FactsPlusLogic
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ATOMIf tax rates on the rich get too high, they just pick up and move out. There are rich, so they can afford to pick up and move. The same logic applies to rich corporations wishing to escape taxes. Domestic laws cannot stop this for the same reason that one country cannot impose taxes on another.
Reagan cut the top tax rate in the U.S. from 70% to 28%. 1 It was subsequently raised to 39% by G.H.W. Bush, and then lowered by G.W. Bush to the present 35%. 2 After the Reagan cuts, the U.S. received people escaping high taxes. Since those days, important changes have occurred that create new capital flight problems.
Once thing that has happened is that taxes worldwide have evened out considerably. Corporate taxes in China are comparable to those in the United States, communists though they may be. Some claim that the U.S. has the highest corporate tax rate of economically strong countries.
In days past, “picking up and moving” meant exactly that, a physical move. Now activities can be moved over the Internet independent of the people. A large web site that hosts poker games with cash stakes is physically in Gibraltar, taking advantage of the gambling laws there. You may not be able to play poker for cash in your neighborhood, but you can get on you laptop and play virtually in Gibraltar.
A few years ago I wanted a computer that was only sold officially in Japan. I found it on the internet and placed a call that was routed to Britain to take my order. The credit card transaction was promptly cleared in the Bahamas, and the computer shipped from Hong Kong. The company had a strong reputation as being reputable, and there were no problems.
What works for gambling and laptops works for larger financial dealings. Billionaire George Soros keeps massive financial holdings stashed in the Bahamas as he lives in the United States and advocates high taxes for the rest of us. He is so wealthy he could always have done that. The difference now is the ease with which less wealthy people can play in that game. It allows people to move transactions abroad while they can stay in the U.S. to, perhaps, look after elderly parents or to preserve other ties to the locality.
People do not ordinarily want to move physically, but with enough incentives they will. Part of the equation is the desirability of the potential destination. The very wealthy could always have a comfortable lifestyle anywhere. The wealthy could buy a mansion and staff it with servants. In that way, they could take advantage of entrepreneurial opportunities — like operating rubber plantations, or whatever.
A comfortable living in distant places is now more affordable, and the opportunities overseas are much broader. You don’t need the capital for a plantation. American retirees live comfortably on Social Security in places like Mexico and Poland. There are great entrepreneurial opportunities in India, China, and Brazil. Moving physically is not so great a barrier.
While much has happened, there is more to come. The idea of moving either virtually or physically is in its infancy. As it catches on, we can expect more services that facilitate such moves. Means of sorting out scams from legitimate service operators will improve, lowering the risks. It is a matter of time before small tax-haven countries realize that a key to success lies in keeping scam operators at bay, and publicizing the fact that they do so. People will then view the risks more favorably.
The benefits notwithstanding, there is an extra hassle in operating abroad. That means that, say, an extra two percent in US taxes will not produce a flood of tax refugees. As the hassle factor and the risks decrease this margin will diminish, but it won’t disappear. That the rich can leave does not mean that they necessarily will leave. It depends upon who is taxed for how much and on what. It also depends upon how much hassle there is in the United States, in the form of excessive regulation, versus that overseas. 3
The increased mobility of money means that tax policy within any country must now consider tax competition as a factor. For example, what will happen if the US decides to make a grab for oil company profits? Or perhaps lay heavy taxes on the profitable pharmaceutical industry? Or put heavy burdens on commodities options trading? Think about it.
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1. Wikipedia, Tax Bracket
2, Wikipedia, Tax Reform Act of 1986
3. The National Interest, “Escape from New York: capital flows overseas.“http://goliath.ecnext.com/coms2/gi_0199-6003581/Escape-from-New-York-capital.html, November 1, 2006
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