Quote of the Day: Slash Taxes to Restrain Government

This is the problem with taxation. Major public corporations can move their tax domicile offshore to avoid taxes legally. The average person cannot move his labor offshore to lower his taxes, which is a disadvantage we must address with tax reform. VAT is far worse than a sales tax. Every person in the chain must collect and file paperwork. It must require three times the number of people to administer such a system compared to a point of sales tax collection.

But that issue aside, there should be ABSOLUTELY NO income taxes whatsoever. That not only eliminates government having to track everything, but it also eliminates the whole movement of capital solely for tax purposes. This is unfair, for the average person cannot send their labor offshore to avoid taxation without moving. Even then, that would only get an American the first $100,000 tax-free; after that, it would be subjected to U.S. income tax. 

The Founding Fathers of the United States revolted over taxation without representation. We are back to that now, for we are being taxed to pay interest to service debts from the last two generations. We had no right to vote on that spending, which took place before we were born. This is not a democratic process.

There should be ONLY a retail sales tax EXCLUSIVELY for local government. Federal government should be prohibited from imposing ANY tax and it should be barred from borrowing money. The local tax will naturally be checked by the free market, for if they keep raising taxes, businesses will move to the next town and there goes the jobs. This will help to restrain government on a more practical level.

This is from former Princeton Economics chairman and present day analyst, Martin Armstrong at his website.

Aside from than administrative taxation, the INFLATION TAX should be ABOLISHED.

For Many Greeks, Taxes have been seen as Theft…

…and thus massive tax avoidance and the huge informal economy.

The Wall Street Journal explains: (bold mine)

Of all the challenges Greece has faced in recent years, prodding its citizens to pay their taxes has been one of the most difficult.

At the end of 2014, Greeks owed their government about €76 billion ($86 billion) in unpaid taxes accrued over decades, though mostly since 2009. The government says most of that has been lost to insolvency and only €9 billion can be recovered.

Billions more in taxes are owed on never-reported revenue from Greece’s vast underground economy, which was estimated before the crisis to equal more than a quarter of the country’s gross domestic product.

The International Monetary Fund and Greece’s other creditors have argued for years that the country’s debt crisis could be largely resolved if the government just cracked down on tax evasion. Tax debts in Greece equal about 90% of annual tax revenue, the highest shortfall among industrialized nations, according to the Organization for Economic Cooperation and Development.

Greece’s new government, scrambling to secure more short-term funding, agreed on Tuesday to make tax collection a top priority on a long list of measures. Yet previous governments have made similar promises, only to fall short.

Tax rates in Greece are broadly in line with those elsewhere in Europe. But Greeks have a widespread aversion to paying what they owe the state, an attitude often blamed on cultural and historical forces.

During the country’s centuries long occupation by the Ottomans, avoiding taxes was a sign of patriotism. Today, that distrust is focused on the government, which many Greeks see as corrupt, inefficient and unreliable.

“Greeks consider taxes as theft,” said Aristides Hatzis, an associate professor of law and economics at the University of Athens. “Normally taxes are considered the price you have to pay for a just state, but this is not accepted by the Greek mentality.”

The above article manifests of rich political economic insights.

 

One, the typical approach by political agents in addressing economic disorders has mainly been to focus on superficiality or the immediacy—in particular “could be largely resolved if the government just cracked down on tax evasion”. 

Political solutions that fail to understand the incentives guiding the average Greeks has been the reason why tax policies continue to falter.

Two, just to be sure that non-payment of taxes hasn’t been the reason why Greeks have been struggling…

Nominal government spending based on tradingeconomics.com and Eurostat data

The above represents Greek’s government spending relative to GDP

Greece’s government debt relative to GDP (tradingeconomics and Eurostat)

Greece and Europe’s welfare state in % of GDP based on OECD data

As one can see in the above, the controversial “austerity” exists only in the mindset of the statist occult. The Greek government continues to spend at a rate more than the statistical economy and thus the ballooning debt which consequently translates to heightened economic burden on the Greek society.

Three, Greece’s (and the Eurozone’s) boom bust cycle have only exposed on the chink in the armor of Greece’s big government.

The dilemma facing Greece today exemplifies the paragon of radical changes in fiscal conditions when the bust phase of the boom cycle emerges.

This can be seen from the article: (bold mine) 

The reason isn’t just political, but economic. The country’s depression has already pushed many small businesses to the brink of collapse. Forcing them to pay more in taxes would put even more out of business—and more Greeks out of work.

“The Greek economy would collapse if the government were to force these people to pay taxes,” one senior government official said.

So the above data shows why many Greeks see their government as “corrupt, inefficient and unreliable” for them to “consider taxes as theft”

It doesn’t require a libertarian of the Rothbardian persuasion to see how taxes are theft. 

All it takes is for one to see with two eyes the real nature of how governments operates. This has been best described in the article as “corrupt, inefficient and unreliable”. 

Nonetheless here is the dean of Austrian Economics, the great Murray N. Rothbard on taxes. (For A New Liberty, The Libertarian Manifesto, p.30 )

Take, for example, the institution of taxation, which statists have claimed is in some sense really “voluntary.” Anyone who truly believes in the “voluntary” nature of taxation is invited to refuse to pay taxes and to see what then happens to him. If we analyze taxation, we find that, among all the persons and institutions in society, only the government acquires its revenues through coercive violence. Everyone else in society acquires income either through voluntary gift (lodge, charitable society, chess club) or through the sale of goods or services voluntarily purchased by consumers. If anyone but the government proceeded to “tax,” this would clearly be considered coercion and thinly disguised banditry. Yet the mystical trappings of “sovereignty” have so veiled the process that only libertarians are prepared to call taxation what it is: legalized and organized theft on a grand scale.

For the Greeks, the logical solution would seem as to dramatically pare down government spending and taxes or real austerity. These should ease tax burdens on the entrepreneurs or the productive agents that would allow them to channel resources to productive means. This should entail real economic growth.

In doing so, the informal economy should flourish and grow for the latter to integrate with the formal economy voluntarily.

But it’s not just taxes, there is the exigency to incentivize entrepreneurial activities via liberalization from excessive politicization of economic activities, specifically regulations, mandates, controls and all other politically erected anti-competition obstacles favoring entrenched interests. 

Importantly, the Greeks should embrace sound money by preventing the government from tinkering with interest rates, and the currency via the central bank and allow real competition in both the currency and the banking system.

Of course, given the size of the debt burden, debt that had benefited politicians and cronies of the past, such debt has to be defaulted on. Creditors who took the risk in financing the previous government excesses should pay their dues.

But of course, parasites would not want to end their privileges so this will hardly be the route taken. 

Politicians will continue to sell free lunch politics in order to get elected and stay the course. 

So after winning on such populist platform, the Tsipras government’s sellout to the Troika and the Eurogroup reinforces this dynamic

But since Greek’s problem has been about economics, the solution will always be about economics. Yet political solutions that fails to address the real (and not statistical) economic issues will have inevitable economic consequences.

I am reminded by this gem from author and professor Thomas Sowell:

The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.

Yet my ideal solution is the Rothbard solution; end organized theft.

Simon Black: Some of the dumbest taxes throughout history

From the ever eloquent Simon Black at the Sovereign Man:

In the days of ancient Rome, it was tradition for the upper class to liberate their slaves after a set number of years.

The Roman government, however, looked at this as an opportunity to generate revenue, and they taxed the newly freed slave on his freedom.

I can’t imagine anything more repulsive than paying tax on freedom. But they gave it a pretty good try–

In 1696, the English government under William III (William of Orange) passed a new law requiring subjects to pay a tax based on the number of windows in their homes.

Not willing to pay such a ridiculous tax on something as basic as sunlight, many Englishmen simply reduced the number of windows in their homes.

There was less light… and less ventilation… which ultimately became a public health problem.

To follow that up, England introduced a tax on candles in 1789. Making your own candles was outlawed unless you first obtained a license and paid tax on your own homemade candles.

As you could imagine, most people just did without.

Coupled with the window tax, this was a very dark time for England. And it took until the mid 19th century for the government to realize its stupidity and repeal the taxes.

But if that sounds excessive, consider the Johnstown Flood Tax.

In 1936, the town of Johnstown, Pennsylvania was devastated by nasty flood, and in its efforts to ‘do something,’ the state assembly imposed an emergency, ‘temporary’ tax of 10% on all alcohol sold in the state.

This ‘temporary’ tax remained in place for nearly three decades, at which point it was raised to 15% in 1963, and again to 18% in 1968.

The ‘temporary’ tax still exists today, proving once again that there’s nothing more permanent than a temporary government measure.

Read the rest here

For as long people’s lives are politicized there will be “dumbest taxes or legal mandates”. That’s because populist politics have always been directed at addressing the symptom rather than the disease.

I am sure there are examples in the Philippines.

Quote of the Day: The police don’t work for us

The police don’t work for us, if by “us” we mean you, me, and at least 95 percent of the rest of the population. On the contrary: we work for them, literally; we work to earn money and acquire wealth that they take forcibly from us for their own support, either by taxation or by outright confiscation (civil forfeiture). The cops don’t work for us; they never worked for us. They work now, as they have always worked, for the government, which is to say, for the small part of the population that has any nonnegligible control over the government at any level — federal, state, or local. Certainly no more than 5 percent of the population has any such control. More likely the percentage is 1 percent or less of the population.

This is from economist Robert Higgs at the Mises Blog

Shinzo Abe Increases Sales Tax as Japan’s Industrial Output Slumps

We have been repeatedly told that Abenomics or Japan’s version of central bank inflationism will deliver the magic economic growth formula for Japan's seemingly perpetual stagnation.

Lately media, banking on surveys, say that one source of optimism has been in the manufacturing index, which in August rose to 52.2 from 50.7. This has supposedly even risen to 52.5 in September. 

And unfortunately like in Europe, what people say and what people actually do have been different.

Contra surveys, real Industrial output DROPPED in August, according to the Wall Street Real Time Economics Blog (bold mine)

In a sign that Prime Minister Shinzo Abe’s aggressive economic stimulus has only produced mixed results at best so far, industrial production dropped a larger-than-expected 0.7% in August from the previous month, according to the Ministry of Economy, Trade and Industry on Monday. Economists were looking for a more modest 0.4% fall…

By category, output for consumer durables, such as passenger cars, refrigerators, TV sets and notebook computers, fell an average 2.5%.

“Recent data show that a larger portion of household income needs to be spent to pay for basic necessities, leaving much less money for discretionary items,” said the ministry official briefing reporters.

The prices of daily necessities, such as energy, have been on the rise recently as businesses started passing on the higher costs of imported goods to consumers amid a sharply weaker yen.

Output was also down in the important export sector. Production of capital goods, which are largely for export, fell 1.7%, despite the recent weakness of the yen, which should make Japanese exports more competitive. “Exporters are using a weaker yen to rebuild profit margins rather than cutting prices and boosting exports. We are waiting for them to start cutting prices and boosting output,” the briefer said.

The only good news for Mr. Abe in the figures was itself something of a mixed blessing. There was strong demand for cement and other bridge construction materials, on demand from expressway operators. Output was up 1.3% for the fabricated metals category, and up 1.0% for the ceramics and stone category

Media blames the fall in industrial production on Consumer Price Inflation (CPI).

The reality is that the bulk of Japan’s consumer price inflation for August appears to have been largely concentrated on energy and energy related expenditures such as light and transportation (red rectangles). Excluding energy (and food), Japan’s CPI even FELL by .1% annualized (lower green rectangle).

With input prices rising faster, businesses in Japan are having a difficult time passing these costs to the consumers as I explained before. So a squeeze in profits, which are distortions on economic calculation and therefore a drag on economic coordination activities, has been prompting for reduced output; no matter what media and their apologists say.

And the increases in cement and construction materials is a sign of government induced output. 

Thus, the industrial data reveals that the private sector has been reluctant to participate in real economic activities, while government activities has been bolstering statistical economic growth. Yet statistical growth is being touted as an excuse to raise taxes.

This fall in industrial output appears have been reinforced by Japan’s joblessness which likewise soared in August. Again from another Wall Street Real Times Economics blog

The main unemployment reading came in at a surprisingly high 4.1% in August, the government said Tuesday, the first rise in six months and an apparent dark cloud on a day of otherwise bright economic data. It was also higher than the 3.8% predicted by economists surveyed by The Wall Street Journal.

Media has been quick to defend this by saying that the August spike has been due to more people entering the workforce. 

However, logic tell us that when businesses dithers on investing, so will this be reflected on employment....unless the government goes on a hiring binge.

The reality is that all these extoling or media worship of Abenomics represents a (propaganda) justification for Japan PM Shinzo Abe’s call for higher taxes and more inflationism and interventions—which of course benefits the cronies than the economy.

And today PM Abe raised taxes. From today’s Reuters:

Prime Minister Shinzo Abe took a long-awaited decision to raise Japan's sales tax by 3 percentage points, placing the need to cut the nation's towering debt ahead of any risk to recent economic growth, as he now focuses on crafting a broader package of measures to address both problems further.

Mr. Abe on Tuesday promised more stimulus to cushion the impact of the sales-tax rise on the economy, stressing the nation needs both fiscal consolidation and economic growth to end 15 years of debilitating deflation.

The stimulus measures total around ¥5 trillion ($51 billion), including cash-handouts to low-income families, Mr. Abe said. On top of that, there will be tax breaks valued at ¥1 trillion for companies making capital investments and wage increases.

The so-called statistical growth of Japan’s debt laden economy has recently been driven by government spending rather than from the private sector. The industrial output data, as noted above, reveals of such disparity.

The implication is that Japan will need more debt to finance all these noble sounding crony benefiting boondoggles which will only extrapolate to increasing debt and consequently the burden of debt servicing.

And it is a mistake to believe that tax hikes will proportionally raise the required revenues for the simple reason that people respond to incentives (whether positive or negative) brought about by such policies.

Café Hayek’s Don Boudreaux explains

The reason for these outcomes is that people respond predictably to incentives – in this case, to incentives created by higher taxes.  Obliged, for example, by such a tax to pay a higher price for apples, consumers will not buy as many apples as they bought before the tax hike. Similarly, obliged – because of the tax – to accept a lower take-home price on each pound of apples sold, sellers aren’t willing to sell as many pounds of apples with the tax as they were before the tax was raised.

So Abenomomics runs a greater risks of generating lower rather than higher revenues overtime as real (not statistical) economic growth weakens further.

As I wrote three weeks back:

Raising sales tax or whatever taxes will only accelerate the downside spiral of Japan’s economy. Japanese investors have already been reluctant to invest, how would higher taxes encourage investments and more economic output?

Even a former adviser to billionaire George Soros and now a member of Japan’s upper house of parliament, Takeshi Fujimaki reportedly joined politics because he sees the inevitability of Japan crisis which he sees will occur in 2020.

With Japan’s government’s government intensifying the ponzi financed debt spending spree, I believe that a Japan credit event is likely sooner than later (2020)

Finally, seen from the yen (USD-JPY), the wonders of Abenomics seem to be stalling. This has big implications. A falling yen is a manifestation of the effects of the BoJ’s inflationism. If the yen refuses to fall further then the “inflation” on Consumer Price Index will have hit a wall. 

So this means either the current boom will turn into a bust or that PM Abe will have to significantly ante up on Abenomics via an even more aggressive BoJ.

Tick toc tick toc.

Quote of the Day: Only the IRS (taxman)

Only the IRS can attach 100% of a tax debtor's wages and/or property.

Only the IRS can invade the privacy of a citizen without court process of any kind.

Only the IRS can seize property without a court order.

Only the IRS can force a citizen to try his case in a special court governed by the IRS.

Only the IRS can compel the production of documents, records, and other materials without a court case being in existence.

Only the IRS can with impunity publish the details of a citizens debt.

Only the IRS can legally, without a court order, subject citizens to electronic surveillance.

Only the IRS can force waiver of statute of limitations and other citizen's rights through the threat of Arbitrary assesment.

Only the IRS uses extralegal coercion. Threats to witnesses to examine their taxes regularly produces whatever evidence the IRS dictates.

Only the IRS is free to violate a written agreement with a citizen.

Only the IRS uses reprisals against citizen and public officials alike.

Only the IRS can take property on the basis of conjecture.

Only the IRS is free to maintain lists of citizen guilty of no crime for the purpose of harassing and monitoring them.

Only the IRS envelops all citizens.

Only the IRS publicly admits that it's purpose is to instill fear in the citizenry as a technique of performing it's function.

This is from former US House of Representative of Idaho George Vernon Hansen. Sourced from the Liberty-Tree.ca

The confiscatory power of the taxman applies everywhere. 

The Economist: Why Americans Love the IRS

The Economist’s sarcastic takedown of the the US tax agency the IRS: (bold mine)

WHEN Barack Obama fired the acting head of the Internal Revenue Service (IRS) earlier this month, he doubtless hoped to quell the hullabaloo about its seemingly partial treatment of applications for tax-exempt status from conservative groups. The IRS selected for extra scrutiny groups whose names included conservative buzzwords, such as “tea party”, “9/12” and “patriot”. Republicans accuse the taxmen of persecuting anti-tax groups. The IRS’s defenders insist that a few low-level functionaries simply made a clumsy attempt at an administrative short-cut. But the main reason why Americans dislike dealing with the IRS is not, however, the bureaucrats’ fault. Congress keeps making the tax code more complex. It is now 4m words long, and has been changed over 4,000 times since 2001. Americans spend 6.1 billion hours a year complying with it—enough work to keep over 3m people employed full-time without producing anything. Nearly 90% of filers pay for help with their returns. The cost of all this is equivalent to 15% of the tax raised says the Taxpayer Advocate, an ombudsman. Yet change may be a long time coming. Politicians usually balk at taking on the myriad vested interests which all ferociously defend their favourite tax breaks, says Bill Gale of the Brookings Institution, a think-tank. For that reason, he argues, “tax reform is always the bridesmaid and never the bride”

To give a better picture of what the bold highlights mean

US Tax code ballooned from 400 to 72,000+ pages

Here is the basic 1040 tax form

More tax laws equals more tax breaks which serves as rewards to the politically favorite vested interest groups.

Cato’s Dan Mitchell tells us more “why the IRS bureaucracy deserves scorn”.

• It has thieving employees.
• It has incompetent employees.
• It has thuggish employees.
• It has brainless employees.
• It has protectionist employees.
• It has wasteful employees.
• And it has victimizing employees.

As Chief Justice Marshall once wrote

The power to tax is the power to destroy.

Murray Rothbard on Tax Day

Murray N. Rothbard at the lewrockwell.com on Tax Day

April 15, that dread Income Tax day, is around again, and gives us a chance to ruminate on the nature of taxes and of the government itself.

The first great lesson to learn about taxation is that taxation is simply robbery. No more and no less. For what is "robbery"? Robbery is the taking of a man’s property by the use of violence or the threat thereof, and therefore without the victim’s consent. And yet what else is taxation?

Those who claim that taxation is, in some mystical sense, really "voluntary" should then have no qualms about getting rid of that vital feature of the law which says that failure to pay one’s taxes is criminal and subject to appropriate penalty. But does anyone seriously believe that if the payment of taxation were really made voluntary, say in the sense of contributing to the American Cancer Society, that any appreciable revenue would find itself into the coffers of government? Then why don’t we try it as an experiment for a few years, or a few decades, and find out?

But if taxation is robbery, then it follows as the night the day that those people who engage in, and live off, robbery are a gang of thieves. Hence the government is a group of thieves, and deserves, morally, aesthetically, and philosophically, to be treated exactly as a group of less socially respectable ruffians would be treated.

This issue of The Libertarian is dedicated to that growing legion of Americans who are engaging in various forms of that one weapon, that one act of the public which our rulers fear the most: tax rebellion, the cutting off the funds by which the host public is sapped to maintain the parasitic ruling classes. Here is a burning issue which could appeal to everyone, young and old, poor and wealthy, "working class" and middle class, regardless of race, color, or creed. Here is an issue which everyone understands, only too well. Taxation.

Quote of the Day: Income Tax: Its unpopularity will grow with its life

POPULARITY OF THE INCOME TAX.

The Chamber of Commerce has directed an inquiry into the administrative feature of the income tax after a debate in which it was said that the tax would not affect 99 per cent. of the citizenship. It was suggested that this deprived the bill of general interest, and that it was sure to be unpopular on account of the narrowness of its application.

[...]

The case is worse than this. It will tax the honest and allow the dishonest to escape. The administrative features which the Chamber is to investigate are so complicated that those who understand them will make their taxes light at the cost of those less well informed about the law. The income tax law may be considered good nevertheless by some, but even those who approve the tax despite its faults cannot contend that the same sums could not have been raised more certainly, more equitably, and with less trouble to both payers and collectors by a stamp tax.

The experience with the tariff shows how hard it is to reduce or remove a tax once laid. It always seems better and easier to devise ways to spend the money than to repeal the tax. This fact will be better appreciated as the years pass, and particularly when the time shall come when this extraordinary tax–as it ought to be–shall be needed for an emergency. Then it will appear that this resource has been utilized and that the tax must be doubled instead of imposed initially. The tax was most popular before it was laid. Its unpopularity will grow with its life.

This is from the New York Times published in April 12, 1913 when the income tax had been made a permanent fixture in the US tax system via the Sixteenth amendment to the US constitution (hat tip Mises Blog)

Chart of the Day: How Americans Feel About Paying Income Taxes

From a study by Pew Research:

As April 15 approaches, a majority of Americans (56%) have a negative reaction to doing their income taxes, with 26% saying they hate doing them. However, about a third (34%) say they either like (29%) or love (5%) doing their taxes.

I wonder how many of those who say they like doing taxes are being honest on themselves, and how many may have been simply social signaling.

I wonder too how these "like-love" camps will feel with a slew of new or higher taxes, especially from Obamacare.

 

Here is a noteworthy quote from former Commissioner of Internal Revenue T. Coleman Andrews.

I don't like the income tax. Every time we talk about these taxes we get around to the idea of 'from each according to his capacity and to each according to his needs'. That's socialism. It's written into the Communist Manifesto. Maybe we ought to see that every person who gets a tax return receives a copy of the Communist Manifesto with it so he can see what's happening to him.

Here is the link on 10 planks of the communist manifesto

Curse of the Laffer Curve: Why Manny Pacquiao Prefers His Next Fight Outside the US

Boxing legend Manny Pacquiao seems to have joined the list of celebrities in implicitly denouncing class warfare policies by voting with their feet. 

More signs of the curse of the Laffer curve (elasticity of taxable income) in motion.

From Yahoo.com

Manny Pacquiao's chief adviser insisted Monday that the Filipino superstar's preference is for his next bout – a fifth fight against Juan Manuel Marquez – to take place away from Las Vegas, with the off-shore Chinese gambling resort of Macau emerging as the "favorite."

Michael Koncz told Yahoo! Sports that the 39.6 percent tax rate Pacquiao would face if he were to fight again in the U.S. makes a fall bout in Las Vegas "a no go."

Promoter Bob Arum is hopeful of arranging a fifth match between Pacquiao and Marquez in the fall, potentially on Sept. 14. Arum's preference is for the fight to be at the MGM Grand in Las Vegas, which is his company's home base.

But Arum and Koncz say Pacquiao is balking at the additional money he'd lose to the government if the fight were held in Las Vegas. Arum said Pacquiao would not have to pay taxes if the fight takes place in casinos in either Singapore or Macau.

"Manny can go back to Las Vegas and make $25 million, but how much of it will he end up with – $15 million?" Arum said. "If he goes to Macau, perhaps his purse will only be $20 million, but he will get to keep it all, so he will be better off."

Mr. Pacquiao appears to have learned his lessons from his domestic experience.  

Philippine tax authorities has continually been pressuring, if not harassing, by filing criminal charges against him for "failing to present his tax records"in 2012. 

The persecution of Mr. Pacquiao may have been politically motivated. This can be traced to his previous endorsement of the opposition in the 2010 presidential elections, as well as having joined the opposition political party of led by vice president Jejomar Binay (PDP Laban) in 2012.  Mr. Pacquiao has also been known ally of the ex-President GMA.

Nonetheless international celebrities opting to vote with their feet, which serves as an implicit tax protest, signifies as more bad news for the welfare-warfare state.

Statist Tax Fantasies Unmasked: Two-Third of UK Millionaires Vanish

Once again, reality has made an abject spectacle of popular statist’s fantasies about “class warfare” or “soak the rich” tax policies where tax rates are seen as having linear effects on tax revenues. 

The axiom “if you tax something, you get less of it” seems to have been proven valid anew.  

In Britain, 2/3 of millionaires swiftly vanished (or in just a year!) in the face of 50% tax rate increase. 

From the Telegraph, (bold mine)

Almost two-thirds of the country’s million-pound earners disappeared from Britain after the introduction of the 50p top rate of tax, figures have disclosed.

In the 2009-10 tax year, more than 16,000 people declared an annual income of more than £1 million to HM Revenue and Customs.

This number fell to just 6,000 after Gordon Brown introduced the new 50p top rate of income tax shortly before the last general election.

The figures have been seized upon by the Conservatives to claim that increasing the highest rate of tax actually led to a loss in revenues for the Government.

It is believed that rich Britons moved abroad or took steps to avoid paying the new levy by reducing their taxable incomes…

Far from raising funds, it actually cost the UK £7 billion in lost tax revenue.

The above account shows that amplified elevation of tax rates equals a considerably smaller tax base and significantly lower tax revenues. Maybe politicians should learn about the Laffer curve or the elasticity of taxable income.

In terms of politics of taxation, the Philippines seems to have a parallel experience: When taxes on gold sales were substantially raised, this prompted for a surge in gold smuggling and a similar collapse in tax revenues.

The same phenomenon will likely beset the local version of the proposed sin taxes, which is being pushed by international agencies as Moody’s and the IMF. 

As side note, is the Philippines in a crisis for them to keep intervening by pushing absurd policies (higher mining taxes, SMS tax etc...) and whetting on the insatiable spending appetites of local politicians for a debt financed consumption driven model of economic development?

Yet the blowback from its legislation will likely boost the informal economy and lubricate further corruption, in the same way sin taxes failed in the UK,

We should learn from the lessons from the unmasking of, or the blatant failures of political magical thinking.

Into the Eyes of the Gorgon: IMF’s Endorsement of the Philippines

The mainstream implies that accolades made by the IMF on the Philippines must be read as bullish for the stock market.

I’d say that the Philippine stock market and the IMF’s approval are two different issues.

Well with the IMF pushing for SMS Taxes[1] as well as Sin Taxes[2], the only thing bullish here is for politicians, who will have more political control over the populace, but not necessarily more money.

As I pointed out earlier[3], Sin Taxes in the United Kingdom have not only failed to achieve the desired tax revenues and the supposed morality to be attained from such a regulation. Instead sin taxes spawned a bootleg industry, increased health risks of alcohol patrons who decided to go underground, and importantly increased corruption, as well as risks of violence.

Sin taxes are equivalent to prohibition laws focused on human vices like drugs, cigarettes gambling, prostitution and etc… that seems noble sounding humanitarian based, but have been hardly in touch economic reality.

As exiting US Congressman Ron Paul said in one of the greatest speech ever[4],

Humanitarian arguments are always used to justify government mandates related to the economy, monetary policy, foreign policy, and personal liberty. This is on purpose to make it more difficult to challenge.  But, initiating violence for humanitarian reasons is still violence.  Good intentions are no excuse and are just as harmful as when people use force with bad intentions.  The results are always negative.

Importantly a common mistake has been to misinterpret taxes rates as a constant or linear function of revenues. An important economic axiom to realize is that “when you tax something, you get less of it.”

And such economic law applies to the effects of raising taxes on gold sales that has only prompted for the skyrocketing of smuggling activities[5] from the output of small scale gold mining or the informal gold economy in the Philippines. In fact, some lawmakers have appealed for the repeal of these taxes[6].

Rampant smuggling has not been limited to gold but has broad based.

According to an Inquirer report[7], smuggling activities in the incumbent administration has exploded to a $39.2 billion industry, or an average of $19.6 billion per year or for the two years of President Aquino’s tenure. This is far from the average of $3.1 and $3.8 billion for the Estrada and the Arroyo administration respectively. As a side note, mainstream economists may deny it but this seems to be one of the real factors contributing to the economic vitality. 

Political agents and the apologists of the state would like make us believe that edicts, ordinances and regulations can supplant the law of economics. Guess who will be wrong?

Or is it that President Aquino realizes that the informal economy has been real force behind the growth in the domestic economy for him to promote populist regulations that drives economic activities underground? So could he be hitting two birds with one stone?

Another more important point is that the diversion of productive resources to redistributive unproductive or politically directed activities will eventually lead to more debt and more inflation whose outcome will be worse than the cumulative effects of individual’s vices. Think Greece.

SMS taxes regardless of the form, on the other hand, will raise the cost of texting at the expense of consumers. Given that the mobile phone market will reach nearly 100% in terms penetration level[8], this implies that kernel of text users are likely to be from the middle to the lower income levels. 

So IMF’s Christine Lagarde in essence discriminates the poor by taxing them in favor of the political class.

Should I be bullish with the IMF’s endorsement? Ms Lagarde’s acclaim seems tantamount to the risk of catching the eyes of the mythical gorgon: victims turn to stone.

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[1] Manila Bulletin IMF chief says SMS tax could help Philippines November 16, 2012

[2] GMANetwork.com Sin tax bill a transparent way to raise revenues — IMF’s Lagarde November 16, 2012

[3] See The Unintended Effects of Alcohol “Sin” Taxes: UK Edition November 26, 2012

[4] See Video: Ron Paul's Farewell Speech to Congress November 15, 2012

[5] See Philippine Informal Gold Mining Industry Booms August 24, 2012

[6] Inquirer.net Stop gold tax, BIR urged November 12, 2012

[7] Rigoberto Tiglao Smuggling at its worst under Aquino Inquirer.net November 14, 2012

[8] GMANetwork PHL mobile penetration to hit 100 percent in 2012, telco claims July 17, 2012

How Tax Policies Affect Investments

From Steven M. Davidoff at the New York Times (bold emphasis mine)

Apple has a cash problem. It’s not just that Apple has too much cash, $76 billion as of June 30. It’s rather that the bulk of that pile, estimated at $41 billion, is held abroad.

Apple does not want to bring it back to the United States for several reasons, primarily because of the tax consequences, but also because of its own growing foreign presence. Apple is not alone — this problem is an increasing one in corporate America. And the answer may not be more big, all-cash acquisitions, like Google’s $12.5 billion offer for Motorola Mobility.

In an analyst report in May, JPMorgan Chase estimated that 519 American multinational corporations had $1.375 trillion outside the United States. The problem is particularly acute among technology companies, which historically tend to hoard cash because of the cyclical nature of their business.

A recent Moody’s report noted that Microsoft held $42 billion abroad, or more than 80 percent of its cash. Cisco Systems has $38.8 billion, or almost 90 percent of its cash. Google — at least before Monday’s deal — had nearly $40 billion in cash, with more than 43 percent of it held abroad

Tax policy is driving much of this trend. For multinational corporations, cash earned abroad cannot easily be remitted to the United States. If it is paid back to the United States, it is subject to a dividend tax that can rise to as much as 35 percent. Companies are loath to pay this tax because while they can offset it with taxes paid abroad, the companies still end up paying a relatively high tax rate.

Again, tax policies are seen as one of the major forces in prompting for distortions of investment decisions. This greatly affects the allocations of resources or the economy.

In the case above, money which should have been used for more investments or for paying off shareholders in the US has been hoarded overseas.

On the other hand, globalization is an issue too. (bold emphasis mine)

Yet it is not just a tax issue. Many United States companies want to keep cash abroad to focus on high-growth regions for investments and acquisitions.

A recent Standard & Poor’s study found that 50 percent of sales by companies in the S.&P. 500-stock index are outside the United States. Interestingly, the report also found that these companies paid more in foreign taxes than to the United States government. For Apple, 60 percent of its sales are abroad, and like these other companies, its foreign sales are expected to only go higher.

So, for those who expect that a change in tax policy would prompt Apple and other companies to put their cash piles to use in the United States, don’t be so sure. Even if there were no dividend tax, a large portion of this cash would stay abroad as these companies focus on higher growth overseas for investment.

Of course there many other domestic factors involved too which contributes to investment or resource allocation dynamics, this comes in the substance of monetary policies, regulatory climate, growing heft of political distribution of resources (seen via deficits) and etc.

The above evinces that world is complex, with variable interloping factors at work and simply can’t be ‘modeled’.

Point is: political actions affect the economy, most of them negative.

As a caveat, this not only applies to the US but everywhere including the Philippines. Thus, we have to be vigilant with politicos calling for more regulations or taxes or other interventionist measures.

US Government’s War on US Expats and American Investments Overseas

I have been saying that the US government has increasingly been intruding in the marketplace or applying financial repression for implicit political reasons.

This time the object of their engagement appears to be American expats and possibly overseas investment by American residents! In other words, the US has declared war with her own citizens.

From Financial Times’ Gillian Tett [bold emphasis mine]

This summer, the senior management of one of Asia’s largest financial groups is quietly mulling a potentially explosive question: could it organise some of its subsidiaries so that they could stop handling all US Treasury bonds?

Their motive has nothing to do with the outlook for the dollar. Nor does it reflect fears about the US debt ceiling (or the risk that the US will soon default if it fails to raise the legal limit on bond issuance).

Instead, what is worrying this particular Asian financial group is tax. In January 2013, the US will implement a new law called the Foreign Account Tax Compliance Act (Fatca), that forces all global financial companies to report details to the IRS, the US tax authority, of any clients linked to the US with more than $50,000 in an account. These rules, quietly passed by Congress last year, would partly put the responsibility on the bank or asset manager – not just the individual – to make this filing.

The IRS insists that these measures are simple for banks and asset managers to implement; they just need to perform an electronic “sweep” of their clients to track those with more than $50,000 in an account and obvious connections with the US, such as an address, Treasury officials argue.

“The US interest is to have reporting on accounts to stem the tide of offshore tax evasion,” says Manal Corwin, a senior official at the US Treasury, which hopes the measures could net billions of dollars of badly needed new revenues.

While this logic might sound sensible, the new rules leave some financial officials fuming in places such as Australia, Canada, Germany, Hong Kong and Singapore. Little wonder. Never mind the fact that implementing these measures is likely to be costly; in jurisdictions such as Singapore or Hong Kong, the IRS rules appear to contravene local privacy laws. After all, as Terry Campbell, head of Canada’s banking association, points out, the rules are essentially akin to “conscripting financial institutions around the world to be arms of US tax authorities”.

What has left some financiers doubly angry is that Congress introduced the law with little overseas consultation – but the IRS is now threatening heavy penalties for non-compliance.

More specifically, the IRS is threatening to impose a withholding tax of up to 30 per cent on sales of US assets by groups that it deems to be “non-compliant” – and the assets could include US shares or US Treasury bonds.

Hence the fact that some non-US asset managers and banking groups are debating whether they could simply ignore Fatca by creating subsidiaries that never touch US assets at all.

“This is complete madness for the US – America needs global investors to buy its bonds,” fumes one bank manager. “But not holding US assets might turn out to be the easiest thing for us to do.”

Whether anybody follows through on this threat remains doubtful. In practice, banks in places such as Canada, Australia and Germany say that it would probably be impossible for them to not handle US Treasuries or stocks. Some are consequently considering whether they should shun US citizens as clients instead.

In the name of tax evasion, this time taxes are being deployed as instruments for repression and implied interventions on the actions of market participants—“threatening to impose a withholding tax of up to 30 per cent on sales of US assets by groups”.

Also regulations imposed on foreign institutions will likely to create geopolitical frictions and other untoward effects, some of which have been explained above.

Maybe legendary investor Jim Rogers got them all so roiled up.

Again we are seeing increasing signs of desperation.

Could capital controls be next?