Overpaid and Undertaxed

I sympathize with almost all taxpayers, but it's difficult to feel sorry for government workers who get in trouble with the IRS. Compensation packages for federal bureaucrats are twice as lucrative as those for workers in the productive sector of the economy and their pensions are similarly extravagant. Yet they often can't be bothered to fully pay their taxes, owing billions of dollars to the IRS according to a Washington Post report. Among the biggest scofflaws are the folks at the Postal Service, who have accumulated more than $283 million of unpaid taxes. Retired bureaucrats, meanwhile, have amassed nearly $455 million of back taxes. Even tax collectors sometimes fall behind. Treasury Department bureaucrats owe $7.7 million. How hard can it be for them to walk down the hallway and cough up? Or do they think they're exempt since their boss barely got a slap on the wrist after "forgetting" to declare $80,000? The most startling part of the story, though, is the degree of tax dodging on Capitol Hill. Here's an excerpt from the story.

Capitol Hill employees owed $9.3 million in overdue taxes at the end of last year... The debt among Hill employees has risen at a faster rate than the overall tax debt on the government's books, according to Internal Revenue Service data. ...The IRS data...shows 638 employees, or about 4 percent, of the 18,000 Hill workers owe money, a slightly higher percentage than the 3 percent delinquency rate among all returns filed nationwide. ..."If you're on the federal payroll and you're not paying your taxes, you should be fired," [Congressman] Chaffetz said in an interview. He said the policy should apply across the board and "there should be no special exemptions."

The shocking part about this blurb, at least to me, is not the 638 staffers who owe money to the IRS. It's the fact that there are 18,000 bureaucrats working for Congress. Do 100 Senators and 435 Representatives really need that many attendants? How I long for the good ol' days, when each politician had about two staffers. I suspect it's no coincidence that the federal government was a much smaller burden back when there were far fewer staff.

Crocodile Dundee vs Australia's Tax Police

Here's a Reuters story about the Australian Tax Office harassing Paul Hogan, better known to Americans as Crocodile Dundee, because of a tax dispute. The grinches at the tax office took advantage of Hogan's return for his mother's funeral to hold him hostage, refusing to let him leave the country until he coughs up some cash. It appears that the tax police in Australia are just as politicized and above the law as the IRS. Hogan has never been charged with tax evasion and there are plenty of signs that the bureaucrats want to make him a high-profile victim to justify the amount of money that has been squandered in a probe of supposed offshore evasion.

Actor Paul Hogan, star of the "Crocodile Dundee" movies, has vowed to continue fighting the Australian tax office which has barred him from leaving Australia until he pays a massive bill, saying he's victim of a witch hunt. Hogan, 70, was served with a departure prohibition order 10 days ago while in Australia to attend his 101-year-old mother's funeral which has prevented him from leaving to return to Los Angeles where he lives with his wife and son. The Australian Tax Office refused to comment on reports of seeking tax on A$38 million ($34 million) of allegedly undeclared income from Hogan, saying it cannot give details of individual taxpayers. But the actor went public in the Australian media this week to put forward his side in his five-year row with the tax office, saying he had done nothing wrong and the tax office was on a witch hunt for a high-profile case. ..."If I was a tax evader, which I'm not, I must be the dumbest one in the world to keep coming back here instead of fleeing to a tax haven ... I know they're absolutely desperate to nail some high-profile character with money to justify the expense to the taxpayer." Hogan, who was once a painter on the Sydney Harbour Bridge, is under investigation as part of Australia's biggest probe into offshore tax evasion, Operation Wickenby. The operation is budgeted to cost at least $300 million. The tax office has claimed he put tens of millions of dollars in film royalties in offshore tax havens, a claim that he has denied. He has never been charged with tax evasion.

This story is symbolic of a bigger issue, which is the the unfortunate tendency of governments to create ever-more oppressive and misguided laws in response to failures of existing policy. We see this in the failed War on Drugs, which leads to trampling of civil liberties and erosion of privacy. We see it in the failed War on Poverty, which leads to more redistribution that further traps people in dependency. We see it in the failed government-run education system, which wastes more money every year as outcomes remain stagnant and children from poor and minority communities suffer.

In the case of tax policy, politicians impose high tax rates and punitive forms of double taxation. As anybody with a modicum of common sense could predict, this bad tax policy undermines economic performance and drives economic activity to jurisdictions with better tax law. The politicians then have two ways to respond. They can lower tax rates and reform tax systems, an approach that simultaneously would boost growth and improve compliance. Or they can tighten the thumbscrews on taxpayers, trample their rights, and conspire with other high-tax nations to punish the jurisdictions that do have good policy.

Not surprisingly, most politicians choose the latter approach. And the attack on low-tax jurisdictions is a particularly loathsome part of their response. As this video explains, tax competition is a liberalizing force in the world economy and the effort by high-tax nations to penalize so-called tax havens is driven by a statist impulse to prop up decrepit and inefficient welfare states.

The Laffer Curve Strikes Again

In the private sector, no business owner would be dumb enough to assume that higher prices automatically translate into proportionately higher revenues. If McDonald's boosted hamburger prices by 30 percent, for instance, the experts at the company would fully expect that sales would decline. Depending on the magnitude of the drop, total revenue might still climb, but by far less than 30 percent. And it's quite possible that the company would lose revenue. In the public sector, however, there is very little understanding of how the real world works. Here's a Reuters story I saw on Tim Worstall's blog, which reveals that Bulgaria and Romania both are losing revenue after increasing tobacco taxes.

Cash-strapped Bulgaria and Romania hoped taxing cigarettes would be an easy way to raise money but the hikes are driving smokers to a growing black market instead. Criminal gangs and impoverished Roma communities near borders with countries where prices are lower -- Serbia, Macedonia, Moldova and Ukraine -- have taken to smuggling which has wiped out gains from higher excise duties. Bulgaria increased taxes by nearly half this year and stepped up customs controls and police checks at shops and markets. Customs office data, however, shows tax revenues from cigarette sales so far in 2010 have fallen by nearly a third. ...Overall losses from smuggling will probably outweigh tax gains as Bulgaria struggle to fight the growing black market, which has risen to over 30 percent of all cigarette sales and could cost 500 million levs in lost revenues this year, said Bezlov at the Center for the Study of Democracy. While the government expected higher income from taxes in 2010 it has already revised that to the same level as last year. "However, this (too) looks unlikely at present," Bezlov added. Romania, desperately trying to keep a 20 billion-euro International Monetary Fund-led bailout deal on track, has a similar problem after nearly doubling cigarette prices in 2009 then hiking value added tax. Romania's top three cigarette makers -- units of British American Tobacco, Japan Tobacco International and Philip Morris -- contributed roughly 2 billion euros to the budget in taxes in 2009, or just under 2 percent of GDP. They estimate about a third of cigarettes in Romania are smuggled and say this could cost the state over 1 billion euros.

The Destructive Economics of Class-Warfare Taxation

Caroline Baum of Bloomberg has an excellent column explaining why soak-the-rich taxes don't work. Simply stated, wealthy people are not like you and me. They have tremendous control over the timing, composition, and level of their income. When the rich are hit with higher tax rates, they adjust their behavior and protect themselves by reducing the amount of taxable income they earn and/or report to the IRS. That usually causes collateral damage for the economy, but the class-warfare crowd is either oblivious or uncaring about real-world effects.

Why, after all this time and an extensive body of data, are we still questioning whether reductions in marginal and capital- gains tax rates increase economic activity enough to generate more revenue for the federal government? “Because they don’t like the answer,” Laffer says of the doubters. “It’s not tax cuts that pay for themselves. Tax cuts on the poor cost you lots of money. Tax cuts on the rich pay for themselves. Rich people can afford lawyers, accountants, and can defer income.” ...The rich have the luxury to respond to incentives, to opt for more work and less leisure when the return on work is greater. They are motivated to take risks, maybe start a business, invent something, and get even richer while giving others the opportunity, through hiring, to do the same. The opposite is true for low-income workers. When the government raises taxes, someone struggling to put food on the table for his family may have to go out and get a second job to maintain his level of take-home pay. For this socio-economic group, higher taxes translate to more work. To ignore evidence that the rich behave differently is silly. The government can’t get more blood from a stone, yet it keeps trying. Instead of demagoguing tax cuts for the rich, Democrats should try embracing them for a change. ...Academics are busy churning out articles claiming tax cuts for the rich deliver less bang for the buck because the rich save more of the money than the poor. That’s true. It also misses the point. The goal isn’t spending, or distributing other people’s money to create “aggregate demand.” That’s a wealth transfer, not a net stimulus. (Fiscal policy gets its punch from monetary policy, from the increase in the money supply to pay for the spending.) The goal should be to incentivize individuals to work hard, save and invest in the future. It’s about growing the pie. Sound familiar? We’re right back to square one. I, for one, would like to see the debate shift from class warfare over tax rates and targeted tax relief to tax reform. Either scrap the tax code and introduce a simple flat tax with no deductions, or scrap the IRS and move to a consumption tax. If you want to get money out of politics, there’s only one way to do it. Take the tax code out of Congress’s hands.

Baum's column touches on most of the key issues, but she doesn't address the political economy of class-warfare taxation. In this video on soak-the-rich tax policy, I provide five reasons why high tax rates are misguided - including the oft-overlooked point that politicians impose punitive taxes on the rich as a prelude to hitting the rest of us with higher taxes.

America's Self-Destructive (and Imperialist) Tax Regime

One of my main issues at the Cato Institute (and one of the reasons I was a founder of the Center for Freedom and Prosperity) is protecting and promoting fiscal sovereignty. I don't want international bureaucracies such as the United Nations or Paris-based Organization for Economic Cooperation and Development telling nations what kind of tax systems they're allowed to have - especially since those bureaucracies want to undermine tax competition in order to prop up high-tax welfare states. While I realize international tax issues are not that exciting, there is an excellent column in the Wall Street Journal Europe that shows the negative impact when nations (in this case, the United States) seek to tax economic activity in other nations. When foreigners no longer want to invest in America and when Americans are compelled into giving up U.S. citizenship, that's a sign of a bad tax code:

American expatriates are fast becoming the world's financial refugees. Onerous legislation from the U.S. government is making it too difficult – and too expensive – for banks to service U.S. citizens that live abroad. ...An increasing number are taking the most drastic step and renouncing their citizenship. ...bankers, lawyers and accountants are waking up to the wider implications of the new rules. American expats, it seems, may only be the first to suffer. ...Foreign banks are, in effect, being asked to act as the international enforcement arms of the Internal Revenue Service. Those banks that don't comply will be subject to a 30% withholding tax on all payments made to them in the U.S. Many banks and wealth managers have decided it is far easier to politely show their U.S. clients the door. Earlier this month, the law firm Withers conducted a survey of bankers, accountants, independent financial advisers, trust companies and other private client advisors to analyze the impact of the HIRE Act. Over half said they have seen instances where Americans were denied investment and banking services in the last two years. And 95% expect this to increase as a result of the HIRE Act. ...The U.S. government already taxes expatriate citizens on their worldwide income regardless of where it is earned or where they live, making them the only people in the developed world who are taxed in both their country of citizenship and country of residence. ...there has been an explosion in the time it takes us to keep U.S. expat clients compliant with the U.S. tax regime. He says that their bills have "at least doubled" in the past couple of years. ...A number of banks decided that the concept of U.S. citizenship was too nebulous for them to police. Darlene Hart, the chief executive of U.S. Tax & Financial Services says that when the rule came out in 2001 many of her U.S. clients received letters from their wealth managers telling them that their investment portfolios had been liquidated. Now a second wave of banks – especially in Switzerland but increasingly in the UK and the Channel Islands – are closing their doors to Americans because of the added burden of the HIRE Act. ...What then are U.S. expats to do if even more banks cut them adrift as a result of those reviews? A small but growing number have decided that the best way to avoid the rules is to hand in their passports. According to U.S. government figures, twice as many Americans renounced their citizenship in the last quarter of 2009 than in the whole of 2008. The numbers are still only in the hundreds but are expected to rise now that the HIRE Act has been signed. Ms. Hart says the last time she checked it was not possible to get an appointment at the U.S. embassy in London to renounce citizenship until 2012. In Bern, you couldn't get an appointment until June next year. ...Those that don't want to take such a drastic step can move their investments back to the U.S. However, this can be tricky without an address in the U.S. because of the Patriot Act, which tightened up the procedures by which banks verify their clients' identities. ...although it is the U.S. expats that are suffering the most at the moment, the impact of the new law could eventually be felt far more widely. The banks that sign up to the new rules are likely to pay for the required upgrades to their systems by increasing the bank fees for their rest of their customers. And eventually the reverberations from the HIRE Act may also be felt back in the U.S. ...Nearly three-quarters of respondents to the Withers survey said they expected to see investment into the U.S. decrease in the coming years because of the HIRE Act. Wegelin & Co. is, for one, advising its clients to exit all direct investments in U.S. securities.

Anti-Tax Competition Schemes by High-Tax Nations Will Expand the Underground Economy

Regular readers know that I am a big supporter of international tax competition as a mechanism to limit the greed of the political elite. Unfortunately, the statists are having some success in their efforts to undermine the fiscal sovereignty of low-tax jurisdictions. Even the Swiss have been forced to weaken their human rights policy of protecting financial privacy. So does this mean the politicians from high-tax nations will get more money to spend? Probably not. One reason is that "better" enforcement of high tax rates on saving and investment will have the same economic impact as an increase in tax rates. This, of course, will mean less saving and investment, which translates into slower growth and a smaller tax base. Another reason is that restrictions on the ability to shift economic activity across border to escape oppressive taxation will lead many people to find domestic strategies as a substitute means of protecting their income and assets. An article by a Romanian academic explains further and notes that low-tax jurisdictions will continue to enjoy better economic performance.

It is of course illegal not to declare assets and income held abroad, but the fact that some people are driven to this extreme suggests that in some countries taxes have reached unacceptably high levels. In exactly the same fashion, people are also driven to hide some of their economic activity from the tax man, giving rise to the well known phenomenon of the underground economy. In fact, tax evasion is as old as taxes themselves, and the best way to minimize it is to levy reasonable taxes. International tax evasion and the local underground economy provide the two main escape routes. In modern democratic times, they also set implicit limits to the growth of government. They are both illegal, but the local shadow economy is now so widespread that governments know that they cannot enforce compliance without becoming hugely unpopular (suggesting that high taxes are, in fact, not as widely accepted by the population as some would like to think). Limiting international tax competition looks a much easier bet. However, if high-tax countries are successful in stopping the shift of savings to tax havens by enforcing transparency and information exchange, they will displace, but not halt, tax evasion and fiscal competition. The underground economy, both local and international, will grow. In the meantime, wealthy people and their assets will continue to move from high to low tax environments. Over time, the economically more attractive places will still enjoy much higher rates of economic growth.

Hillary Clinton's Misguided (and Dangerous) Advice for Latin America

In an amusing coincidence, Secretary of State Hillary Clinton and I were both in Latin America this week offering fiscal policy advice. But it won't surprise you to know that Mrs. Clinton's suggestions are radically different than the advice I provided. She spoke in Ecuador and, according to an AFP report, said it was time for "the wealthy across the Americas to pay their 'fair share' of taxes in order to eliminate poverty and promote economic opportunity for all." She also claimed that "her appeal to overhaul tax systems did not amount to 'class warfare' and was instead a recognition that the 'winner-take-all-approach' was a drag on progress." The AFP story concludes with Mrs. Clinton asserting, "We can't mince words about this. Levels of tax evasion are unacceptably high,"

By contrast, in my remarks to the Fundacion Libertad in Panama and the Chamber of Commerce in El Salvador, I explained that academic research shows that better tax compliance is best achieved by lowering tax rates and eliminating inefficient and corrupt spending programs so that taxpayers have more confidence that their money is not being wasted. But let's touch on something even more important than economics. I also made a moral argument about the danger of giving national tax authorities too much power and information - especially in a region where governments oftentimes are the source of oppression, expropriation, and tyranny. Simply stated, there are some things that are more important than obeying tax laws. This Center for Freedom and Prosperity video explains that so-called tax havens are an extremely important refuge for people who are subject to persecution and other forms of government malfeasance.

Let's consider some Latin American examples. Imagine a political dissident in Venezuela. Hugo Chavez has turned that country into a thugocracy and opponents of his sinister regime are vulnerable to having their assets expropriated (and worse). Thankfully, many Venezuelans are able to protect themselves from socialist tyranny by putting their money in Cayman, Panama, or Miami (the U.S. is a tax haven for non-U.S. people). But if Mrs. Clinton got to make the rules, tax havens would no longer exist and Chavez would be empowered.

Or what about families in Mexico, who rightfully are afraid that if they keep their money in the country and report it on their tax returns, corrupt bureaucrats in the national tax office will sell their names to criminal gangs and suddenly their children will be kidnapped and they will have to deal with the horror of getting a ransom note accompanied by a child's finger. Fortunately, many Mexicans can guard against this horrific possibility by placing their assets in Cayman, Panama, or Miami. But in Mrs. Clinton's ideal world, those options would not exist and many more people would experience the nightmare of vicious crime.

And consider the plight of Argentinians. A few years ago, the nation's venal government stole the private pension assets of the people. This is in addition to radical currency devaluations that have wiped out a big chunk of people's savings. Prudent Argentinians have avoided these forms of back-door thievery by moving funds to Cayman, Panama, and Miami. In the Orwellian world envisioned by Mrs. Clinton, however, tax havens wouldn't exist and governments would have carte blanche to engage in bad policy.

This is not the first indication of Mrs. Clinton's government-über-alles mindset as Secretary of State. Let's remember that she urged class-warfare tax policy for Pakistan and more recently said Brazil was a role model for soak-the-rich tax policy (a strange assertion since the top tax rate there is only 27.5 percent). If nothing else, at least we can give her credit for being consistent.

But if I have to choose between Mrs. Clinton's consistent statism and protecting the liberty and freedom of oppressed and persecuted people, it's no contest. Politicians and senior government appointees all over the world act as if folks in the private sector are nothing more than serfs and peasants who have an obligation to pay ever-higher tax burdens, so we should be happy that so-called tax havens offer a refuge - even if we don't live in failed states such as Venezuela, Mexico, and Argentina. Actually, since Obama is trying to turn us into Greece, maybe this issue will be important for Americans even sooner than we think.

Greetings from Austria

I spoke yesterday in Vienna on the third stop on the FMRS tour. My speech focused on solutions to the fiscal crisis. I pointed out the need to substantially reduce the burden of government spending and also warned against higher tax rates - in part because higher tax rates discourage much-needed economic growth.

This puts me in direct conflict with many European politicians, many of whom think extracting more money from taxpayers is the answer to the over-spending problem. Some of these politicians try to sound more rational by saying they don't necessarily want to boost tax rates and instead would be happy to collect more money by more onerous enforcement of existing tax laws.

I don't think it is reasonable to expect big reductions in the underground (or shadow) economy. In a previous post, I quoted an IMF paper authored by Friedrich Schneider, which noted (with particular reference to Austria):

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.

Interestingly, I just came across a new study from the Bank of Italy that looks at the issue from the perspective of "taxpayer morale." The study finds that tax compliance also is sensitive to public perceptions about whether taxpayer money is being wasted. This excerpt touches on many of the key issues, and all I could think of when reading the study was bailouts, handouts, and other forms of corrupt and inefficient spending on both sides of the Atlantic:

...our measure of public spending inefficiency enters with the expected negative sign, and it is significant at the 1 percent level. Taxpayers interacting with a more efficient public sector are likely to show a higher level of tax morale. Our result can be interpreted by looking at the interaction between citizens and the government as a contractual relationship, implying duties and rights for each contract partner. If the taxpayer observes that the tax burden is not spent efficiently, he will feel cheated and his willingness to cooperate will fall. ...Torgler and Werner (2005) state that greater fiscal autonomy allows regions to spend the tax revenues according to local preferences and this, in turn, might have a positive impact on tax morale. ...As expected, the coefficient on the level of public spending per capita enters with a positive sign, and it is significantly different from zero. On the other side, we find a weak positive relationship between fiscal autonomy and tax morale, thus partially confirming the results by Torgler and Werner (2005). At the same time, the coefficient of public spending inefficiency remains negative and highly significant. ...We find that tax morale is higher when the taxpayer perceives and observes that the government is efficient; that is, it provides a fair output with respect to the revenues. This evidence can be interpreted in terms of a psychological contract between taxpayer and fiscal authorities in which the former punishes the local government when he observes that resources are not spent well. Therefore, encouraging more efficient spending of public resources has wider consequences and contributes to increasing the citizens’ propensity to pay taxes.

Greetings from Curacao

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.

Greece's Problem Is High Tax Rates, not Tax Evasion

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.

Class Warfare, Tax Rates, and the Laffer Curve

Obama imposed higher tax rates on the so-called rich as part of his government-run healthcare scheme, and he wants to punish success with additional tax rate increases at the end of this year. This excerpt from a New York Post column comments on how many people are getting a free ride from the tax system, but then goes on to explain why a spiteful policy based on class warfare will backfire:

Nearly half of American tax filers didn't have to pay any federal income tax last year. But Americans -- especially New Yorkers -- shouldn't enjoy the free ride. Soon enough, everybody will pay for the higher spending that Washington's "generosity" encourages. And thanks to Washington, we'll be paying for higher state and local spending at the same time, too. Just a decade ago, two-thirds of American tax filers still paid into the tax system. ...everyone should have to pay something -- and anyone who earns enough to have cable TV can pay something toward their own national defense, too. A big majority of people, in fact, should pay enough to be annoyed on April 15 rather than excited. Otherwise, the politicians will figure they can just keep spending without angering a critical mass of voters. ...seems certain to let the Bush tax cuts for upper-income Americans expire -- so in January the top rate will jump back to 39.6 from 35 percent. Two years later, a new 3.8 percent tax kicks in on investment income earned by families who make $250,000 and up (part of the health-care bill). Thing is, the rich already do pay. And when it comes time to pay for all of the spending we're doing now, the rich may not be able or willing to pay even more. Taxpayers earning over $200,000 paid more than 54 percent of federal income taxes in 2007, way more than the 32 percent of the nation's income they earned. ...there's a limit to how much the government can get. Last year, New York hiked income taxes on people who earn more than $200,000. But, as E.J. McMahon of the Empire Center for New York State Policy noted last month, the expected take from that tax hike seems likely to come in half a billion below estimates. There's good reason to think Obama's tax hikes on the rich will fall short, too. No, federal taxpayers can't leave the country as easily as a handful of Bloomberg's Upper East Side neighbors can leave New York -- but they can park more money in tax-free investments or simply decline to earn it in the first place. Such tax-avoidance is perfectly legal -- but it means less economic growth, and thus less income earned by everyone else.

Stories from the French Resistance

Statists often claim that high taxes have no impact on behavior. Too bad Harry Reid and Nancy Pelosi weren't with me today. I needed to get a taxi from the Nice Airport to the railway station. I asked the cabbie whether he took credit cards and he visibly recoiled and said I needed cash.

During the drive, I asked him why he doesn't take credit cards. He said none of the taxi drivers take credit cards. He said something to the effect that they would have to charge 10 euro more to make up for the taxes. It didn't require much reading between the lines to understand that my taxi fare was not going to be reported to the greedy French tax authorities.

Viva le resistance! (I'm probably spelling that wrong and/or using bad grammar, and/or missing some accents, but it's the spirit that counts)

Clueless English Government Raises Tax Rates, then Wonders Why Compliance Is a Problem

Academic research is fairly unanimous that high tax rates cause tax avoidance and tax evasion. Not many people, after all, are going to take big risks or engage in inefficient tax planning to escape Hong Kong's low-rate flat tax. But people begin to figure out ways of keeping more of their money as tax rates climb above 20 percent and they are very interested in protecting their income when tax rates reach confiscatory levels. In the United Kingdom, for instance, the top tax rate is being raised from 40 percent to 50 percent, which will almost certainly lead to more tax dodging. So now the U.K. government is setting up a panel to figure out how to reduce the "tax gap." Sadly, it's a near certainty that the only good answer - lower tax rates - will not be one of their suggestions. Tax-news.com reports:

The UK government has announced the formation of a new panel of experts to recommend changes that aim to reduce the size of the 'hidden' economy and the 'tax gap' between taxes legally owed and those actually paid. ...Mike Eland, HMRC's Director General of Enforcement and Compliance...commented: “We estimate that the hidden economy contributes to around 7.5% of the net tax gap, which means we could be losing in the region of GBP3bn a year from people who are living and working in the hidden economy. They also gain an unfair competitive advantage over businesses that pay their taxes. This new group of experts with a variety of experience will identify new practical steps to tackle this problem.”

Great Moments in Foreign Government

German politicians apparently have been hot on the trail of evil evaders who did not pay tax on coffee ordered over the Internet. To address this terrible crisis, the government spent 800,000 euro and tracked down 4000 dangerous criminals. Shockingly, a few cynics, including the folks at Reuters, are trying to diminish this triumph by pointing out that the government spent 30 times more than it collected:

Germany spent more than 30 times as much collecting taxes on coffee beans ordered online from abroad than it received in the tax revenues, the accounting office said on Tuesday. Some 4,000 Germans who bought coffee over the Internet from other EU countries but failed to pay the coffee tax have been charged between a few cents to 10 euros ($14.81) in taxes and fees, said Dieter Engels, head of Germany's Federal Accounting Office. Tax collectors ended up with just 25,000 euros, way below the 800,000 euros in the costs of staff charged with collecting the payments, Engels said.

Saying No to Obama's Fiscal Imperialism

I explain why the Obama Administration should not export America's wretched internal revenue code to other nations that have better tax policy and more respect for human rights.

New Laffer Curve Paper Shows Why Obama's Proposed Higher Tax Rates Are so Misguided

The Center for Freedom and Prosperity just released a paper analyzing the Laffer Curve.

The central lesson is that tax increases do raise more revenue in most cases, but at a very high cost in terms of economic growth. However, the tax increases proposed by the Obama Admininstration - based on class-warfare ideology - are especially destructive and may actually lose revenue if taxable income falls enough to offset the impact of the higher tax rate.

The three-part video series on the Laffer Curve can be seen here.

Heading to San Diego Tomorrow for Cato University

I've heard that "Cato U" is the most popular Cato Institute public program, so I'm looking forward to my first visit. I'll be speaking on "Leviathan on a Diet: Tax Competition and Restraints on State Power."

For those of you who won't be there, this eight-minute video is a condensed version of my remarks. And if you're too lazy to watch the video, my message is that forcing governments to compete with each other is the world's most powerful force for freedom.

President Obama's Dishonest Demagoguery

Politicians exaggerate as a routine matter and have well-deserved reputations for stretching the truth. But when they repeatedly make assertions that they (or their aides) know to be false, they surely deserve to be criticized. That is the purpose of my new video. Entitled "President Obama's Dishonest Demagoguery on So-Called Tax Havens," the four-minute presentation looks at the two sound bites that the President uses to demonize low-tax jurisdictions.

Defending Tax Havens on CNBC

Did I win?

Making Governments Compete to Protect Taxpayers

This should be self explanatory.