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CF&P E-Mail Update, April 10, 2003

Center for Freedom and Prosperity's E-mail Update

1) Washington Update

2) CF&P Announces Caribbean Tour to Discuss Tax Competition, Financial Privacy, and Fiscal Sovereignty

3) Tax Notes International acknowledges Center's key role in blocking tax harmonization

4) New York Governor George Pataki Urges Withdrawal of IRS Interest Reporting Regulation

5) IRS Regulation Update

6) The Mouse that Roared….Cayman Islands  1   EU 0:

7) Richard Rahn: Constructive revenge

8) ITIO Fears Erosion Of Level Playing Field

9) David Burton:  Financial Privacy and Individual Liberty

10) IMF admits its policies seldom work

11) Richard Rahn: The New World War Against Economic Growth and Civil Society

12) AEI's Kevin Hassett: The Axis of Losers: The countries that do not support us have terrible economies.

13) NBER: Expectations and Expatriations: Tracing the Causes and Consequences of Corporate Inversions

14) IPI: What's the Most Potent Way to Stimulate the Economy?

15) CF&P Clips

 

1) Washington Update

CF&P enters its third spring of existence by announcing a tour of low-tax jurisdictions in the Caribbean. In January of 2001, CF&P's first trip to the Caribbean was to the OECD's Global Forum in Barbados.  From that first confrontation with the OECD (where we were threatened by one of President Clinton's Treasury officials), we felt that the Center would be able to make a contribution in defending tax competition, financial privacy and fiscal sovereignty. We believed than, and still believe today, that the attack on the Caribbean was also an attack against the United States.  This is why we look forward to visiting the British Virgin Islands and the Cayman Islands later this spring.  Attempts to thwart tax competition and promote tax harmonization are growing again and we plan on starting our continued drive against these dark forces early next month. We hope that many of you can join us (see below for more information on the forums).

The rest of this e-mail brings you up-to-date on several of the issues we are following. We feature the continued opposition to the IRS interest reporting regulation with a letter from New York Governor George Pataki who represents the world's largest offshore financial center – Manhattan.  We also highlight the Cayman Island's victory in the ECJ's Court of First Instance over the EU on the much-debated Savings Tax Directive. Richard Rahn's great column on how to deal with the EU and his speech he gave on the New World War Against Economic Growth and Civil Society. We also present items below by Washington Tax Attorney David Burton and AEI Scholar Kevin Hassett.

Best regards,  AQ

 

2) CF&P Announces Caribbean Tour to Discuss Tax Competition, Financial Privacy, and Fiscal Sovereignty

The Center for Freedom and Prosperity announced April 3rd that it is sponsoring a series of Caribbean seminars this spring on tax competition, financial privacy and fiscal sovereignty.

The Center plans on holding its first forum in the British Virgin Islands in early May and a similar event is the Cayman Islands in late May. [Link to full announcement linked below:]
http://www.freedomandprosperity.org/press/p04-03-03/p04-03-03.shtml

 

3) Tax Notes International acknowledges Center's key role in blocking tax harmonization

[Excerpt from Tax Notes International, March 31, 2003]

 The U.S. was supportive at first, with Clinton administration Treasury Secretary Lawrence H. Summers issuing a statement on 19 June 2000 encouraging "all jurisdictions that have not previously made commitments to eliminate harmful tax practices to do so" and reiterating the Clinton administration's "strong support for the OECD's Tax Competition Project. . . . "

Early in the Bush administration, the Treasury Department seemed likely to continue supporting the OECD initiative. In February 2001, at a G-7 meeting in Palermo, Italy, incoming Treasury Secretary Paul O'Neill expressed concern that the OECD tax competition project might undercut national tax sovereignty, but he nevertheless joined in an official communiqué that lauded the OECD's efforts to curb harmful tax practices.

Meanwhile, a Washington-based nonprofit group known as the Center for Freedom and Prosperity (CFP) had begun an intensive campaign to subvert the OECD harmful tax practices initiative. The CFP describes itself as "a non-profit organization created to lobby lawmakers in favor of market liberalization." Its "top project" is "fighting to preserve jurisdictional tax competition, sovereignty, and financial privacy." The CFP is headed by Andrew Quinlan, a former Congressional Joint Economic Committee aide who previously represented customers of Swiss banks. The CFP appears to be well financed, but its funding sources are unknown. Financial services firms that benefit from tax haven activity are reported to be among them.

At the urging of the CFP, members of Congress, think-tank executives, and scholars enlisted in a drive that succeeded in demonizing the OECD plan. The plan, it was claimed, was contrary to free-market principles, was based on a hidden agenda to "harmonize" -- that is, raise -- tax rates on a worldwide basis, and was designed to establish a "global tax police" force. Senior Republican members of Congress supported the campaign, as did conservative columnists. Even the Congressional Black Caucus was induced to speak out against the OECD plan, on the basis of solidarity with people of color living in Caribbean tax havens.

The CFP effort worked. On 10 May 2001, U.S. Treasury Secretary O'Neill published an op-ed article in the conservative Washington Times declaring that "The United States does not support efforts to dictate to any country what its own tax rates or tax systems should be, and will not participate in any initiative to harmonize world tax systems. The United States simply has no interest in stifling the competition that forces governments -- like businesses -- to create efficiencies."26

[Source: March 31, 2003, Tax Notes International, By Thomas F. Field, Tax Competition in Europe and America, p. 1233]

 

4) New York Governor George Pataki Urges Withdrawal of IRS Interest Reporting Regulation

Excerpts from the Governors Letter to Treasury Secretary Snow]

"New York City is the world's largest financial center. This is a testament to a vibrant, high-quality workforce, but also a result of wise public policy decisions. For more than 80 years, federal lawmakers have sought to make the United States an attractive home for global capital. As a result, more than $1.7 trillion of foreign money is deposited in American banks. This capital helps to finance American jobs, and provides affordable credit for homebuyers, consumers, and small business."

"Unfortunately, the IRS is pushing a regulation that could undermine the competitiveness of U.S. banks."

"If the regulation is finalized, the likely result is that this money will flee to banks in London, Zurich, Hong Kong, and other financial centers." [Link to full letter below:]
http://www.freedomandprosperity.org/pataki.pdf

 

5) IRS Regulation Update

Over the last few months, nearly 20 U.S Senators and more than 35 Members of the House of Representatives have condemned the proposed Internal Revenue Service's Interest Reporting Regulation. CF&P is in the middle of our second lobbying trip to Capitol Hill in the last few weeks. We hope to energize more lawmakers against this misguided regulation.  Also, more than thirty of the country's most well known free-market organizations have come out against the proposed rule. Recently, The Heritage Foundation's President Edwin Feulner and Americans for Tax Reform's President Grover Norquist sent letters to Treasury Secretary John Snow in opposition to the regulation.  Please see links below to their letters and additional information.

The Heritage Foundation -- Edwin J. Feulner
http://www.freedomandprosperity.org/ltr/feulner-irs/feulner-irs.shtml

Americans for Tax Reform -- Grover G. Norquist
http://www.freedomandprosperity.org/ltr/norquist-irs/norquist-irs.shtml

CF&P's Dedicated IRS Interest Reporting Regulation Web Page:http://www.freedomandprosperity.org/update/irsreg/irsreg.shtml

New Clips:

March 14, 2003, Tax-News.com, Members Of Senate Banking Committee Attack IRS Interest Reporting Plans
http://www.tax-news.com/asp/story/story.asp?storyname=11145

 

6) The Mouse that Roared….Cayman Islands 1    EU  0: 

The Cayman Islands government is seeking to force the European Union to obey the law and follow appropriate legal procedures – something that the EU has ignored in its effort to impose a savings-tax cartel. This is probably an uphill battle because the EU legal authorities ultimately will bow to the high-tax governments that provide their budget. Nonetheless, it is encouraging to see that the Cayman Islands has won round one in this battle.

Cayman Island Press Release on Court Decision
http://www.freedomandprosperity.org/cayman1.pdf

April 04. 2003, The Royal Gazette, By Roger Crombie, Island [Bermuda] may escape savings tax directive
http://www.theroyalgazette.com/apps/pbcs.dll/article?Site=RG&Date=20030404&Categor y=BUSINESS&ArtNo=104040051&Ref=AR

April 2, 2003, Tax-News.com, by Amanda Banks, Partial Success For Cayman Islands At ECJ
http://www.tax-news.com/asp/story/story.asp?storyname=11397

March 21, 2003, Tax-News.com, by Amanda Banks, Cayman Delegation Challenges EU in Court
http://www.tax-news.com/asp/story/story.asp?storyname=11244

March 17, 2003, Tax-News.com, by Amanda Banks, Cayman Takes EU To Court Over Savings Tax Directive
http://www.tax-news.com/asp/story/story.asp?storyname=11175

Additional EU STD News:

April 8, 2003, Tax-News.com, by Ulrika Lomas, EU Convention Remains Split Over Direct EU Taxation
http://www.tax-news.com/asp/story/story.asp?storyname=11467

April 7, 2003, Tax-News.com, by Jason Gorringe, Guernsey To Adopt Withholding Tax Under EU Directive
http://www.tax-news.com/asp/story/story.asp?storyname=11451

April 3, 2003, SwissInfo, by Jacob Greber, Money laundering "not impossible" in Switzerland
http://www.swissinfo.org/sen/swissinfo.html?siteSect=105&sid=1738765

March 27, 2003, Tax-News.com, by Ulrika Lomas, EU/Swiss Savings Tax Agreement Hangs In The Balance
http://www.tax-news.com/asp/story/story.asp?storyname=11320

March 24, 2003, Tax-News.com, by Ulrika Lomas, European Commission Mulls EU Tax Reform
http://www.tax-news.com/asp/story/story.asp?storyname=11256

March 22, 2003, The New York Times, By Paul Meller, European Union Economic Meeting Reports Limited Progress
http://query.nytimes.com/gst/abstract.html?res=F30B1FF635550C718EDDAA0894DB404 482

March 21, 2003, LawAndTax-News.com, by Ulrika Lomas, Confusion Continues Over EU Tax Packages
http://www.tax-news.com/asp/story/story.asp?storyname=11238

March 20, 2003. Expatica.com, EU split on cross-border tax evasion
http://www.expatica.com/germany.asp?pad=190,205,&item_id=29809

March 17, 2003, Reuters, By Lisa Jucca, Italian demands may block EU tax plans - officials
http://www.reuters.com/financeNewsArticle.jhtml?type=usFundsNews&storyID=239365 0

 

7) Richard Rahn: Constructive revenge

[Excerpt]

So, you are mad at the French and have decided not to eat Brie or drink French wine. Or perhaps you want to get real tough with them and put higher tariffs or quotas on French products. The first solution is not likely to have much impact, and the second might get us in a trade war that will hurt us as much as it will them.

Don't despair. There is revenge we can take for their behavior, which will provide considerable benefit to us, and also hurt the high-handed French bureaucrats. The solution is to make a few changes in our tax laws that will encourage even more investment capital to flow out of France into the United States.

By way of background, over the last couple of decades a few hundred billion dollars from the citizens of "Old Europe" (primarily France and Germany) have been invested into the U.S. The reason for this capital flight from Europe is that their tax rates and regulations have been much more punitive than ours. This capital flow into the U.S. has enabled our businesses to invest more in new plant and equipment, resulting in faster productivity growth, more new and higher-paying jobs, and much higher rates of economic growth than Europe.

March 20, 2003, The Washington Times, by Richard W. Rahn, Constructive revenge
http://www.washtimes.com/commentary/20030320-71181160.htm

 

8) ITIO Fears Erosion Of Level Playing Field

[Excerpt]

The 16-member International Trade and Investment Organisation (ITIO) has called for 'a strictly focused meeting of the Global Tax Forum' to discuss the erosion of the level playing field concept with regard to to the OECD's harmful tax competition initiative.

Despite delays in the adoption of the European Union's savings tax agreement as a result of Italian objections, the ITIO argued, the principle behind the EU's decision to offer special treatment to certain countries - namely Austria, Belgium, Luxembourg and Switzerland - flies in the face of, and therefore threatens, the principles espoused by the OECD with regard to tax competition. [Link to full article below:]

March 27, 2003, Law and Tax-News.com, by Amanda Banks, ITIO Warns Over Erosion Of Level Playing Field
http://www.tax-news.com/asp/story/story.asp?storyname=11311

Additional OECD news clips:

March 21, 2003, Maritime Press, OECD moves to lift corporate veil
http://www.maritimepress.co.kr/english/asp/mis/search/view.asp?num=37701.4496990741 0

March 21, 2003, Tax-News.com, by Jason Gorringe, Guernsey Bank Deposits Fall 6.8% in 2002
http://www.tax-news.com/asp/story/story.asp?storyname=11245

March 20, 2003, The Nassau Guardian, By Lindsay Thompson, 'BISX must not die!'
http://www.thenassauguardian.com/business/281672116091696.php

 

9) David Burton: Financial Privacy and Individual Liberty

[Excerpt]

Many OECD governments appear to be exploiting the political climate in the aftermath of September 11 to promote information exchange policies that have more to do with limiting tax competition than enhancing international efforts to apprehend terrorists and criminals.

This paper is divided into five major parts. The first examines current practice and major proposals for change with respect to information gathering and exchange. This discussion separately treats issues relating to national security, terrorism and law enforcement, on the one hand, and tax administration, on the other. The second discusses the relationship between financial privacy and individual liberty. The third analyzes current practice and various reform proposals in light of the importance of financial privacy to individual freedom. The fourth discusses recommendations for reform that will enable the federal government to actually enhance its ability to protect the lives, liberty and property of the American people while enhancing the privacy of law abiding citizens. The fifth sets forth a proposed international Convention on Privacy and Information Exchange that would for the first time impose enforceable limits on the uses to which governments can put the information obtained. [Link to full paper below:]

March 14, 2003, Ludwig von Mises Institute (http://www.mises.org/) Austrian Scholars Conference 9, By David R. Burton, Financial Privacy and Individual Liberty
http://www.mises.org/asc/2003/asc9burton.pdf

 

10) IMF admits its policies seldom work

[Excerpt]

The International Monetary Fund, the Washington-based bank set up to police the financial globe and assist the Third World, yesterday made the startling admission that the policies it has been pursuing for the last 60 years do not often work.

In a paper that will be seized on by IMF critics across the political spectrum, leading officials reveal they can find little evidence of their own success.

Countries that follow IMF suggestions often suffer a "collapse in growth rates and significant financial crises", with open currency markets merely serving to "amplify the effects of various shocks".

Kenneth Rogoff, the IMF chief economist who is one of the report's authors, called the findings "sobering". [Link to complete article below:]

March 20, 2003, Telegraph (London), By Simon English, IMF admits its policies seldom work. [Link to full article:]
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2003/03/20/cnimf20.xml&sShe et=/portal/2003/03/20/ixportal.html

 

11) Richard Rahn: The New World War Against Economic Growth and Civil Society

[Excerpt]

Global economic growth and civil society are now under attack by a group of largely un-elected government and international organization bureaucrats who either do not understand or do not care about the ultimate consequences of the policies and actions which they advocate. The aggressors in this new war began by attacking so-called harmful tax competition in their quest for "tax harmonization", code words for higher levels of taxation, particularly on capital, throughout the world. Financial capital is the "seed corn" of economic growth.  More financial capital means more productive investment which in turn causes faster economic growth, more and higher paying new jobs, and enhanced living standards. Increasing the tax burden on financial capital means less capital available for new investment, hence falling growth rates, more unemployment, and lower living standards.

In order to achieve "tax harmonization" it is necessary to eliminate so-called capital flight, which requires extensive information sharing among governments, and international organizations. In reality, information sharing must be complete and will ultimately strip away any vestige of financial privacy. This is because, in the age of digital electronics where almost any asset can be securitized, financial capital will flow through any electronic hole on the globe that is not blocked.  To stem capital flight, governments are requiring increased financial reporting by their citizens and resident institutions, in order to fully monitor all sources of income and expenditures. As this sensitive information is increasingly shared among government agencies and between various governments, more of it is subject to leaks and misuse. Personal and institutional financial information is of enormous benefit to corrupt or despotic governments, and to various criminals, whether they be kidnappers, extortionists, or other lawbreakers. As more and more financial privacy is stripped away, and revealed either deliberately or inadvertently, to the criminal and corrupt, both individuals and institutions become increasing at risk, and as a result civil society is undermined and ultimately destroyed.

The remainder of this paper details the causes and consequences of this war, and what must be done to stop it. [Link to full presentation below]

February 26, 2003, Speech before the Cayman Islands Bankers' Association, by Richard W. Rahn, The New World War Against Economic Growth and Civil Society
http://www.freedomandprosperity.org/rahn02-26-03.pdf

 

12) AEI's Kevin Hassett: The Axis of Losers: The countries that do not support us have terrible economies.

[Excerpt]

On March 14 German Chancellor Gerhard Schroeder delivered a much-anticipated speech outlining his latest plan to rescue the German economy from the doldrums. The speech was an impassioned appeal to continue to defend German workers against the evils of capitalism

"Our country has not," Schroeder said, "become economically strong through the law of the jungle, through indiscriminate hiring and firing." Indeed, to Schroeder's eye, there is hardly anything worth cutting, right down to the generous dental benefits. "I do not want to return to an era when you can judge someone's wealth by the state of their teeth," he observed.

It is wholly appropriate that such a speech could be delivered at the height of the tension between Germany and the United States, for the content of the speech explains better than anything the surprising intensity of the opposition to the U.S. from "Old Europe." President Chirac, after all, has paraded around the world actively recruiting opponents. His smug and malicious actions could hardly be more brazen if he were militarily allied with Iraq.

So the question naturally arises, why do they act as if they hate us? Schroeder's speech provides a glimpse at the answer. Indeed, an analysis of the economic philosophies of these nations suggests that something more deeply rooted in the struggle between left and right is at the core of this conflict. [Link to complete article below:]

April 2, 2003, National Review Online, By Kevin A. Hassett, The Axis of Losers: The countries that do not support us have terrible economies.
http://www.nationalreview.com/nrof_comment/comment-hassett040203.asp

 

13) NBER: Expectations and Expatriations: Tracing the Causes and Consequences of Corporate Inversions

This paper investigates the determinants of corporate expatriations. American corporations that seek to avoid U.S. taxes on their foreign incomes can do so by becoming foreign corporations, typically by "inverting" the corporate structure, so that the foreign subsidiary becomes the parent company and U.S. parent company becomes a subsidiary. Three types of evidence are considered in order to understand this rapidly growing practice. First, an analysis of the market reaction to Stanley Works's expatriation decision implies that market participants expect its foreign inversion to be accompanied by a reduction in tax liabilities on U.S. source income, since savings associated with the taxation of foreign income alone cannot account for the changed valuations. Second, statistical evidence indicates that large firms, those with extensive foreign assets, and those with considerable debt are the most likely to expatriate - suggesting that U.S. taxation of foreign income, including the interest expense allocation rules, significantly affect inversions. Third, share prices rise by an average of 1.7 percent in response to expatriation announcements. Ten percent higher leverage ratios are associated with 0.7 percent greater market reactions to expatriations, reflecting the benefit of avoiding the U.S. rules concerning interest expense allocation. Shares of inverting companies typically stand at only 88 percent of their average values of the previous year, and every ten percent of prior share price appreciation is associated with 1.1 percent greater market reaction to an inversion announcement. Taken together, these patterns suggest that managers maximize shareholder wealth rather than share prices, avoiding expatriations unless future tax savings - including reduced costs of repatriation taxes and expense allocation, and the benefits of enhanced worldwide tax planning opportunities - more than compensate for current capital gains tax liabilities.

July 2002, National Bureau of Economic Research, By Mihir A. Desai & James R. Hines Jr., Expectations and Expatriations: Tracing the Causes and Consequences of Corporate Inversions
http://www.people.hbs.edu/mdesai/expectations.pdf

 

14) IPI: What's the Most Potent Way to Stimulate the Economy?

This short Issue Brief ranks several proposals, including reducing the corporate tax rate, as far as stimulating economic growth. A reduction in the corporate tax rate is shown to have a much bigger effect in stimulating economic growth than the more usually proposed "middle class tax cuts."
http://www.ipi.org/ipi/IPIPublications.nsf/F726F4998BA46F86862567D80074727A/D60339 9574988A7F86256AE1007AA7E5?OpenDocument

Note:  IPI has written several reports over the last few year's advocated lowers taxes to stimulate economic growth. Please go to http://www.ipi.org for more information.

 

15) CF&P Clips

April 9, 2003, Tax-News.com, by Mike Godfrey, US Hi-Tech Firms Lobby For Tax Cut On Foreign Earnings
http://www.tax-news.com/asp/story/story.asp?storyname=11476

April 8, 2003, CNN/Money, By Leslie Haggin Geary, The real tax nightmare: Millions of taxpayers discover they owe a little known, but more expensive, tax.
http://money.cnn.com/2003/04/08/pf/taxes/q_amt/

April 8, 2003, The Associated Press, GAO: IRS Says Budget Too Small to Enforce Tax Laws
http://www.foxnews.com/story/0,2933,83594,00.html

April 8, 2003, Tax-News.com, by Mike Godfrey, Senate Tax Exile Bill Extends The Long Arm Of The IRS
http://www.tax-news.com/asp/story/story.asp?storyname=11462

April 6, 2003, The Miami Herald, by Dave Barry, Want a little something EGTRRA?
http://www.miami.com/mld/miamiherald/living/columnists/dave_barry/5564439.htm

April 7, 2003, Tax-News.com, by Ulrika Lomas, French PM Advocates Domestic Tax And Spending Cuts
http://www.tax-news.com/asp/story/story.asp?storyname=11441

April 3. 2003, The Royal Gazette, By Becky Ausenda,  McDermott to consider relocation
http://www.theroyalgazette.com/apps/pbcs.dll/article?Site=RG&Date=20030403&Categor y=BUSINESS&ArtNo=104030040&Ref=AR

April 1, 2003, Christian Science Monitor, A Taxing Problem
http://www.csmonitor.com/2003/0401/p10s02-comv.html

April 1, 2003, Expatica.com, Expats face 'loyalty test'
http://www.expatica.com/germany.asp?pad=190,205,&item_id=30143

March 27, 2003, Tax-News.com, by Jason Gorringe, OECD Praises Ireland For Taking 'High Road' In Tax Policy
http://www.tax-news.com/asp/story/story.asp?storyname=11316

March 27, 2003, Tax-News.com, by Robert Lee, New Stealth Tax Could Spark Exodus Of Entrepreneurs From UK
http://www.tax-news.com/asp/story/story.asp?storyname=11317

March 27, 2003, Tax-News.com, by Jason Gorringe, OECD Praises Ireland For Taking 'High Road' In Tax Policy
http://www.tax-news.com/asp/story/story.asp?storyname=11316

March 25, 2003, China Daily, Increasing flow of foreign cash
http://www1.chinadaily.com.cn/cndy/2003-03-25/109299.html

March 25, 2003, Tax-News.com, by Amanda Banks, Chief Minister Enthuses Over BVI Financial Sector's Performance
http://www.tax-news.com/asp/story/story.asp?storyname=11280

March 20, 2003, Legal Times, by Vanessa Blum, U.S. Mounts New Attack on Privilege: Corporate defense bar sees threat to vigorous counseling
http://www.law.com/jsp/article.jsp?id=1046833592233

March 14 2003, Tax-News.com, by Tatiana Smolenskaya, Putin Calls Time On The Tax Police
http://www.tax-news.com/asp/story/story.asp?storyname=11159

March 13 2003, Tax-News.com, by Mike Godfrey, US Institute Recommends Low-Tax Policies To Congress
http://www.tax-news.com/asp/story/story.asp?storyname=11135

 

Best regards,

Andrew Quinlan
Center for Freedom and Prosperity
President
202-285-0244
208-728-9639 (efax)
quinlan@freedomandprosperity.org
www.freedomandprosperity.org

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