TJN: OECD’s tax evasion work ineffective

Tax Justice Network published this report today to say that the OECD's standards on tax information sharing and transparency are ineffective and even hamper the development of better standards.

TJN notes:

"...the OECD is running a 'black, white and grey' list of jurisdictions, according to its 'internationally agreed tax standard. The blacklist is empty. The grey list consists of three jurisdictions - Nauru, Niue and Guatemala. On this measure, everyone else is clean! Including some of the world's dirtiest secrecy jurisdictions, such as Panama, the British Virgin Islands and the UAE (Dubai.)

[the report shows that ] By ruling out the much better and already widely practiced alternative of automatic information exchange, the massive problem of undetected tax evasion and illicit financial flows remains unaddressed by the Global Forum process.

'It is remarkable to see how a flawed standard, created by notorious secrecy jurisdictions such as Bermuda, Cayman Islands and Mauritius together with OECD's tax havens in 2001/2002, are still so prominent. With those standards as its backbone, the G20's famous crackdown on financial secrecy remains a farce. We need to get serious about clamping down on cross-border tax evasion.'"

News from the tax transparency movement

Richard Murphy links to this review of an international tax conference hosted by the Oxford Centre on Business Taxation, in which the author quotes Lord Hollick, a businessman and influential member of the UK House of Lords Economic Affairs Committee:

"In a world of globalisation, how do single countries hold corporations to account? . . . It's hard to work out how much tax is paid where.  The disclosure regime does not get to the heart of the issue.  We need full disclosure. ... Having been an executive of a large corporation, I would be happy to do this. Companies should pay a fiar rate of tax.  We should move vigorously towards the path of transparency."

Murphy adds: "good for Lord Hollick. You can't keep a good idea down and country-by-country reporting is an idea whose time has come."

I've been working on a chapter about the rise of the tax transparency movement and its connection to economic development, will post a link to a draft soon.

Kwak on the GOP's Turn Against College

James Kwak asks, Why is the GOP Suddenly Turning Against College?  He answers:

because of two historical trends. One is globalization. The other is the anti-tax revolution.

... Today those elites have realized that they can maximize wealth for themselves and their grandchildren by cutting their own taxes (especially taxes on investment income and the estate tax), letting public education deteriorate, and either hiring workers overseas or investing in overseas assets. 

... when you have hundreds of millions of dollars invested all around the world, the health of the American economy is pretty irrelevant to your family fortune. Most Americans can't say the same.

The 1%: indifferent about their tax rate

Bruce Bartlett: Would a Higher Top Tax Rate Raise Revenues?

On Friday, Prof. Allan Meltzer of Carnegie Mellon University, a well-known conservative economist, offered a commentary in The Wall Street Journal arguing against policies to equalize the distribution of income.  [Meltzer used the Piketty Saez study, linked earlier here] to say that 'domestic policy can’t be the principal reason for the current spread between high earners and others.'

... If, as Professor Meltzer has shown, the rich get richer regardless of the tax rates, there is no economic reason not to raise the top rate. Perhaps unwittingly, his research confirms that of other economists who say that we could get substantial additional revenues even if the top rate doubled.

Everybody does it

Britain is talking about Ken Livingstone, a Labour party politician, who is being called a tax dodger because he unapologetically channels "his earnings through a company – paying 20 per cent corporation tax instead of up to 59 per cent income tax and National Insurance" on some $750,000 over the past several years.  Livingstone responds that this is "something that 'everybody else who has a small business' did, and to suggest otherwise was a 'smear campaign.'"  But he's in a bit of a difficult spot because:

"These rich bastards just don't get it," Livingstone wrote in 2009. "No one should be allowed to vote in a British election, let alone sit in our parliament, unless they are paying their full share of tax."

No representation without taxation!

Tax activist Richard Murphy posts some financials and has a go at articulating the structural features of the tax system that cerate this scenario and some fixes.

Come on and Take a Free Ride

Last week, I referred to a paper on the deficit bias, in which we see chronic under-taxation as an inevitable state of affairs in democratic nations because the perpetuity of election cycles and the influence of lobbying leads to constant tax cutting.  On the other side of the budget equation, Capital Gains and Games posts why spending is equally impossible to reduce:

"federal spending" is popular until you get to the specific programs. Then, with only a few very small exceptions, it becomes impossible.

While many polls have shown that large numbers of people want to reduce "government spending" and reduce the budget deficit, a new Harris Poll finds that only rather small minorities of the public want to cut most of the biggest federal government programs. Only 12% of the public want to see a cut in Social Security payments, 21% want to cut federal aid to education and 22% want to cut federal health care programs. The only programs of the 20 listed in the poll that majorities of Americans want to cut are foreign economic aid (79%), foreign military aid (74%), subsidies to business (57%), spending by regulatory agencies (56%), the space program (52%) and federal welfare spending (52%).

Of course this is not a new phenomenon (Krugman); it's cognitive dissonance at work (Bartlett) and it involves an extraordinary amount of ignorance about how much things cost--both overestimating things like foreign aid and how much money government wastes, and underestimating things like defense and medicare. 

Note that if the U.S. cut 100% of federal spending on foreign economic aid--that apparently most vile of all federal expenditures, it would produce a savings of about 1% of the federal budget and some impossibly small percentage of the national debt, and this is what you'd be cutting off.  That dog don't hunt.

On this topic last year, Bartlett laid out the many polls and many misperceptions (link above) and concluded:

Presumably, if people simply had better information they would make better judgments. It certainly seems obvious that if people didn’t grossly overestimate foreign aid spending they would be less inclined to think that is the only program worthy of cutting. Perhaps then they would pay more attention to the really important contributors to deficit spending such as Medicare. 

Unfortunately, the political science literature suggests that it may not matter. . . . giving people correct information not only had little effect on changing their misperceptions, in some cases it actually increased them.

People want and like and maybe even cherish the safety net, and people dislike paying / prefer to free ride to get it.  

A Government is not Like a Family.

Krugman:

"you could view Greece as being like a family that overspent, got itself into debt, and whose members now have to do all the things families do when they get in that position: slash spending on inessentials, postpone medical care and other big expenses, quit their jobs and reduce their incomes — oh, wait.

That’s the key point, of course. When a family tightens its belt it doesn’t put itself out of a job. When a government tightens its belt in a depressed economy, it puts lots of people out of jobs; and this is a negative even from the government’s own, narrowly fiscal point of view, since a shrinking economy means less revenue."

(How) Should we tax capital?

Dan Shaviro on Ed Kleinbard's "The Sorry State of Capital Income Taxation":

...a key reason for reading it is to learn (or remind oneself) about the BEIT [business enterprise income tax], which is not just a corporate integration proposal but a comprehensive plan to address how capital income is taxed under U.S. law. It would get rid of numerous formal distortions under current law (e.g., corporate vs. non-corporate and debt versus equity). In addition, it would convert the entity-level corporate tax into the equivalent of a cash-flow consumption tax, while reserving actual income taxation (in the sense of taxing the pure return to waiting) for application at the individual level.

And this is interesting:

Final question (for extra credit): Why does the corporate part of the BEIT work better than the individual part, so far as realization timing is concerned? The answer, of course, is that the corporate part is a consumption tax, while the individual part is an income tax, so realization timing matters for the latter in a way that it doesn't for the former. 

Countries don't help each other to tax, and they should.

Despite the compelling idea that a central mark of statehood is the power of the sovereign to impose taxation, it is surprising how little states help each other to tax.  Tax information exchange is virtually the only way to impose income taxation coherently in a world of footloose capital.   Yet while countries have cooperated to some extent in signing some bilateral and some multilateral information sharing covenants, in most cases they seem to do very little sharing of necessary information.

This is mostly because of the onerous identification requirements countries have imposed on themselves before they will divulge taxpayer information to each other, even under an agreement to do so.  Under the current status quo, the government that seeks information can typically only obtain it by requesting it on a case by case basis, i.e., by identifying a specific taxpayer suspected of specific tax avoidance or evasion activity.  This is hard to do when the major difficulty of mobile capital that information sharing is meant to resolve is the impossibility states face in finding out about taxpayer's offshore assets.  Worse, even when identification is possible, the other state can deny the request if local laws prohibit disclosure of taxpayer information.

That makes specific request-based information exchange "a charade," in which countries appear to agree in principle but in practice do little but defect.   The result is, countries don't help each other very much at all, and so all continue to struggle to tax effectively.

The best way to fix this problem is automatic or spontaneous information exchange.  This would mean that countries would as a matter of routine gather information about the home countries of anyone receiving income from sources within their jurisdictions, and report that this income was received to the recipients' home countries.  In simple form this means that governments would require payors of income, such as banks (paying interest on savings accounts) and mutual funds (paying dividends to shareholders), to let the government know when they make payments to their payees (such as on a form 1099), and in so doing take note of the residence of these payees.  Governments then would sort the payments by residence of the payees and send periodic reports to the home countries to apprise them that the payment has been made.

Not only is this not difficult to do, it is not untested.  Canada and the U.S. have this arrangement, and it has been called "the best existing example of what an automatic exchange of information protocol would look like."  It's a strange arrangement, in that it only requires U.S. payors to report payments made to Canadians: for now, U.S. banks are not required to report any payments made to non-Canadian foreign payees if no U.S. tax is owed (typically the case).  In turn, the U.S. government apparently only turns the pertinent info over to Canada, and not to any other country even if it has such information (possible under an odd twist to the disclosure rule that permits banks to simply collect and report residence information on all payees, rather than segregate the Canadian accounts and only turn those over).

There is no good reason not to extend this rule to all foreigners, and the only reason the U.S. has not done so is political malfunction--each time some legislator sensibly suggests that the rule be expanded to all foreigners (which happens periodically), the idea is discarded amongst cries (by lobbyists and their representatives in Congress) that the U.S. ought not to be in the business of helping other countries enforce their tax systems, that such aiding and abetting would hurt U.S. banks by subjecting them to standards more strident than their foreign competitors.

Thus the consensus seems to be that every country has an inviolable right to tax, but no country has any obligation to help the others exercise that right, and indeed, a country that does do that is only hurting itself.  That is an odd status quo.  The Canada-U.S. arrangement (along with some other similar arrangements like the European savings directive) suggests that there is something fundamentally untrue about the status quo story.  Countries can help each other, and they should help each other, and it is likely even the case that they must help each other, if any of them are to continue to have anything that resembles a coherent income tax system going forward.

Recent subsidies

sports stadiums and tar sand oil exploitation.

"A Minimum Fair Share"

Nick Clegg's 'tycoon tax' plans

"Speaking as the Liberal Democrats meet in Gateshead for their spring conference, Mr Clegg said he believes thousands of millionaires pay tax at a rate of less than 30 per cent. 

It comes after prospective US Republican presidential candidate Mitt Romney admitted he was paying just 13.9 per cent tax on his earnings. 

Nick Clegg said: "You hope that kind of thing doesn't go on in this country. So I looked into it. There are hundreds of people earning millions per year who are barely paying 20 per cent tax, forget 40 per cent, forget 50 per cent, forget 30 per cent. They are not even paying 20 per cent. Therefore, I think it's time that we look at what I call a tycoon tax. 

The deputy prime minister told Channel 4 News it is "completely unacceptable". 

"If you're earning millions per year, if you're able to pay an army of lawyers and accountants to basically pick and choose what tax you are paying, if you are paying as low as 25, 20 per cent or even less in tax, there should be a minimum fair share that you should pay to society."

America Is Stealing the World’s Doctors

From The New York Times: America Is Stealing the World's Doctors

“I do feel guilty sometimes,” said Ofori-Amanfo, who came to the United States in 1995, when he was 30. About 530 Ghanaian doctors practiced in the United States in 2006, which amounted to about 20 percent of the doctors left in Ghana, according to an article in The New England Journal of Medicine. Ofori-Amanfo, for one, doesn’t think he’ll ever return for good.

“Particularly when I look at the investment that the nation had put in me to give me my basic training and what the nation would have expected me to contribute,” Ofori-Amanfo said. “There’s a lot of guilt in that. Some cocoa farmer worked very hard to pay his taxes so I can go to school.”

What Offshore Offices Do

Tax Justice Network: Investigation exposes Vodafone's phoney Swiss operators

and from the Bureau of Investigative Journalism:

In a meeting with reporters posing as consultants, Vodafone’s Swiss branch manager revealed that:
• He is primarily a bookkeeper;
• Vodafone takes up less than 5% of his time;
• He is not involved in decision-making but follows orders from Vodafone’s Luxembourg office;
• Vodafone has a dedicated room in his office but it is almost always unoccupied.

The revelations suggest the Swiss set-up is artificial and should not escape greater scrutiny from the British taxman. They also call into question HMRC’s agreement in 2010 that the Swiss branch structure could continue untaxed in future.

For one subsidiary, profits worth $2.5bn (£1.6bn) were taxed at less than 1% in 2011  

They got a little farther than Leslie Stahl.

Is the 1% the same everywhere?

Interesting dialogue on whether rising inequality is a global trend and therefore changing redistributive policy would be ineffective.  Krugman's take.

Taxing "Wealth" (i.e. property) instead of Income

Britain is in a big debate over tax reform right now, with the conservative government proposing to drop the top individual rate of 50%.  Fifty percent!  We haven't seen that rate in America for some time. Progressives argue that this is the wrong direction; in It's time to shift the tax burden from income to wealth the argument is to drop the income tax all together and shift taxation fully on to property:

"If taxes on income are to be reduced, as they must be, either through a significantly higher personal allowance (as the Liberal Democrats suggest) or through a reduction in the basic rate, then taxes on wealth should be increased. In an age when capital is so mobile and the rich are so adept at avoiding taxation, property taxes have the merit of being easy to collect. Even the most determined tax avoider cannot move his or her mansion to Geneva. In addition, as a recent report from the Organisation for Economic Co-operation and Development noted, property taxes benefit the economy by shifting investment away from housing and into wealth-creating industries. Consequently, they are seen as less economically harmful than taxes on consumption, income and corporations."

Corporate Tax Reform & "Competitiveness"

"In a world of mobile capital, corporate tax rates matter."

except when they don't.

How the 1% have been doing

Emmanuel Saez updated his article "Striking it Richer" to include data through 2010.  From the excel tables, available on his website:

Summary of the findings from Planet Money:

"1. Over the long term, the top 1 percent have seen much larger gains than everyone else.
2. During the recession, the incomes of the top 1 percent fell more sharply than the incomes of everyone else. This happened because the stock market crashed, and the highest earners get a big chunk of income from investments.
3. In 2009-2010, when the market came back, incomes of the top 1 percent bounced back, while incomes for everyone else remained flat."

What Mormons Can Teach The IRS : Planet Money : NPR

The Tuesday Podcast: What Mormons Can Teach The IRS : Planet Money : NPR:

The Church of Jesus Christ of Latter-day Saints teaches that each Mormon in good standing should tithe 10 percent of his or her income. ... while the church is very precise about that figure — 10 percent of income — it does not tell its members what income means. 

"Which is really interesting to us economists, because we want to know how people define income," says Dahl. 

As anyone who has ever done their taxes knows, figuring out what counts as income is harder than it sounds. 

On the show today, we look into how Mormons figure out how much to tithe, and what that tells us about how people think about income and taxes.

"Civil Society" and the Contestation of Law

In a chapter I am writing for a book on tax law and development, I introduce the rise of activism in international tax policy, with groups like UKUncut and the Occupy movement bringing attention to the under-taxation of multinationals (and Bono) as a main culprit for the deep budget austerity being imposed in the U.S. and Europe.  I frame the emergence of these individuals and groups as a needed counterweight to the influence of the multinational business industry on tax policy and politics at both national and international levels.

One of the conceptual difficulties is explaining who these people are, that is, protestors and non governmental organizations that are not affiliated with business interests (i.e., not GE or Microsoft, and not CATO or Heritage).  Is this "civil society"?  No, if civil society means members of society who are not in government service, since that definition includes the multinationals against which these groups are working to gain influence over tax policy.   A Georgetown law professor just posted Conceptions of Civil Society in International Law-Making, in which she explores the normative conceptions of civil society and maps a terrain of interests and influences.  She writes:

In the past two decades, as the reach of international organizations has expanded, so has the number of civil society organizations that seek to influence international policy-making and national implementation efforts. Diverse types of international organizations have enacted consultative mechanisms to incorporate civil society input into decision-making and implementation processes. Nevertheless, and despite its widespread use, the concept of civil society remains undertheorized in the legal literature. . . . 

[C]ivil society can contribute to the legitimacy of international organizations by constituting a space where different normative legitimacy claims are constructed and debated, and where consensus (even if limited) on what the legitimacy of international organizations requires can be reached. This understanding of civil society is particularly important in issue areas likely to engender normative disagreement about the proper role of international institutions, where legitimacy questions are of particular importance. 

I'm on to final round edits on my chapter but I will try to squeeze some of this in anyway.

Instant Economist

I'm always on the lookout for books I can recommend to students that will give them a quick introduction to the basics of economics without being too partisan one way or the other and especially without reducing all taxation to deadweight loss.  Too often I start reading and then just get turned off by the tone, and wouldn't want to recommend it. But now I'm just finishing up The Instant Economist by Timothy Taylor and it seems like a solid intro that I can recommend.  He does a nice job of explaining demand side/Keynesianism and supply side/neoclassical theory and the short run/long run outlook. He has nice discussions on public goods, budgets, and deficits.  There is a nice discussion of taxation's role as automatic stabilizer and the political necessity for, yet practical limitations of, nondiscretionary stabilization methods.  Most importantly, it is short and an easy read.