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Thursday, May 20, 2010

The New Financial Imperialism

The Britannica Concise Encyclopedia defines imperialism as “the policy of extending a nation’s authority by territorial acquisition or by the establishment of economic and political hegemony over other nations. Because imperialism always involves the use of power, often in the form of military force, it is widely considered morally objectionable, and the term accordingly has been used by states to denounce and discredit the foreign policies of their opponents.”

For example, Britain colonized North America, and what now constitutes the United States, until 1783 when the Brits were kicked out because out they imposed high taxes. The Declaration of Independence had it exactly right: “He [King George III] has erected a multitude of New Offices, and sent hither swarms of Officers to harass our people, and eat out their substance.”

Today, the United States makes George III look like a piker. It is amazing how, with respect to taxes and freedom, the U.S. government has copied and often been more ruthless than the British Empire. As a consequence, the extent to which economic liberty has been destroyed in America and what is now the EU is almost beyond belief. It is as if the American and French revolutions never took place, or took place to provide cradle-to-grave management by government over our lives.

The U.S. governments—federal, state, and local—find that extracting 35–40 percent of incomes is not sufficient. They need more to continue their march toward the perfect welfare state and, in the case of the national government, military dominance of the world. As a result the tax burden under which the average American suffers is now about 20 times higher than under George III.

The EU countries are even worse, with governments raking in around 50 percent of national output. Even Louis IV of France would now be viewed as a benevolent uncle compared to that. The U.S. and EU governments intrude on the financial lives of citizens in every conceivable way, from taxes to regulations to absurd laws that shape and control their citizens.

Empire of the Welfare State

The welfare state, even more than the war on drugs or organized crime, drives the financial imperialism of the U.S. and Europe. Financing the welfare states—most of them are technically bankrupt because of the huge costs of Social Security, public-sector pensions, medical care, and aging populations—creates massive problems, so the United States and Europe look hungrily abroad for more money.

Thomas Paine, who wrote of “the greedy hand of government, thrusting itself into every corner and crevice of industry,” would be astounded at today’s situation. Some taxpayers subsidize other taxpayers, or pay taxes that they later themselves get back as subventions, or pay for services they do not want or even positively oppose. Industry after industry is regulated by millions of bureaucrats and thousands of pages of regulations.

Not content with levying excessive taxes on their citizens at home, large governments using the Organisation for Economic Co-operation and Development (OECD) have in their sights the tax policies of small and less-influential countries whose cardinal sin is to siphon off revenues or poach wealthy taxpayers.

Instead of fighting Britain, the United States has now joined hands with its former colonial oppressor and several other European countries in seeking to prevent a major threat to their treasuries. (For some examples see Daniel Mitchell’s July/August 2009 Freeman article, “In Praise of Tax Havens.”) What is the nature of this threat?

There are a number of countries, disparagingly called tax havens (or offshore financial centers), most of them small and insignificant, such as Bermuda, Monaco, Liechtenstein, and Cayman, that are allegedly sabotaging the grandiose plans of the United States and the European Union to create their utopian welfare states and undermining expensive military ventures in obscure places like Iraq and Afghanistan.

What on earth can these toe-holds on the world atlas be up to?

According to a March 2, 2009, floor statement of Senator Carl Levin of Michigan on the introduction of the “Stop Tax Haven Abuse Act” (an earlier version of which was supported by then-Senator Obama), a tax haven is a foreign jurisdiction that maintains corporate, bank, and tax secrecy laws and industry practices that make it difficult for other countries to find out whether their citizens are using the tax haven to cheat on their taxes. He went on to say, “that secrecy breeds tax evasion. Tax evasion eats at the fabric of society, not only by starving health care, education, and other needed government services of resources, but also by undermining trust—making honest folks feel like they are being taken advantage of when they pay their fair share.”

It is dubiously alleged that offshore tax abuses cost the U.S. treasury an estimated $100 billion each year in lost tax revenues. (As Mitchell says, “That number is phony.”) “Tax havens are engaged in economic warfare against the United States, and honest, hardworking Americans,” Levin said. The implication is that no country should derive a comparative economic advantage from its fiscal policies and that such policies should be harmonized with countries like the United States.

An appropriate response might be that this $100 billion is channeled from tax havens into productive investment that creates jobs, wealth, and opportunities for Americans rather than disappearing into the rat-hole of government spending. Or that tax policy should not be decided by OECD bureaucrats.

Truly in many ways the world has changed—and not always for the better—during the past two centuries. High taxes are good, and low taxes are bad now. Freedom to spend your money in the way you deem best is no longer a virtue but a sin. Diversity is out, homogeneity in. Millions of people in the United States and Europe now depend on taxing others in order to enjoy income, medical care, and unemployment and other benefits.

The greatest enemy of the modern State is not the terrorist, criminal, hoodlum, or even the foreign aggressor; it is the citizen who simply wants to keep his own income or to protect his own wealth. “Need” is defined as getting your hands on other people’s money, and greed has come to mean the natural desire to protect your own property and assets from sequestration by governments.

The jihad against low-tax jurisdictions and the imperialist tax policies being implemented by the United States and the European Union have at least four adverse consequences.

Privacy is reduced. Increasingly, the right to be left alone or to tell the government, “Mind your own business,” is seen as a quaint throwback to the eighteenth century. But is not the principle a fundamental part of privacy and liberty?

The enjoyment of financial and personal privacy is the essence of a free and civilized society. Freedom means the right to spend your own money as you like and to talk to your lawyer or banker without fear he is a government agent.

Government power is increased. The tax laws of most countries are voluminous, so much so that even tax lawyers and accountants have trouble interpreting them. Everyone breaks them inadvertently. The more laws, the greater is the power of government, and proportionately the freedom of the individual is diminished. John Mitchell, the attorney general under President Nixon, is alleged to have said to his boss, “Let me know who you wish to be arrested, and I will find a law he has broken.” He likely wouldn’t have to look further than the tax code. For anyone.

The sorry and tragic history of government power is that it is likely to be abused, and the likelihood, or even the certainty, of abuse grows along with that power. This point was made early on after the creation of the income tax, when Richard E. Byrd, speaker of the Virginia House of Delegates, predicted, “[A] hand from Washington will be stretched out and placed upon every man’s business. . . . Heavy fines imposed by distant and unfamiliar tribunals will constantly menace the taxpayer. An army of Federal officials, spies and detectives will descend upon the state.”

The income tax changed the relationship between the taxpayer and government. Taxpayers are allowed to retain a portion of their earnings as pocket money while the government filches the rest. Freedom to spend hard-earned wages is at the discretion of the tax authorities.

Capital investment is reduced. One of the fundamental and settled propositions of sound economics is that the standard of living of everyone depends on capital investment, which today is not only tools, factories, and equipment, but human capital. Capital investment requires resources not consumed but saved. Ludwig von Mises said it best: “The confiscation of business profits does not benefit the masses. It prevents the efficient entrepreneur from expanding his efforts to supply the consumers in a better and cheaper way, and it shelters the less efficient against the competition of more efficient newcomers. It substitutes rigidity and immutability for progress and continuous improvement.”

Inhibiting, through punitive taxation, the production of wealth in order to create the impression of equality is not humanitarianism but simply stupidity because it makes everyone less well-off—especially the poor.

Tax policy is “harmonized,” that is, “cartelized.” Tax harmonization is the equivalent of tax bullying. The hypocrisy of governments’ bullying tax havens is appalling. If the OECD tax systems were mild, most people who now use tax havens wouldn’t bother.

The belief that tax harmonization is sound public policy has its genesis in the mistaken belief that government spending is good and private spending is bad. This is the private affluence/public squalor argument sanctified by the 1958 publication of The Affluent Society by the late John Kenneth Galbraith—patron saint of political big spenders. However, history tells us that when you leave people alone and keep taxes low, economies flourish and people prosper. If the ability to avoid taxes were impossible, a tyrannical regime could squeeze the taxpayer orange until the pips squeaked.

Guilt by Lack of Association

One of the latest stunts of the OECD is to compel offshore financial centers to sign tax information exchange agreements (TIEAs), under which authorities in these centers can be forced to provide information. Failure to sign a sufficient number of TIEAs can place a jurisdiction on a blacklist. This is a bully-boy tactic.

Appearing on the blacklist means that there is a strong suspicion that monkey business is going on, and that the low-tax jurisdiction is using improper secrecy to shelter potential money launderers, terrorists, tax evaders, and other assorted financial riffraff. However, the pristine reputation of the United States has been undermined lately by research conducted by Jason Sharman of Griffith University on Australia’s Gold Coast. Sharman tested the difficulty in setting up anonymous bank accounts in various places around the world, including tax havens. The highest standards of probity were small island tax havens, while the lowest standards arose in Somalia and the United States, where service providers were prepared to set up anonymous bank accounts without proper identification. This led Jean-Claude Juncker, prime minister of Luxembourg, to state, “If there must be a blacklist, then America should have its place on it.”

Tax competition compels governments to think more carefully before spending the public’s money and frees entrepreneurs for greater access to investment funds. Contrary to common belief, low-tax jurisdictions do not siphon off capital from high-tax areas, but allow a better and more effective means of making investment decisions.

The Bible established a tax rate of 10 percent, known as the tithe. That should be enough for governments. There is little hope for optimism on that score.

Low-tax countries are an affront to high-tax countries that believe they have a right to tell the rest of the world how to live. So high-tax countries try to force their tax regimes on everyone else. That is financial imperialism.