June 10, 2016

Low-Tax Antagonists Strike Again

What has made Monaco such a crowded little piece of real estate? What made Switzerland one of the most prosperous nations in the world? Why have so many people from around the world parked their money in places like the Bahamas, Cayman Islands and Panama? How does a piece of wind-torn prairie called Wyoming attract so many high net-worth residents?

The answer is simple: low taxes and high privacy.

Taxpayers from high-tax jurisdictions, primarily welfare states in Europe, have flocked to low-tax countries and territories to be able to keep more of their savings. Unfortunately, the freedom for people to choose where to keep their money has been dwindling over the past 10-15 years because of an international campaign against low-tax jurisdictions. The campaign has been very well funded through the Organization for Economic Cooperation and Development (OECD) and the European Union.

On the other side, trying to fight back and defend financial freedom, is a tiny little think tank in Alexandria, VA called the Center for Freedom and Prosperity. Now, though... 

...this think tank is coming under some rather unfair media scrutiny. On June 10 the Washington Post wrote:
In May 2007, during a global crackdown on offshore tax havens, an obscure nonprofit lobbying group in Northern Virginia sent a fundraising pitch to a law firm in one of the biggest tax havens in the world — Panama. The Center for Freedom and Prosperity promised to persuade Congress, members of the George W. Bush administration and key policymakers to protect the players of the offshore world, where hundreds of thousands of shell companies had been created, often to hide money and evade taxes. To reach out to American officials and fund its U.S. operations, the center said it needed an infusion of cash for an eight-month campaign: at least $247,000. “We hope you can support this effort with a donation,” the center wrote in a document sent to Mossack Fonseca, the law firm at the heart of an international financial scandal known as the Panama Papers. The leak of more than 11.5 million documents, which came from inside the Panamanian law firm, has pulled back the curtain in recent months on secretive offshore tax havens and the people who use them to stash their money, including a rogues’ gallery of international criminals, money launderers and drug dealers.
It is common practice among antagonists of low taxes to associate low-tax jurisdictions with "international criminals, money launderers and drug dealers". The intention is to associate governments who keep taxes low with the shadiest cast of characters the world has known. In reality, the biggest favor to "international criminals, money launderers and drug dealers" that any government has done recently was the introduction of the euro. Its highest printed value was the 500-euro note, which since the minting of the euro has had a value of $600-700. 

The practical meaning of this is that "international criminals, money launderers and drug dealers" can traffic six to seven times as much illegally earned cash in euro as they can in dollars, making their business a whole lot easier.

I worked for the Center for Freedom and Prosperity some ten years ago. I count the two people who run that think tank, Andrew Quinlan and Dan Mitchell, among my friends. They are two honest, decent guys with a passion for economic and individual freedom. I mention this for full disclosure, but also to reinforce my point about associating proponents of low taxes with crooks, drug lords and mafia bosses: low taxes neither cause nor help toward the advancement of criminal activity. If Sicilian mafia bosses park their money in Panama, then the problem is the lack of law enforcement in Italy that allowed the criminal activity to take place. 

Dictators are another group of less honorable men that low-tax jurisdictions are often associated with. It might be worth remembering that two of the most crooked dictators in modern times, Emperor "The Cannibal" Bokassa of the Central African Republic and Yasser Arafat, chairman of the Palestinian Liberation Organization, both invested their money in France, evidently immune to any French law enforcement attention. Arafat apparently had about $1 billion parked in a bank in Paris when he died.

Again, the point here is that antagonists of low taxes try to derail any common-sense discussion about low taxes and financial freedom by personal innuendo. In its article the Washington Post de facto tries to suggest Quinlan and Mitchell are indifferent to how the low-tax jurisdictions they defend can be used by criminals. That is, of course, nonsense: both Quinlan and Mitchell are honorable men who want nothing more than the greatest opportunity for law-abiding citizens to live their lives as they want to.

Therefore, let us focus this debate on what it is really all about: the benefits of low taxes. 

It is worth noting that the global campaign against financial privacy, a center piece of the attack on low-tax jurisdictions, was not started by countries that keep their taxes low. It was started by nations with high taxes, almost all of them European welfare states. Why did they start this campaign? Quite simple: people who worked their entire lives in those countries, either as employees or as entrepreneurs, built some wealth that they wanted to enjoy as best they could when they retire. They brought that money from their high-tax home country in Europe to another European country, such as Luxembourg, Lichtenstein, Switzerland and Monaco. 

As more and more people found the advantages with investing where taxes are low, the outflow of capital from high-tax welfare states increased. Businesses used every opportunity they got to invest and operate where taxes are low, shifting jobs from high-tax nations to low-tax nations. A compelling example of this is the shift in tax policy in Ireland in the early 1990s. Almost immediately after their reform, global businesses flooded the green island with money, building European headquarters and creating large numbers of jobs where previously unemployment and economic despair prevailed. 

Welfare states such as, but not limited to, Germany, France, Britain, Sweden and the Netherlands were highly dissatisfied with the competition they felt from low-tax nations and territories. But instead of following the Irish example they put together a global campaign against low-tax alternatives. The smearing of those jurisdictions as somehow being in cahoots with criminals was just the upfront part of that campaign. Using international organizations such as the OECD and the EU they have been able to slow down the outflow of money and make it more onerous for individuals to choose where to invest their money.

Antagonists of low taxes have one goal, and one goal only: to eliminate every opportunity for people in high-tax countries to avoid (which is legal and different from evade, which is illegal) those high taxes. They claim that when people invest their legally earned money in a low-tax jurisdiction they deprive their country of tax revenue that the country in question is somehow entitled to. What they fail to mention - intentionally - is that the person who is trying to save a few more bucks of his own money has already paid taxes in the process of earning that money, such as income and payroll taxes. On top of that, during his lifetime he has paid sales taxes (value-added taxes in Europe), excise taxes, property taxes and a slew of fees for government services. 

It is frankly cynical and greedy to prevent regular citizens from the financial freedom of choosing where to invest their money. These are people whose tax payments often exceed 40 and sometimes 50 percent of their lifetime earnings. 

But perhaps the most cherished argument from low-tax antagonists is that their countries suffer economically when people bring their money to low-tax jurisdictions. There is, of course, a great deal of truth to this, but the responsibility for lost investments, consumption and jobs does not lie with those who seek to invest under low taxes - it lies entirely with those who defend the welfare states that demand high taxes. 

As I explained in detail in my book Industrial Poverty, slow GDP growth and high unemployment in Europe's high-tax welfare states is the fault of the very system that define those countries: their expansive entitlement programs and their very high taxes. It has become abundantly clear in the past 25 years that Europe's welfare states have become so costly to their private sectors that businesses and citizens simply keep their investments, job creation, spending and savings as small as they can. This shrinks the tax base that those welfare states so badly need, but not because there is a low-tax alternative. The tax base shrinks because high taxes discourage productive economic activity.

The movement of capital from high-tax welfare states to low-tax jurisdictions is not the root cause of the stagnation of that tax base. It adds to it. However, shutting the financial borders of high-tax welfare states to eliminate financial freedom will not lead to growth in that country's tax base: instead of working and investing their way to some wealth, people will simply choose leisure over productive economic activity. 

Once locked in with no other option than to pay confiscatory taxes on their earnings and investments, people will lose the drive to contribute to the financial future of their families. Slowly but inevitably, this means fewer highly productive professionals, fewer businesses, fewer jobs and stagnant family incomes for the vast majority of the population. 

One need not look to the old Soviet Empire to realize what this means. All you have to do is look at the economic wasteland that is slowly but inevitably spreading across Europe, depriving the young of career opportunities - even jobs - and putting entire nations on the downslope of industrial poverty, declining prosperity and hollowed-out welfare-state promises.

The campaign against low-tax jurisdictions is trying to save dying welfare states from their self-imposed economic decline. It is a completely misdirected campaign, driven by macroeconomic ignorance and statism. The question is: how high a price are we all going to have to pay before we decide to defend economic and individual freedom against low-tax antagonists and collective greed?

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