[Clips] Taking Aim at Low Taxes

[R.A. Hettinga]

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  Date: Wed, 4 Apr 2007 09:29:16 -0400
  To: Philodox Clips List <clips at philodox.com>
  From: "R.A. Hettinga" <rah at shipwright.com>
  Subject: [Clips] Taking Aim at Low Taxes
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  <http://online.wsj.com/article_print/SB117563923218558860.html>

  The Wall Street Journal


  COMMENTARY

  Taking Aim at Low Taxes

  By DANIEL J. MITCHELL

  April 4, 2007

  Hong Kong and Singapore have enjoyed rapid growth and now rank among the
  world's wealthiest jurisdictions -- thanks, in part, to their low tax rates
  and open markets. But no good deed goes unpunished. Today, both thriving
  jurisdictions face possible economic sanctions courtesy of the U.S.
  Congress.

  Two proposals attacking low-tax jurisdictions are currently making the
  rounds in Washington. The first, Michigan Senator Carl Levin's "Stop Tax
  Haven Abuse Act," would change U.S. tax laws to deter Americans from
  investing in 34 low-tax jurisdictions. Inclusion on the list is based on
  Mr. Levin's claim that a jurisdiction has been described as a "secrecy
  jurisdiction" by the U.S. Internal Revenue Service in court filings against
  allegedly tax-dodging third parties. In Asia, Singapore and Hong Kong would
  be among the jurisdictions effectively blacklisted. Even worse, the bill
  authorizes sweeping financial sanctions for jurisdictions that do not
  changes their tax and/or privacy laws to facilitate the extraterritorial
  enforcement of U.S. tax law.

  The other, equally pernicious, proposal is sponsored by Democratic Senator
  Byron Dorgan of North Dakota. His bill creates a blacklist of 40 nations
  and territories, though Senator Dorgan's two-page bill does not explain how
  nations got on his blacklist or how they could get off the list. The
  legislation would require American companies to act as if income earned in
  those jurisdictions were U.S.-source income, a change that would
  dramatically boost their tax burdens. Hong Kong and Singapore aren't
  currently on Senator Dorgan's list, though that could change as the bill
  wends its way through the legislative process.

  Given the toxic combination of anti-free trade sentiment and hunger for new
  tax revenue bubbling in the Democratic Congress, there is speculation that
  the sponsors of the two bills may create a combined blacklist of 46
  jurisdictions. But even if a jurisdiction escapes that list, both proposed
  bills would give the Treasury Secretary unchecked authority to add new "tax
  havens" to the list.

  If enacted, these bills would inflict higher tax rates and economic
  uncertainty on Asia's most vibrant financial centers, discouraging American
  investors, entrepreneurs and companies. Equally worrisome, other nations
  might use the U.S. action as an excuse to impose similar blacklists.
  Politicians from Europe's high-tax welfare states have been staunch
  advocates of anti-tax-competition policies and they would be delighted if
  America took the lead in an attack on low-tax jurisdictions -- especially
  since both Hong Kong and Singapore already have rejected participation in
  the savings tax directive, a scheme by the European Commission to track and
  tax flight capital.

  These proposals, particularly the Levin legislation, already are causing
  unease in Asia. The Hong Kong and Singapore governments are very aware of
  the threat posed by these pieces of legislation. The private sector in both
  jurisdictions also is paying attention, particularly since Senator Levin
  implies that his legislation will boost tax collections by $100 billion
  yearly. This suggests a steep increase in the tax burden, though it is
  likely that there would be very little if any additional tax revenue since
  American investors and companies would change their behavior to avoid the
  tax -- most likely by pulling money out of the blacklisted jurisdictions.

  Ironically, America may be the biggest victim if the Levin and Dorgan bills
  are approved. The Center for Freedom and Prosperity already has sent a
  letter to Treasury Secretary Henry Paulson explaining why the Levin and
  Dorgan proposals are contrary to U.S. interests. Signed by representatives
  of 45 think tanks, free-market groups and taxpayer organizations, the
  letter attacks the proposals on three fronts.

  First, in a competitive globalized world, discriminating against American
  investors, entrepreneurs and companies would create opportunities for other
  nations to grab market share. Second, the bills disproportionately target
  poor nations, as about three-fourths of the blacklisted jurisdictions are
  from the developing world, further reducing America's list of friends
  around the world. Lastly, the bills almost surely would get America in
  trouble with the World Trade Organization because of national-treatment and
  most-favored-nation obligations.

  Ideally, the proposals will be stopped because they represent bad policy,
  not merely because they would harm American interests. Senators Levin and
  Dorgan are trying to undermine tax competition, yet this is a process that
  should be celebrated rather than persecuted. The mobility of labor and
  capital has forced governments around the world to lower growth-stifling
  tax rates and personal and corporate income. Beginning with the Thatcher
  and Reagan tax cuts, personal tax rates have dropped by an average of
  nearly 25 percentage points in the developed world and corporate tax rates
  have fallen nearly 20 percentage points. This liberalization, encouraged by
  fiscal rivalry, would be undermined if governments no longer had to worry
  that the geese that lay golden eggs could escape to other jurisdictions.

  Fiscal protectionism is not the answer. If Senators Levin and Dorgan are
  worried that jobs and capital are migrating to places such as Hong Kong and
  Singapore, they might think about lowering U.S. tax rates instead. After
  all, America should be exporting freedom, not bad policy.

  Mr. Mitchell is a senior fellow at the Washington-based Cato Institute.

  --
  -----------------
  R. A. Hettinga <mailto: rah at ibuc.com>
  The Internet Bearer Underwriting Corporation <http://www.ibuc.com/>
  44 Farquhar Street, Boston, MA 02131 USA
  "... however it may deserve respect for its usefulness and antiquity,
  [predicting the end of the world] has not been found agreeable to
  experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'
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-- 
-----------------
R. A. Hettinga <mailto: rah at ibuc.com>
The Internet Bearer Underwriting Corporation <http://www.ibuc.com/>
44 Farquhar Street, Boston, MA 02131 USA
"... however it may deserve respect for its usefulness and antiquity,
[predicting the end of the world] has not been found agreeable to
experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'