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CF&P E-mail Update, October 7, 2005

Center for Freedom and Prosperity's E-mail Update

1) The moral case for tax havens

2) WSJ praises global flat tax revolution, condemns pro-harmonization bureaucracies

3) Business Week highlights global flat tax revolution

4) President's Tax Panel urged to dump "static" revenue-estimating

5) Massachusetts leftist seeks to make U.S. companies less competitive

6) The OECD commends Slovakia for free-market reforms

7) Federal red tape costs America more than $1 trillion

8) Is England becoming more like France and less like America?

9) Leading U.S. Senators Warn Kofi Annan Against Global Taxes ~ September 13, 2005

10) OECD Reports:  Low tax rates attract highly skilled workers and entrepreneurs

 

1) The moral case for tax havens

Places like Switzerland and the Cayman Islands serve a valuable economic role by enabling oppressed taxpayers to escape the reach of tax authorities in places like France and Germany. This pressures high-tax governments to lower tax rates and be less profligate. But tax havens also should be lauded for their role in protecting human rights. Most governments in the world are corrupt and there is still rampant persecution in many places based on ethnic, religious, economic, social, and political characteristics. Tax havens provide a refuge for victims of discrimination, enabling them to hide their assets - and thus make themselves less of a target for venal governments. For ethnic Chinese in Indonesia, businessmen in Venezuela, and Jews in North Africa, tax havens can be a genuine life-saver. Foreign Policy magazine explains some of the problems that exist in non-Western nations.

[Excerpt from Foreign Policy]

Freedom House, an organization that studies countries' political systems, categorizes 103 of the world's 192 nations as either "not free" or "partially free," meaning that the civil liberties and basic political rights of their citizens are limited or severely curtailed. More than 3.6 billion people, or 56 percent of the world, live in such countries. Statistically, a "normal" human being in today's world is poor, lives in oppressive physical, social, and political conditions, and is ruled by unresponsive and corrupt government. ...Rich-world assumptions about what constitutes the global norm are costly illusions. Billions of dollars have been wasted by assuming that governments in poorer countries are more or less like those in rich ones, only a little less efficient. Despite constant reminders that most governments in the world are unable to perform relatively simple tasks, such as delivering the mail or collecting the garbage, most recipes for how these countries should solve their problems reflect the sophisticated capabilities taken for granted in rich countries, not the realities that exist everywhere else. [Link to full article below:]

September/October 2005, Foreign Policy, By Moisés Naím, Dangerously Unique:  Why our definition of "normalcy" can be costly for everyone else.
http://www.foreignpolicy.com/story/cms.php?story_id=3212

 

2) WSJ praises global flat tax revolution, condemns pro-harmonization bureaucracies such as the OECD

In a hard-hitting editorial, the Wall Street Journal praises the worldwide shift to the flat tax. Importantly, the editorial also condemns the Organization for Economic Cooperation and Development and other bureaucracies for attempting to undermine tax competition, which is the process that is compelling politicians to adopt better tax law.

[Excerpt from the Wall Street Journal]

The mainstream press is finally discovering the flat-tax movement that has been sweeping Europe. It must be painful to credit an idea associated with the likes of Milton Friedman and Steve Forbes, but reality can't be ignored forever. ...By our count, this brings to 11 the number of nations with a single-rate, postcard tax system. More dominoes are expected to fall in the next few years: Bulgaria, Croatia and Hungary are also preparing to feed their thousands of pages of tax code into the shredder in favor of lower, flatter rates. A flat-tax proposal was debated as part of Poland's recent election campaign. And one of the countries that started it all, Estonia, plans to lower its rate one more time, to 20% from 24%, which was down from the initial flat rate of 26%. Lithuania hopes to go to 24% from 33%. ...In response, even Old Europe has had to consider tax reform, lest its economies become increasingly uncompetitive. Rather than catching the flat-tax wave, France, Germany and Italy have been attempting to stop it by outlawing tax competition through international entities, such as the OECD, the European Union and United Nations. ...The best way to get more taxes out of rich people is to generate more rich people, and then give them more incentive to report their income by keeping tax rates low. Russia, for example, has reported that it now gets more tax revenues from the rich from its 13% flat tax than from its pre-existing Swiss cheese tax code with massive evasion and 50%-plus tax rates. Russia's revenues with the flat tax grew in real terms by 28% in 2001, 21% in 2002, and 31% in 2003, according to a recent analysis by the Hoover Institution. ...Last year the Internal Revenue code achieved a new Olympic record for complexity, with nine million words -- 12 times the length of the King James Bible. High tax rates and mindless tax complexity are an economic ball and chain. We hope President Bush's tax reform commission will cut through the class-warfare blather later this month and endorse a simple, broad-based, single-rate tax system. [Link to full article below:]

October 7, 2005, The Wall Street Journal, Review & Outlook:  The World Is Flat
http://online.wsj.com/article/SB112864535887162338.html?mod=opinion&ojcontent=otep   (subscription required)

 

3) Business Week highlights global flat tax revolution.

A new article from Business Week highlights the success of flat tax systems in Eastern Europe and notes the important role of tax competition as a force for better tax policy,

[Excerpt from BusinessWeek]

The flat tax... [is] the Holy Grail of public policy: One low income tax rate paid by all but the poorest wage-earners, who are exempt. No loopholes for the rich to exploit. No graduated rates that take a higher percentage of income from people who work hard to earn more. No need for a huge bureaucracy to police fiendishly complex tax laws. ...it has gotten its first real road test in the former Soviet bloc, where at least eight countries, from minuscule Estonia to giant Russia, have enacted flat taxes since the mid-1990s. Most of these countries' economies are growing at a far-healthier clip than those of their neighbors to the west. So it's no surprise that calls for a flat tax are now being heard in Western Europe, the most heavily taxed zone on the planet. ...Günther Fehlinger, president of Europeans for Tax Reform, a Vienna-based flat-tax advocacy group, says interest has picked up noticeably since last year, when a flat tax took effect in Slovakia: That country's booming automotive industry is luring billions in highly desirable investment away from Western Europe. ...What's driving this interest all of a sudden? It's a competitiveness issue, says Paul Mylonas, chief economist at the National Bank of Greece. "Our neighboring countries are reducing taxes, which provides them with a more attractive business climate." Slovakia is a case in point. The country has been intent on building an investor-friendly climate. So in 2004 it swept away 21 categories of personal income taxes, five tax brackets, and scores of exemptions and deductions, replacing them with a flat 19% rate. ...Total foreign direct investment in Slovakia last year was $13.6 billion, a sixfold increase since 1998. Slovakia's attractively low 19% corporate tax rate is a big draw, too. But, says Martin Bruncko, chief economic adviser to Slovak Finance Minister Ivan Miklos, "the flat [personal income] tax has made Slovakia more attractive for highly paid expatriate employees..." Even without pressure from the East, many Western European governments face growing complaints about the complexity of their tax regimes. France, for example, offers a bewildering 560 tax breaks. ...a flat or streamlined tax code could still go a long way toward restoring public trust in the tax system by wiping away loopholes and cutting out mounds of red tape. Lower top rates also could stanch the flow of "tax expatriates" -- for example, wealthy French people who move to Britain or Belgium to avoid high French income taxes. Flat-tax Europe? It won't happen overnight. But the conversation is getting under way. [Link to full article below:]

September 26, 2005, BusinessWeek, Europe Circles The Flat Tax: The success of a single tax rate in the East is spurring Western Europe to take a closer look
http://www.businessweek.com/magazine/content/05_39/b3952079.htm

 

4) President's Tax Panel urged to dump "static" revenue-estimating

A coalition of more than 40 free-market leaders has asked President Bush to direct the Advisory Panel on Federal Tax Reform to adopt "reality-based" revenue estimating methodology. Currently, the panel is using "static" revenue estimating techniques. But these estimates assume that tax policy changes - regardless of their magnitude - have no impact on the economy's performance. As such, these "official" estimates commonly overstate both the amount of tax revenue that will be generated by tax increases and also exaggerate the amount of revenue the government will "lose"" because of tax rate reductions. This "static" methodology has been widely criticized because it provides policy makers with inaccurate numbers and creates a bias against lower tax rates. Dynamic analysis - sometimes referred to as "reality-based scoring" - acknowledges that taxes do affect the economy. Dynamic scoring recognizes, for instance, that higher tax rates discourage work, saving, and investment, and therefore will not raise the amount of money suggested by static estimates.

[Excerpt from letter below:]

We applaud the direction given in your January 7th Executive Order, which ordered the Panel to develop options that "promote long-run economic growth and job creation, and better encourage work effort, saving, and investment...." However, we have become deeply concerned that this directive is being undercut, and the work of the Panel needlessly compromised, by the use of "static" estimates on reform alternatives. ... By failing to consider how the options affect economic growth, such static estimates prevent the Panel from considering how well or how poorly policy options achieve the primary charge on which the Panel's existence is based. ... The failure to take dynamic effects into consideration is welcomed by the adversaries of reform, because it supports political rather than scientific ends. Static estimates overestimate revenue gains from tax regimes with steeply progressive rates that doubly and trebly tax savings and investment, and they artificially ensure high revenue neutral rates for the most pro-growth reform alternatives. By systematically providing incorrect or inaccurate information to the Panel, such estimates will hamstring the Panel in its efforts to develop reform proposals that truly benefit the American people. [Link to full letter below:]

September 28, 2005, Coalition letter to President Bush
http://www.freedomandprosperity.org/ltr/president2/president2.shtml

 

5) Massachusetts leftist seeks to make U.S. companies less competitive

Rep. Richard E. Neal, a Democrat from Massachusetts, is at it again. Every new session of Congress he reintroduces the same bill trying to stop "un-American" companies from rechartering in low-tax countries. A few points: (1) U.S.-chartered companies should have the right to escape America's anti-competitive "worldwide" tax system by re-domiciling in low-tax jurisdictions like Bermuda (a process known as expatriation); (2) an expatriating company does not reduce its tax bill on U.S. profits; (3) expatriation protects American jobs by allowing these companies to compete on a level playing field against their international rivals; and (4) allowing companies to choose where they charter promotes economic liberalization. This encourages all nations to improve their laws, leading to lower costs and efficiency. Below are links to an article on Neal's bill, a 2002 Strategic Memorandum by CF&P and a 2002 Heritage Foundation Executive Memorandum by Dan Mitchell.

[Excerpt from Masslive.com]

U.S. Rep. Richard E. Neal, D-Springfield, yesterday filed for the third time a bill that would prohibit U.S. firms from relocating their corporate addresses offshore to avoid paying federal income taxes. [Link to full article below:]

[Excerpt from CF&P Memo]

The U.S. taxes companies on their "worldwide" income. In addition to imposing high compliance costs, this system makes American-based companies less competitive. A U.S. firm competing against a Dutch firm for business in Ireland, for instance, would have to pay a 35 percent tax on its income - with the lion's share going to the IRS. The Dutch firm, by contrast, only pays the 10 percent Irish tax on its Irish-source income because Holland has a "territorial" tax system (the common-sense notion that a government only taxes income earned inside a nation's borders). ... In an effort to remain competitive and protect the interests of shareholders and workers, some U.S. companies are re-chartering in low-tax jurisdictions. Bermuda is a popular choice because of its strong legal system and zero-tax environment. The Cayman Islands has attracted several companies for similar reasons. A company that expatriates to one of these jurisdictions no longer has to pay U.S. tax on its overseas income. This enables the company - which still maintains substantial U.S. operations and pays taxes to the U.S. government on all income earned in America - to compete on a level playing field with foreign competitors. [Link to full article below:]

[Excerpt from Heritage Memo]

Corporate executives are being criticized for bad decisions, some of which have crossed the line into criminal behavior. This heightened attention has helped to create a political environment in which all corporate actions are suspect--including decisions by some companies to re-incorporate in low-tax jurisdictions (a step commonly known as inversion or expatriation). At the very least, critics accuse these firms of being unpatriotic. In many cases, they have asserted that such companies are engaged in a questionable form of tax evasion. ... Such claims are absurd. The decision to re-incorporate in a low-tax jurisdiction should be viewed as a prudent and responsible business reaction to a tax code that severely hinders the ability of U.S.-chartered firms to compete in world markets. Expatriation allows a company to compete on a level playing field with foreign-based firms while maintaining its headquarters and jobs in America--a combination that advances U.S. interests. And since the company continues to pay tax on all income earned in the United States, the evasion issue is a red herring. [Link to full article below:]

September 23, 2005, Masslive.com, By Jo-Ann Moriarty, Neal refiles bill to close tax dodge
http://www.masslive.com/hampfrank/republican/index.ssf?/base/news-1/1127462009253730.x ml&coll=1

Wednesday, May 1, 2002, CF&P Strategic Memorandum, by Daniel Mitchell, Fighting Fiscal Protectionism, Helping Companies Compete
http://www.freedomandprosperity.org/memos/m05-01-02/m05-01-02.shtml

August 29, 2002, The Heritage Foundation, by Daniel J. Mitchell, Executive Memorandum #829: Corporate Expatriation Protects American Jobs
http://www.heritage.org/Research/Taxes/em829.cfm

 

6) The OECD commends Slovakia for free-market reforms

The Paris-based bureaucrats at the Organization for Economic Cooperation and Development usually are on the wrong side. It is the OECD, after all, that pushes the awful "harmful tax competition" scheme. So it is nice to discover that there are some sensible people at the organization - as can be seen in the OECD's country survey on the Slovakian economy.

[Excerpt from OECD's Survey]

Major reforms have enhanced the flexibility of the labour market and have improved incentives for the unemployed to seek work. ...In order to stimulate the creation of jobs that require low skill levels, costs of low paid labour should be significantly reduced, either by cutting employers' social security contributions for low-wage workers, or by reducing the minimum wage. ...Slovakia's combination of sound macroeconomic policies, comprehensive tax and social welfare reform, and new regulations for the product, capital and labour markets, has resulted in an acceleration of growth over the past five years and has increased the pace with which Slovakia is catching up to the living standards of wealthier nations. ...net employment creation in the private sector has accelerated in the past two years... The fiscal cost of this should be funded through expenditure restraint in less urgent areas such as industrial and agricultural subsidies. ...the comprehensive 2004 tax reform has significantly improved investment incentives. [Link to full survey below:]

September 2005, OECD's Economic Survey of Slovak Republic, 2005
http://www.oecd.org/dataoecd/40/4/35390288.pdf

 

7) Federal red tape costs America more than $1 trillion

A new study by a George Mason University economist estimates that federal regulation costs $1.1 trillion. Environmental and tax rules are the most costly, and the study finds that small businesses bear a disproportionate burden.

[Excerpt from SBA study]

The research finds that the cost of federal regulations totals $1.1 trillion; the cost per employee for firms with fewer than 20 employees is $7,647. ...The compliance cost per employee for small manufacturers is at least double the compliance cost for medium-sized and large firms. In the service sector, regulatory costs differ little from small to larger firms. The disproportionality of the burden borne by small firms, identified in previous advocacy studies, is further validated in this instance. On a peremployee basis, it costs about $2,400, or 45 percent, more for small firms to comply than their larger counterparts. ...Environmental and tax compliance regulations appear to be the main cost drivers in determining the severity of the disproportionate impact on small firms. Compliance with environmental regulations costs 364 percent more in small firms than in large firms. The cost of tax compliance is 67 percent higher in small firms than the cost in large firms. [Link to full article below:]

September 2005, Office of Advocacy, the United States Small Business Administration, by W. Mark Crain, The Impact of Regulatory Costs on Small Firms
http://www.sba.gov/advo/research/rs264tot.pdf

 

8) Is England becoming more like France and less like America?

Largely thanks to Margaret Thatcher, the United Kingdom has avoided some of the economic problems found on the European continent. But Richard Rahn warns that the left-wing Chancellor of the Exchequer is taxing and spending like a French politician and this is causing growth to suffer.

[Excerpt from The Washington Times]

From the time of the Thatcher reforms in the early 1980s, Britain has been the star economic performer among the major European nations. The British went from having the lowest per capita income of the European big four (Germany, France, Italy and Britain) to having the highest one, but now there are signs the economic sickness in "old Europe" is beginning to infect the British. ...Unfortunately for the British, the chancellor of the exchequer (i.e., treasury secretary) in the Labor government, Gordon Brown, has too much of a "social market economy" streak. As a result, domestic spending and taxes have risen rapidly, and consequently, as would be expected, economic growth has been falling to an annual rate of only 1-1/2 percent. The Europeans, including Chancellor Brown, like to talk about their "social market economy" being superior and more humane than the freer U.S. market economy, but the facts paint a very different picture. Last year, the per capita GDP (on a purchasing power parity basis) of Britain. was only $29,600 as compared with $40,100 in the U.S., and the British on average are about 10 percent richer than other EU members. Even the poorest of the U.S. states, like Louisiana, Alabama and Mississippi (all hit by Katrina), have slightly higher average incomes... While Britain slowly drifts back to the overtaxed and regulated economy of the pre-Thatcher era, its European competitors have been cutting taxes. Ireland, once a poor backwater, after radically cutting tax rates has a higher per capita income than England and the second-highest per capita income in Europe after Luxembourg. ...If Gordon Brown and his high-spend, high-tax allies persist, Britain's economic performance will continue deteriorating until it stagnates like Germany, Italy and France. [Link to full article below:]

September 16, 2005, The Washington Times, By Richard W. Rahn, Britain slowly sinking
http://www.washingtontimes.com/commentary/20050915-090259-3005r.htm

 

9) Leading U.S. Senators Warn Kofi Annan Against Global Taxes ~ September 13, 2005

Senators Inhofe and Frist initiated a letter to U.N. Secretary-General Kofi Annan warning him that the U.N. should not proceed with any global tax schemes. The letter was signed by the following U.S. Senators: Senators James Inhofe, Bill Frist, John Ensign, Kit Bond, Ted Stevens, Thad Cochran, Mitch McConnell, Olympia Snowe, Jim DeMint, Jeff Sessions, Gordon Smith, George Allen, Richard Shelby, Johnny Isakson, Jim Talent, Pete Domenici, and Tom Coburn. [Link to copyof letter below:]

September 13, 2005, Letter to U.N. Secretary-General Kofi Annan
http://www.freedomandprosperity.org/inhofe-annan.pdf

 

10) OECD Reports:  Low tax rates attract highly skilled workers and entrepreneurs

Many nations, including the United States, have preferential policies to attract the best and the brightest. A new study of Swiss data by two OECD economists confirms that this is a wise policy. Workers - particularly highly productive ones - migrate to jurisdictions that take less of their money.

[Excerpt from OECD study]

...several countries * including Canada, Germany, Switzerland, the United States and the United Kingdom * have introduced schemes to attract highly qualified foreigners. Tax incentives have also been used to attract highly skilled migrants. In the Netherlands, for example, highly skilled foreigners may profit from an income tax allowance of 30%. Favourable tax schemes for immigrants also apply in Belgium, Denmark, Finland, Norway and Sweden. ...The regression analysis first studies internal migration within Switzerland. ...Clearly, there is a positive relation between the tax differential and the migration probability. The effect is even stronger for highly qualified people, who are apparently more attracted towards low-tax communities. ...A very robust influence of the tax burden on the share of the highly skilled among the new immigrants can be observed. Indeed, apart from the tax burden, there is little else that is statistically significant... The most important finding of this study is that the community tax burden has a significant impact on highly skilled migration. Both highly skilled natives and immigrants react to tax differences in a similar way, i.e. they are more inclined to migrate to low-tax areas. This result is very robust and holds even after several factors, including qualify-of-life measures, are controlled for. [Link to full article below:]

July 29, 2005, OECD, Taxation, Ethnic Ties and the Location Choice of Highly Skilled Immigrants, by Thomas Liebig and Alfonso Sousa-Poza
http://www.oecd.org/dataoecd/5/60/35239536.pdf

 

Best regards,

Andrew Quinlan
Center for Freedom and Prosperity
President
202-285-0244
quinlan@freedomandprosperity.org
www.freedomandprosperity.org

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