU are taken on a unanimity basis and the European Parliament has little legislative role," according to the report.
