Monday, March 5, 2007

The benefits of tax competition and offshore banking

Tax competition is a sure way to limit socialism, and reduce government.

by StFerdIII

Populists and Marxists are adept at demonizing profit. Any firm or individual that seeks to protect their wealth is portrayed as un-patriotic, rapacious, or anti-social. For these deep thinkers high tax rates, government distortions and compassionate rhetoric replace reality. In the real world high tax rates lead to impoverishment, economic decline and a low-culture that does not have the energy and capital to support its high cost social services. In a slowly globalizing financially interdependent planet we are now seeing international tax competition. This is truly galling for the populist-nationalist and tax-loving Marxist.

As the recent US expansion shows lower tax-rates result in an increase in government revenue. Higher tax rates force people and firms to hide their money and avoid the theft of their wealth. Higher tax rates decrease revenues, diminish wealth and punish society by decreasing net wealth and thereby under-funding social services and infrastructure projects. These truisms are hard for the cultural and social Marxist to comprehend. To these so-called ‘liberals’ money corrupts, profits are public property, and the higher the tax rates the better off we all are. Such ideals are immoral, counterproductive and evil.

The 2003 US tax cuts of $1.3 Trillion were labeled by the US media as ‘sops to the rich’ and pay-offs to Bush supporters. Reality says otherwise. U.S. Federal and state revenues are increasing by 10-15 % per year – thanks to tax cuts, higher investments and concomitant economic growth. This means more capital for social programs and the ever-expanding US state power that Bush has implemented. For the record under Bush the US Federal government has expanded to about 21% of GDP – a record high. Non-essential spending is up about 40% since 2001. Bush is hardly the pro-capitalist, swaggering small government Texan the media makes him to be.

The downside of Bush’s spending? Future tax increases. Either the Americans reduce their non-military spend and get their budgets organized or US capital will flee as tax rates rise to pay off future deficits and meet social security and health care commitments. Some forecasts state that US tax rates will have to rise by between 20-40% over the next 50 years to meet spending commitments. This includes modest GDP growth.

Countries that are big spenders and big debt accumulators – which includes about every country on the planet – are facing tax competition. For the average toiling slave this is good news. Tax competition means that nation states will no longer have unlimited power to steal personal wealth. Moving your money, legally, offshore to a trust, to escape immoral tax rates, grasping wives or greedy family members can be done quickly and cheaply using the internet. Any country that ignores this reality might find its wealth disappearing.

There are two facts that Marxist populists ignore at their own peril. First about 60-70% of all trade takes place inside multinational firms. This means IBM ships parts from China to IBM Europe, then on to IBM Ireland for deployment. This gives firms such as IBM wide leverage to cost parts and limit their tax exposure. High confiscatory rates in France? No problems we will transfer our pricing and profits to Ireland where the corporate tax rate is 12.5% versus 35 % in France.

Second, it is pretty obvious that government power and tax rates are excessive. With some exceptions corporate tax rates are about 35% in the richer world. The result? An increase in the use of offshore havens. About $50 billion world wide is poured into offshore tax havens by firms. The US tax office estimates that at least $200 billion in US corporate profits sits in tax havens. It is a completely legal, and a totally rational response, to avoid government theft.

What will be the impact? Either governments reform themselves, and reduce spending or they will witness an exodus of capital and perhaps entrepreneurs to sunnier climes. This is what happens in the real world. In the age of jet travel and the internet such migrations are rendered easy and reasonably cheap.

So what can governments do? Reduce tax and spend certainly. But more can be done. In one largely unreported move, Bush gave American firms a one-time amnesty on the repatriation of foreign profits. In the US [unlike in most countries] firms and individuals are taxed on world-wide income. By giving amnesty to foreign profits [taxed at only 5 % vs. the usual 35%], Bush was able to repatriate a massive $150 billion in profits.

This money has been essential in helping the US economy continue to grow since 2004. An extension of the Bush amnesty should be a complete reform [and reduction] of US corporate taxation. Make the rate low, make it simple to account for, and make it worthwhile for people and firms to keep their money domestically.

What are the reactions of other states? In Canada $22 billion in private wealth is destroyed when a ‘Conservative’ government decides to abolish legal investments called ‘income trusts’ which only tax profits once at 15 %. Apparently this is unfair tax competition and anti-social [sniff, cry, ‘what about paying fair shares?’ etc.]. It is more about buying votes [tax the rich, deomonize business] than it is about fairness. Double taxing income at excessive rates is hardly about social fairness.

In Europe the same anti-business mentality holds power. Tax competition is close to being outlawed in Europe, with the EU parliament constantly trying to pass [unsuccessfully so far] uniform tax rates. It is hard to understand the mentality behind such actions. Making tax competition illegal, and ensuring that rates of wealth destruction are 35-50% of net income will only damage the economy, reduce jobs, and generate smaller families, lower birth rates and ever escalating debt. Money will flow out of Europe not in when the Europeans abolish tax differentials.

A good summary of Europe’s decline as it relates to taxation, is given by Robert Samuelson in the Washington Post:

‘The trouble is that so much benevolence [socialist programs] requires a strong economy, while the sources of all this benevolence -- high taxes, stiff regulations -- weaken the economy. With aging populations, the contradictions will only thicken. Indeed, some scholarly research suggests that high old-age benefits partly explain low birthrates. With the state paying for old age, who needs children as caregivers? High taxes may also deter young couples from assuming the added costs of children.’

Indeed why do anything at all in a high tax state? Work 35 hours. Work if possible for unions or the government. Take 6 week vacations. Apply for dog-care subsidies. Demand guarantees. Cry and whine about this and that. Stop working at precisely age 55. Believe that profits are bad. Reflexively hate the US or any other ‘power’ that gets busy with reality. Demonize while you decline.

High taxes and big government have zero positive correlation with morality, wealth or higher culture. They do however have a strong connection with political and military weakness; shirking responsibilities; low-culture; declining birth rates; and enfeebled economies. Tax competition should be embraced – it might be the best way to save civilization from the predatory impulses of Marxist culture and its attendant political and social corruption.

Sources:
http://www.washingtonpost.com/wp-dyn/content/article/2005/06/14/AR2005061401340.html