Thursday, January 3, 2008

Some Tax Haven/Tax Competition Points


Why Tax Competition Is Good for You

What's "tax competition" and why should you care about it?
In a nutshell, (which is where Will Rogers said all economic theories originate), tax competition exists when national governments lower taxes, specifically to encourage investments and cash flow or to urge financial resources to stay at home.
Usually this means a government creates an official strategy to attract foreign direct and indirect investment into the country.
The government also might invent tax incentives to attract high value human resources (bankers, investment firms) to the country. These tax incentives might include low corporate and individual income taxes and/or special tax preferences for foreigners. And low taxes keep locals at home.
The Birth of Tax Havens
Thus "tax havens" were born. All over the world, tax havens are places where foreigners can house their assets, do business and pay little or no taxes.
Good example: Panama, a nation that has a "territorial tax" policy. Panama only taxes business and personal income actually earned within its borders. You can base your business in Panama, but you and your business can earn tax-free income from offshore sources.
Other no or low tax jurisdictions include Monaco, Andorra, Belize, Singapore, the Channel Islands and the Isle of Man. And - for foreigners only - the United States and the United Kingdom are also tax havens.
Prudent individuals look at taxes as a business cost that either adds to subtracts from their desired profits. Thus smart folks looking for more profits go where there are no taxes or low taxes.
Let the Tax Competition Begin
Two good examples of tax competition were in the news this week.
From Amsterdam, a new poll showed that many wealthy Dutch residents want to move elsewhere in 2008 to escape the higher income taxes. At least 4% of those polled are considering leaving and becoming a taxpayer in another, lower tax country.
The Netherlands is an EU member state, so Dutch citizens have the option to make their home in any other EU nation. And some EU states, like Ireland and Cyprus, have much lower taxes.
Among the wealthiest Dutch polled, almost 10% say they are considering moving to avoid the proposed new taxes. (This relocation tactic won't work for U.S. persons, because U.S. income tax laws apply to all income, no matter where the U.S. person lives.)
The second example comes from Washington, D.C. The U.S. Treasury Department released a report alleging that American-owned companies that use tax havens are shifting "substantially all of their income out of the United States."
While this is legal under U.S. tax law, the report to Congress claimed that a dozen companies are using a technique known as "earnings stripping" to avoid or minimize taxes on their U.S. profits.
The study looked at companies that have their headquarters in offshore tax havens, while also continuing to operate out of the United States. Of course, the U.S. imposes one of the highest corporate taxes (35%) in the world. No doubt these higher corporate taxes inspired these tax-saving offshore moves.
In both cases, tax competition attracts smart folks to go where taxes are lower - as well they should.
Furious Tax Collectors
Naturally, this tax competition and taxpayer mobility infuriates tax collectors in the socialist welfare states, including the U.S. IRS.
The leftist big spenders claim that what we all need is "tax harmonization." In other words, they want high taxes everywhere for everybody.
For example, the paid propagandist, the Organization for Economic and Community Development (OECD), claims, "tax should not be the dominant factor in making capital allocation decisions." The OECD also says that low-tax policies "distort the location of capital and services."
Instead, the OECD wants nations to have the power to impose taxes on worldwide income. In doing so, tax collectors could ensure that taxpayers always face the same tax rate regardless of where they earn their income or where they live.
European nations generally have very high tax burdens. (One nation, Ireland, has very low taxes and has the greatest prosperity as a result.) Government spending consumes nearly half of economic output in EU countries, compared to one-third of GDP in the United States.
Not surprisingly, this translates into a higher tax burden, which means jobs and investment capital generally flee Europe. Tax harmonization is an attempt to stop labor and capital from escaping by creating, for all intents and purposes, a "fiscal fence" to force tax slaves to stay at home.
A Positive Good
For U.S. persons, (citizens and resident aliens), there are minimal tax savings by going offshore - but there are some. There is also far better asset protection and financial privacy guaranteed by the local's laws.
That's why tax competition is a concept to be encouraged - only because it forces all nations to keep taxes lower than they would be otherwise.

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