Posted on 05/01/2002 4:58:23 PM PDT by Action-America
For Immediate Release
Tuesday, March 12, 2002
202-285-0244
www.freedomandprosperity.org
Tax Reform, not Fiscal Protectionism, is the
Right Response to Corporate Flight:
CFP Reiterates Call for Territorial Taxation
Washington (March 12, 2002) – The Center for Freedom and Prosperity, the nation's leader in the fight for international tax competition, announced today that it will vigorously resist all legislation to restrict the freedom of companies to locate in jurisdictions that have more attractive tax and regulatory environments. Andrew Quinlan, President of the Center, remarked, "Fiscal protectionism is bad policy, and the Center for Freedom and Prosperity will oppose and work vigorously to defeat any legislation seeking to stifle tax competition." Quinlan explained that, "High-tax California should not be allowed to stop companies from moving to low-tax Nevada, and Washington politicians likewise should not be able to stop companies from escaping bad U.S. tax law."
The United States taxes American-based companies on income earned in other nations. This "worldwide" system of taxing corporate income is thought to be very anti-competitive, causing many companies to give up their U.S. charters and instead become foreign-based companies. This has created a debate. On one side are lawmakers who want to meet the challenge of foreign competition, preferably by junking "worldwide" taxation and instead shifting to a "territorial" system that would only tax companies on their U.S. income. On the other side are politicians who want to preserve "worldwide" taxation and instead impose restrictions on the ability of companies to re-charter in other jurisdictions. Representatives Richard Neal (D-MA) and Scott McInnis (R-CO), for instance, have introduced similar bills, H.R 3884 and H.R. 3857 respectively, that would allow the IRS to tax the non-U.S. income of non-U.S. companies.
Proponents assert that legislation is needed because companies choosing to re-charter in other jurisdictions will evade or avoid U.S. tax, but Daniel Mitchell, Heritage Foundation Senior Fellow, dismissed this charge. "All corporations, regardless of where they are based, pay tax to the IRS on all profits they earn in the United States," he explained. Responding to the charge that these companies are being unpatriotic since expatriation means they no longer would be obliged to pay taxes to the IRS on income they earn outside America's borders, Mitchell said, "America should not be taxing income earned in other nations. If politicians want to preserve bad tax law, they are the ones who should be blamed when companies are forced to relocate."
Veronique de Rugy of the Cato Institute added (see related de Rugy article here), "The correct response is to fix the internal revenue code. These companies are relocating because worldwide taxation makes it very difficult for U.S.-chartered firms to compete. Territorial taxation is the answer." She also explained that, "Expatriation helps U.S. workers and U.S. shareholders. The newly formed foreign company still maintains its U.S. operations, but now is able to more effectively compete with businesses that operate overseas."
See Related articles on FR:
(For convenience, I added links in the above article, to the referenced legislation and the de Rugy article.)
However, this level of attention by such widely recognized sources does not necessarily bode well for our economy. In fact, a profusion of such articles at this time will only serve to convince more wealthy individuals and corporations that the time has come for them to make the move offshore, as well.
Until such time as the United States government implements the totalitarian step of closing the borders to US Citizens, the wealthy will always have the option of leaving, regardless of what other laws the government passes. The problem is that many of the wealthy see such legislation as that referenced above, as a strong indication that the once unimaginable concept of closed US borders, is no longer beyond reason. An expatriate friend of mine expressed it best, when he said, "I got out while I still could."
That may sound pessimistic. But, it is really nothing more that good risk management. Companies and individuals with a lot of wealth must constantly evaluate their position. When the risk to any of their assets becomes to great, they must act to reduce that risk. They may not believe that the US government will close the borders. But, the extremes of recent legislation in this area clearly indicates that it is no longer beyond the realm of possibility. If there are safer options available that will continue to produce similar or better profits, it would be ludicrous not to exercise them.
Furthermore, where corporations are concerned, the officers are obligated take all reasonable steps to insure the continued profitability of the corporation. If they fail to take advantage of such an obvious safety measure and the company should lose money as a result, the stockholders would have grounds for a suit against the officers. At the very least, they could be ousted from their cushy positions with the company.
Wealthy individuals and corporations are leaving in significant numbers.
The answer is not the siege mentality that is so prelevant in Congress. Instead of offering up legislation meant to force wealth to stay here, they should be passing legislation meant to entice wealth to stay.
The single thing that the government could do, that would not only encourage wealth to stay, but would actually entice previously expatriated wealth to return, is to pass one of the National Retail Sales Tax bills that is currently in Congress. As long as the IRS remains a functioning entity, capital flight will continue. If articles like the ones above continue to proliferate, that capital flight will increase.
But just remember that as the wealthy leave, taxes for everyone else will be forced up to make up the difference. If only the top 1% of income earners leaves, that would mean that taxes for everyone who is left would have to go up more than 55%, just to keep revenue level. Think about it ...
That's more correct than you might guess.
Though certainly not a macroeconomic expert, I'm studying that field in depth, including economic development of 2nd and 3rd-world countries... And the similarilities between conditions leading to capital flight from the Russian Federation (1994-1997), and conditions here in the USA, are quite striking.
Considering the national debt load has exceeded anything heretofore seen, the tax rates are outrageously high, illegal immigration is sapping current govt. programs and tax avoidance/evasion is at an all-time high, the confidence level people have (for the govt.) in this country must sag. These factors (especially the high tax rate), coupled with the authoritarian and arbitrary laws which hobble the progress and profitability of any serious firm, naturally will make it not only prudent, but the smart move, to send capital and business out of the USA, to countries more "appreciative" of the business opportunities afforded by such a decision.
Government officials are truly leaches on society- they "extract" the maximum amount of resources (read that as "Money") possible, while still having the host live, albeit not enjoying a very pleasant life... Today's officials believe that business and corporations are eeeeevvvvviiiiilllll, that they don't deserve to exist, and are therefore attempting to tax/regulate them out of existence.
From all this, the capital-flight syndrome is born, and will continue to gain steam, until the backlash is so great the government backs off, or an economic collapse results.
Pretty grim, to be sure... But from my (admittedly rookie-economist) viewpoint, I can't really see any way out of this. You might say "it's not likely..." But the fact is, this situation has never existed before. We have no way of knowing for sure...
Be well,
You and I have certainly had our disagreements about income taxes. But on this topic...? Where do you stand on this issue?
"And the similarilities between conditions leading to capital flight from the Russian Federation (1994-1997), and conditions here in the USA, are quite striking."
Check out capital flight in Apartheid era South Africa. They even closed the borders to any substantial amount of money going out of the country without government approval. I don't remember the exact limit you could take out, but I recall that it was about enough for a nice three week vacation.
I bring this up, because it looks like we are heading in the same direction.
If you have not read it yet, check out the article, "Tick-Tick-Tick - The Economy Bomb" on the Action America web site. Check out the numbers and the many links to back them up. I intentionally avoided addressing some of the possible projections from that data, because most people would either not understand or would not want to accept the conclusions. But, since you are into macroeconomics, you will probably find it interesting to play with the numbers. But I'll warn you. Some of the projections can get truly scary.
"April 24, 2002 Identical Letters Sent To:
Senator Max Baucus
Senator Charles Grassley
Representative William Thomas
Representative Charles Rangel
Dear .....:
American-based companies must pay tax to the IRS on income earned in other nations. This "worldwide" system of taxing corporate income is very anti-competitive, causing many companies to give up their U.S. charters and instead become foreign-based companies. These "expatriations" are legal, but have become controversial. Lawmakers likely will choose from two options in deciding how best to respond to this development.
The rest of the letter is available right here.
It is worth the read and in particular, note who signed the letter. The National Retail Sales Tax Alliance joined the Coalition for Tax Competition after the letter was sent.
According to the Tax Foundation, in 2001 the average American paid 23.6% of his or her income in federal taxes, plus 10.2% in state and local taxes - 33.8% total.
Dr. James Payne of the University of California, Reason Magazine '94; found that in addition to direct taxes we also pay huge, hidden taxes including:
- Tax compliance costs: record keeping, reporting, filling out forms, and learning about tax regulations.
- Costs of tax enforcement: resources expended in responding to the tax authority. Each act of tax enforcement--each audit, each notice, each levy--entails a burden for the citizen subject to it.
- Tax disincentive costs: the loss of production because of the discouraging effect of taxes on investment and labor.
"When the overhead costs are added together, (24 percent compliance costs, 33 percent disincentive costs, and 8 percent other costs), they total 65 percent of tax revenue."
And even that figure doesn't include the cost of import duties, license fees and other government regulations. For a typical U.S. family, the real cost of taxes and regulations as a percent of gross income is at least:
Federal taxes 23.6%(taxfoundation)
State & local taxes 10.2%(taxfoundation)
Overhead costs 21.9%(James L. Payne)
Regulatory costs 13.0%(M.W. Hodges)
More than 68% of one's income is now consumed by government through tax collections, compliance costs & regulation.
The single thing that the government could do, that would not only encourage wealth to stay, but would actually entice previously expatriated wealth to return, is to pass one of the National Retail Sales Tax bills that is currently in Congress. As long as the IRS remains a functioning entity, capital flight will continue.
The bottom line:
Rep. Bill Archer, Chairman, House Ways and Means Committee:
- "A recent survey was done, in Europe and Japan, of the major corporations and I was astounded at the results. They were asked, 'If the US abolished its income tax and went to a sales tax, would that have any impact on your decisions?' Eighty percent of the corporations said they would build their factories in the United States of America. Twenty percent said they would move their international headquarters to the United States of America."
I support a retail sales tax (it is far better to tax people on consumption than on production), with a constitutionally mandated cap (my proposed cap: 10%) that may be breached only during a state of declared war. Said breach of the cap would require a 3/4ths vote of both houses of Congress to implement. Upon termination of hostilities, the cap goes back into place. The tax shall be clearly enumerated on the sales receipt.
(it is far better to tax people on consumption than on production),
Your in good company on that belief:
- It is fairer to tax people on what they extract from the economy, as roughly measured by their consumption, than to tax them on what they produce for the economy, as roughly measured by their income
Why punish those who provide a benefit to society through their production, and reward those who take from society through consumption? Somewhere along the line we seem to have gotten our priorities back(_|_)ward.
ONE MORE TIME:
IT’S ABOUT P O W E R AND C O N T R O L!!
SIGN THE PETITION AT HTTP://WWW.VOTR.ORG. Then find out how you can do more to end America’s peculiar SPRING MADNESS.
(my proposed cap: 10%)
Watch out for caps expressed as percentage without defining a percentage of what.
1% when applied to all banking transactions is a larger federal tax burden than what we experience today.
See: the 1% Freedom Fee(PDF file), proposal for nightmares:
"Annual trade in this country can be calculated fairly accurately by adding up all the checks paid in a year. In the banking industry, that simple sum is called "debits"... the total amount of checks cashed by the banks.
Debits, according to the Federal Reserve Bulletin dated December 1994 are running about 360 trillion dollars a year and the cost of Federal Outlays are about 1.5 trillion dollars a year. Now divide the $1.5 trillion cost of government by the $360 trillion to determine the percentage each of us should pay to support the government in a fair and equitable way. That fair share is just over 4 tenths of one percent!"
14.91% ..... rate if Social Security and Medicare were privatized
14% .......... rate if Nat'l Endowment for the Arts were eliminated
11.9%........ rate if Dept. of Education were eliminated
10% .......... rate if welfare were eliminated
etc.
9.8%.......... rate if foreign aid were eliminated
Hmmmmmm....... It's do able, with time and effort, once the blinders are removed from the electorate's eyes.
The key, as in all things, lay with the people and what they ultimately buy into. Until the blinder's are off, and the butcher's bill is seen for what it is in reality, there will be no push for smaller government.
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