Michelle Caruso-Cabrera of CNBC wrote yesterday about why Swiss bank accounts are a good thing. Not sure what MCC was smoking. She writes “This week's agreement between UBS and the Internal Revenue Service to reveal the names of Americans holding secret Swiss bank accounts ... is a terrible thing. There are going to be major unintended consequences.
Somehow, MCC has determined “You may think this is about rich tax cheats—but no matter what your income is—your taxes are lower because of tax havens. And they help prevent tyranny by corrupt governments.”
I spent many years in tax policy. I haven’t heard that one before. In fact, much of the focus is on collecting the uncollected taxes. If you could collect the billions that are lost in the gray market, the theory goes, you could lower taxes for the law abiding taxpayer. After reading her article, I still can’t see how my taxes are lower due to tax havens.
The United States like many countries essentially has a voluntary tax system. Not voluntary as the tax protesters like to think in the sense that it is optional, but voluntary in the sense that we file returns of our income. If you are a wage earner and have little else, it doesn’t feel too voluntary as you have the taxes withheld. But, if you have self-employment income, dividends, interest, capital gains, barter income, gray market income, etc., you soon see how the system relies upon the truth and honesty of the taxpayer. You can play audit roulette and hope the IRS does not catch up with you.
Schemes to hide money offshore have existed since there was an income tax. The United States taxes its citizens (and resident aliens) on worldwide income. So, your interest in that Swiss account or in Costs Rica is as taxable as the interest from your local bank. But, we rely on you to report it.
Still, MCC, argues we are better off due to tax cheats. “Do you know which country in the world is the biggest tax haven?,” she asks, “The United States. The U.S. government generally does not tax interest and capital gains received by foreigners who invest in America, according to Dan Mitchell from the Cato Institute. And guess what, if a foreign government came to us to get that information, we would have no information to give them because the IRS doesn't collect it.” Actually, it is a bit oversimplified but let’s not get into portfolio income and nonportfolio, backup withholding and all that. Let’s assume that most of our foreign investors are indeed not taxed, most likely because the treaty with their country says we won’t tax them. Their home country can tax them. Just as we tax the Swiss interest.
MCC goes on “But now every foreign country can come to us and say: "Hand over information about our citizens—you made the Swiss do it."Think about that. Hugo Chavez of Venezuela, who is stealing his citizens' property in seizures every day, can come to us and say: "These people are evading my taxes." Should we hand that information over to him? By this action, we give him the moral platform to do so. “
Michelle, we have had tax information sharing agreements with many countries for a long time. This is nothing new. And yes, we have a duty under those agreements to help avoid tax evasion elsewhere just as we seek their help in avoiding it here.
She goes on “If you still don't think tax havens are about preventing tyranny, remember why Swiss banking privacy laws were strengthened in the first place: To help Jewish people hide their assets from Hitler's Gestapo. I am not, and do not advocate people cheating on their taxes. But tax havens help keep your taxes lower by providing tax competition. It's no surprise that countries like France, Italy and Germany are the biggest complainers—they have high taxes and they want the rest of the world to have high taxes as well. And the U.S. is getting there too. “
She has just turned the entire world of tax policy on its head. Tax havens are good now. They provide competition? But if they do that only if you do not declare your income, then isn’t Michelle indeed urging people to cheat on their taxes? Interest I earn in Switzerland is subject to tax just like interest earned here. In a worldwide system of taxation it must be. So, Michelle, it remains very hard to understand what you are advocating and why.
Truth is that with a tax system like ours, we, as citizens, are best served if every person honestly reports their income and pays their fait share. Those who cheat on their taxes do not cheat the government. Washington will just raise taxes, borrow more or print more money. Those who cheat on their taxes cheat on all the others who don’t, those others who end up paying more.
See, the problem is that MCC seems to assume that there is a magic tax rate out there that tax havens held keep down. In truth, the federal government has a certain revenue need and it taxes what it must to meet those needs. Tax havens produce leakage in the system. They do not reduce taxes.
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Comments
The Swiss did such a good job of hiding Jewish money that even the heirs didn't know about it. This was a big scandel within the last year or so. Is Michelle Caruso-Cabrera disconnected from the real world?
I don't know. I thought at first that she might be trying for irony but it was clear watching her on CNBC that she believes what she wrote.
The argument about tax havens keeping tax rates down is as follows.
1) The higher tax rates are the more people will lie and cheat to avoid them.
2) The easier it is to hide from the tax man, the more people will lie and cheat to do so.
3) The Laffer Curve does indeed exist. There is some tax rate at which higher tax rates will lead to lower revenue collection.
4) The more tax havens there are and the easier it is to use them the lower that Laffer Curve rate will be for reasons 1) and 2).
Thus, tax havens, by making it easier to avoid taxes lead to lower tax rates being imposed because they lower the tax rate at which you start to lose, rather than gain, revenue by raising tax rates.
Tim, that theory depends upon a belief that you can choose to tax only up to the maximum point. It assumes that budgetting is revenue driven. With some much of the US budget being entitlement in nature, our budget is very much Expenditure driven and we find ourselves taxing to the level necessary to collect that revenue. That said, the best way to be sure everyone pays their fair share is to close down the tax havens. Rather than praise them, responsible tax policy says that we need the revenues necessary to fund those programs we must have and all Americans are responsible for paying their share. Regardless of how we glamorize it, those who hide income off shore are acting illegally and we should applaud IRS effort to get at them.
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